The UK’s Financial Reporting Council has proposed revisions to the UK Corporate Governance Code in the wake of high-profile corporate collapses. One response to the Council’s consultation calls for the role of general counsel to be referenced in the updated Code. The themes highlighted in this consultation response reflect a wider debate about the remit of general counsel and how the role should interact with other senior positions, as In-House Perspective reports.

The UK corporate governance regime is being reviewed as the country’s government responds to recent high-profile corporate collapses such as those at Carillion and BHS. As part of the review the UK regulator, the Financial Reporting Council (FRC), has proposed revisions to the UK Corporate Governance Code (‘the Code’). A consultation on the proposals closed on 13 September 2023 and the FRC intends the revised Code to apply to accounting years commencing on or after 1 January 2025. One response to the consultation calls for the role of general counsel to be referenced in the updated Code.  

In spring 2021, the UK government’s white paper ­– ‘Restoring Trust in Audit and Corporate Governance’ – set out how it proposed to reform these two areas. In July draft regulations were laid in parliament but were withdrawn in October 2023 ‘after consultation with companies raised concerns about imposing additional reporting requirements’. The government says it ‘remains committed to wider audit and corporate governance reform’ and ‘will bring forward legislation to deliver these reforms when Parliamentary time allows’.

The FRC was invited by the government to strengthen the Code in specific areas. The changes the regulator proposes focus on the work of the audit committee, internal controls, remuneration, board performance reviews, over boarding and diversity and inclusion. The revised Code will be supported by updated guidance.

Dr Roger Barker, Director of Policy and Corporate Governance at the UK Institute of Directors, believes these updates were needed to learn lessons from recent corporate failures and to ‘reflect the rapid pace of changing expectations […] about what companies are for and their role in society’.

Diversity to clawback

Under the FRC’s proposed revisions, a new Code principle will make the board responsible for both establishing and maintaining the effectiveness of the risk management and internal control framework. The board will be asked to declare ‘whether they can reasonably conclude that the company’s risk management and internal control systems, including material operational, reporting and compliance controls, have been effective throughout the reporting period’. The Code principle will ask the board to report any material weaknesses it has found in these systems and the action it has taken to address them, to ensure the process of reviewing these systems is carried out on an ongoing basis.

The FRC argues that reporting on how risk management and internal control systems have performed throughout the year ‘reinforces directors’ accountability for these systems’ and gives shareholders and other investors a clearer picture of a company’s ability to manage risk.

The proposed changes will require additional reporting on the financial penalty malus and clawback – a mechanism to recover money that has already been paid – to give investors more insight into what’s available to an organisation to address serious failings and whether these mechanisms are being used. Organisations will be required to report on whether they have these arrangements in place, the minimum conditions and time period where they would apply and whether they’ve been used in the last financial year.

Paul Norris is a senior partner at MM&K, an independent consultancy specialising in pay and reward strategies. He says malus and clawback have been ‘an integral part of incentive plans for quite a long time’. However, he says they’re rarely invoked and that doing so is a difficult process. According to Norris, remuneration committees often work hard to get pay right and a ‘lack of malus and clawback wouldn’t mean necessarily that a company isn’t accountable for its executive pay policy’.

The regulator also proposes changes to strengthen the link between remuneration policies and corporate performance, including environmental, social and governance (ESG) objectives. The updated Code would specifically mention that pay should be clearly aligned to ESG objectives, in addition to company performance, purpose and values.

Norris says there’s an increasing number of companies globally that are incorporating ESG performance measures and targets into their executive pay plans, over the short and long term. He says the biggest challenge can be deciding what their ESG targets should be and how they should be measured.

The proposed revisions give the audit committee a new responsibility for monitoring the integrity of narrative reporting, including sustainability reporting, and for describing this work in the annual report. Any external assurance of ESG metrics and sustainability-related information commissioned by the company should be covered in the annual report.

Barker argues that specifying the responsibilities of a particular board committee in this way risks making the Code – often hailed as a beacon of flexibility – too prescriptive. For him there’s ‘a hint that, somehow, if the audit committee isn’t taking up these responsibilities, it’s bad governance,’ which doesn’t allow the board to tailor how it responds to the specific risks the organisation faces.

Other proposed changes include: outlining in the annual report directors’ additional commitments and considering whether these allow sufficient time for them to carry out their role effectively; referring to ‘board performance review’ rather than ‘board evaluation’ to emphasise the forward-looking and ongoing nature of this process, and including a reference to inclusion in diversity reporting requirements and giving equal weight to protected – under the UK Equality Act 2010 – and non-protected characteristics, to encourage companies to consider diversity beyond gender and ethnicity.

These proposed revisions would add to a growing number of reporting requirements faced by businesses. Some are concerned the annual report has become so long and covers such a large amount of information that it’s no longer fit for purpose. Barker says it’s important to keep materiality in mind when preparing the annual report to ensure it’s tailored and light touch. 

General counsel response

During the consultation period, a group of ‘corporate General Counsel and interested parties’ submitted a response. In it the group states, ‘we find it extraordinary for there to be no specific reference within the Code or its supporting Guidance to the role of the General Counsel’.

The group members describe themselves as ‘in-house lawyers with significant corporate governance experience and responsibilities within our respective organisations or an interest in the same’. In its response the group argues that the professional duties of general counsel are aligned with the goals of the FRC and the Code. It also cites academic research, which it argues demonstrates how in-house lawyers contribute to successful risk management. The group highlights the influence the position of group general counsel can have in UK-based multinationals through its involvement in areas such as governance, ethics and culture, and enterprise risk management. The group argues that corporate governance is weakened when general counsel report to individuals who are not board members.

The response highlights key areas of the FRC’s consultation that the group believes general counsel positively contribute to – for example, culture, audit and financial reporting, and risk management – and where it thinks that contribution should be referenced in the Code. In terms of risk management, the group argues general counsel are uniquely placed to assist because they have visibility across the whole organisation and can intervene ‘on risk issues without the hindrance of internal business conflicts that other executives may suffer’. As general counsel, the group members argue, their professional duties as an authorised person require and enable them to ‘hold the business accountable to its responsibilities, while maintaining professional independence from the organisation as its legal advisor’. Here the group members say their primary duty is to protect the rule of law in the public interest.   

The consultation response compares the status of general counsel in the UK with the legislative status of such professionals as corporate gatekeepers in the US in the Sarbanes–Oxley Act 2002 and the Dodd–Frank Wall Street Reform and Consumer Protection Act 2010. It argues this provides further motivation for codifying the general counsel role in the UK.

The group calls for best practice guidance to recommend that those public companies that are currently required to appoint a company secretary should also appoint a general counsel. It suggests the Code should set standards for running an effective internal legal function that reports to a general counsel or chief legal officer. 

Seeking a common understanding

The themes highlighted in this consultation response reflect a wider debate about the remit of general counsel and how the role should interact with other senior positions. This plays out against the broader backdrop of society’s revaluation of corporate purpose, the growing influence of ESG issues and greater scrutiny over what it means to do the right thing.

The general counsel role is relatively new and has evolved into a more senior and influential position over time. Its scope and reporting lines are often defined by each organisation and the individual holding the post. As such, there’s a lack of clarity about the expectations of the role and the part it could or should play in preventing corporate failure, the driving force behind the FRC’s proposed revisions to the Code.

Jenifer Swallow, a lawyer and business adviser who led the consultation response, believes ‘lawyers in organisations make a significant contribution to corporate governance’. She argues that recent corporate collapses demonstrate why the general counsel role should be defined. She’s particularly alarmed at the cultural problems that contribute to misconduct and argues that corporate scandals demonstrate the relevance of lawyers in helping prevent bad practice. ‘There are environments where lawyers aren’t supported to do their job’, she says.

For Swallow, outlining in writing how business leaders should involve general counsel in areas such as risk management or audit would standardise best practice and remove any excuses not to seek their input. ‘The formally writing of it down will bring a practical focus and thereby a practical shift’, she says.

Abhijit Mukhopadhyay, Website Officer of the IBA Corporate Counsel Forum and President (Legal) & General Counsel at Hinduja Group, agrees it would be beneficial to stipulate the expectations of the general counsel role, which could be outlined in a document that sits alongside the Code. Currently, he says, ‘when you talk about [the general counsel], everyone has got their own idea’ about what the role entails.

According to Angélique Parisot-Potter, Executive Vice President, Business Integrity & Group General Counsel at the Massy Group, codifying the general counsel role could also provide security to those who want to stand up to corporate misconduct and make any discussion about the ethical application of the law easier.

Zoe Bucknell, Chief Executive Officer (CEO) and co-founder of Kuberno, a governance software-as-a-service developer, says the FRC proposals include amending its guidance on implementing the Code to recognise the general counsel. The revised guidance outlines that, in commenting on the effectiveness of the company’s risk management and internal control systems, the board should include when and how it has consulted a number of key executive stakeholders, specifically including the general counsel.

For Bucknell, this is the right place to reference the general counsel role rather than in the main body of the Code. ‘The legal function has a significant role to play as part of internal controls, but it’s not the only one,’ she says, highlighting the importance of internal audit, the chief financial officer and human resources staff, all of which are not specifically referenced in the Code.

Susan Permut, Principal in the Board Effectiveness Practice at Korn Ferry in Boston and former Deputy General Counsel and Assistant Secretary at EMC Corporation, says that because the US doesn’t have a governance code there isn’t the equivalent opportunity to codify the general counsel role in her jurisdiction. Even if there were, however, Permut doesn’t think it would be encouraged by US lawyers, who might find it overly restrictive.

Questions of role and remit

In the UK public companies are required to appoint a company secretary and many private companies also appoint one. This role usually takes responsibility for corporate governance. The company secretary is specifically referenced in the Code, which states, ‘All directors should have access to the advice of the company secretary, who is responsible for advising the board on all governance matters. Both the appointment and removal of the company secretary should be a matter for the whole board’.

The Code also states that ‘The board, supported by the company secretary, should ensure that it has the policies, processes, information, time and resources it needs in order to function effectively and efficiently’.

In their response to the Code consultation, the general counsel signatories call for their role to be referenced alongside the company secretary position in these two areas of the Code. For them, this proposal highlights the different experience of general counsel and company secretary and how both contribute to good governance in different ways.

Swallow stresses the proposal is not about taking over the remit of the company secretary or creating conflict between the two functions. She says that ‘each role is critical and collaboration between them is very powerful – they face similar tensions’. Other commentators agree that the roles are complementary and should work together.

Many general counsel say their remit is broader than the company secretary’s, which allows them to gain insight into every area of the business and bring that learning back to the board. For them their insight has become more important as the scope of governance has expanded, for example through the increased emphasis on ESG issues and society’s focus on purpose and values.

Mukhopadhyay says some legal questions that arise at board meetings will specifically require the general counsel’s input, such as the legal aspects of doing business in a certain jurisdiction, in terms of how litigious it is, or if there is conflict in the region.

Many argue the two positions have different clients: the company secretary’s client is the board and the directors, and the general counsel’s client is the business overall. Swallow says this can mean the general counsel advises in a different way to the company secretary.

Some argue that the general counsel position isn’t a governance role at all. Bucknell is against including the role in the Code for this reason. She says the general counsel isn’t an officer of the company and that taking on that position would affect their independence as a lawyer. She also argues that the general counsel wouldn’t be sufficiently independent of the executive if they took on a significant governance remit akin to that of the company secretary.

In Bucknell’s view, general counsel can have the most impact through having a seat on the executive committee, where they can contribute to day-to-day decision making and the information the committee compiles for board meetings. For her this is the right forum for the general counsel because it’s an executive function whereas the company secretary, in her opinion, sits between the board and the executive.

In the US there’s scope for general counsel to be involved in governance work. According to Permut, often the exact remit is defined by the company and the individuals involved, but ‘in most instances the [general counsel] absolutely is involved with governance and with the board’.

Getting things done ‘the right way’

General counsel often feel conflicted between their obligations to their client who is also their employer and their professional obligation to remain independent. This ‘can be a difficult thing to navigate and needs governance around it,’ says Swallow.

Parisot-Potter highlights that pay structures incorporating performance-related bonuses can create a dynamic where in-house lawyers potentially lack the independence to advise against certain actions. This is because their bonuses, feedback and performance reviews are directly tied to the business, which could penalise them for giving advice, in the best interest of the client, against a particular course of action.

Reporting lines can also stifle general counsel’s independence. For many it’s important that the general counsel reports directly to the CEO and perhaps to the board as well, to maintain their independence. In cases where there’s an issue with the CEO, the general counsel should feel they can report their concerns to the board. If this isn’t possible, there may be broader cultural issues for counsel to address.

There’s also concern about the trend to cast the in-house lawyer as a businessperson first and a lawyer second, which Swallow sees as potentially conflicting. ‘It doesn’t match the core of why the lawyer is hired, even in-house where you need to be super practical and commercial’, she says.

However, in-house lawyers do need to give legal advice in the context of the business they work for. It’s important to give advice that solves problems for the business while respecting the spirit of the law. Mukhopadhyay argues that this is how in-house lawyers gain influence, authority and respect. ‘People will come to you if you can provide [a] solution, not a shortcut,’ he says.

Parisot-Potter also emphasises the need for quality legal advice. ‘I do think it is [the in-house lawyer’s] role not just to make sure the business gets done but that it gets done in the right way,’ she says. According to Permut, ‘you have to have the goals of the business in mind and work with the business to do things obviously within the law, but which produce the best result possible from a business standpoint’.

Swallow says some lawyers are beginning to rethink what they as a community exist for and therefore what a lawyer in business is. She believes there’s a great opportunity for the wider legal community to consider their role in modern society. The response to the FRC consultation, alongside fellow signatories, is one aspect of this process.