The Independent: Let me in, I'm a lawyer
Shell paid little attention to its in-house legal team. But as the recent scandal showed, no modern business can afford to keep its briefs unbriefed
By Jon Robins
10 May 2004
Posted 11 May 04
So where were all the lawyers then? The oil giant Royal Dutch/Shell boasts the largest legal department of any UK company but when it came down to the company's staggering failure to disclose the extent of its oil reserves, not one of its 623 lawyers was anywhere to be seen. The explosive report by the US law firm Davis Polk & Wardwell revealed that Shell's disastrous disclosure strategy was signed off at meetings of the company's committee of managing directors without legal advice.
This apparent absence of input from lawyers with the requisite securities law and corporate governance expertise has stunned some lawyers. A US lawyer who has regular dealings with the oil giant said: "Given the importance of disclosure to the energy sector and the fact that there are significant legal ramifications if they get it wrong, it is ridiculous that they weren't around." Shell now faces months, and even years of investigations. In the US, the Securities & Exchange Commission (SEC) is considering whether misreported reserves amount to misleading investors, while on this side of the Atlantic there is the prospect of investigations by the Financial Services Authority in the UK and the Dutch regulators.
The recent wave of corporate scandals around the world has finally buried the myth of the in-house lawyer as a cushy number for those who can't cut it in private practice. "Being general counsel is like being the England football manager: you're going to get sacked sooner or later. Not many leave in a blaze of glory," comments Nick Holt, a former managing partner of KLegal. He believes the Shell saga makes clear that shock waves of corporate scandals such as Enron and WorldCom are being felt by lawyers on this side of the Atlantic.
Many UK lawyers read the nature of the scandal as a straight accounting issue with little to do with lawyers. Others see it as fairly indicative of the way in which heads of legal are routinely marginalised in UK business. "The Shell story shows that the days when it's possible to cut heads of legal out of the corporate knowledge process have to end, by law if necessary," said Canary Wharf legal head Michael Ashley-Brown. ".... [It] is patently obvious to me that a huge number of legal directors at the FTSE250 companies have not got a clue what is going on in their own companies."
That a shy and self-effacing in-house lawyer can be thrust centre stage was most dramatically illustrated when US jurors pulled out an e-mail from Nancy Temple, a 38-year-old lawyer with accountants Arthur Andersen, to her partner David Duncan in which she, "suggested deleting some language that might suggest we have concluded the release is misleading" in connection to a memo Duncan had prepared concerning Enron's third-quarter results. It was the kind of advice lawyers give every day - "Don't put it in writing". "Who amongst us has not thought: 'There but for the grace of God go I'," asked William Lytton, the chairman of the American Corporate Counsel Association at the time.
Clearly, Shell is no Enron but as regards the role of the legal department, the David Polk report, which is a 26-page executive summary of a 450-page report, makes eight corporate governance recommendations, including a beefed-up role for the lawyers. "The visibility of the internal legal function at the highest levels should be increased and this should start by providing for attendance by Shell's legal director at meetings of CMD, conference [Shell's strategic review body] and the parent company boards," it says. UK general counsel Richard Wiseman has told the press that the company has already identified "substantial things which we ought to be doing in relation to compliance," that require a higher profile for the lawyers.
So what are the lessons for lawyers from the Shell debacle? Paul Gilbert, a legal director at LawBook Consulting, who was head of legal at Cheltenham & Gloucester and who sits on the Law Society council representing in-house lawyers with Wiseman, reckons it provides: "a pause for thought for all in-house lawyers. It is too easy to get sucked into the day job - the run-of-the-mill, routine issues - whereas you still have this overarching duty to act in the best interests of the client," he says. "Given the recent history of serious governance upsets and outright crises, you really have to assess whether the legal team is adding value through their visibility on the board."
Typically, US lawyers take a more strident view, not least because the Sarbanes-Oxley legislation brings US corporate lawyers squarely into the firing line. SEC regulations have now introduced a couple of new phrases into the US legal lexicon such as "up-the-ladder" reporting - where lawyers are required to bypass general counsel if there is no appropriate response to concerns and report directly to the audit committee or the board - and "noisy withdrawal" - where lawyers are required if necessary to resign with notice to the SEC where there has been a serious breach of securities law. Don Guiney, a corporate finance partner at Freshfields, points out that SEC rules have been amended to carve out non-US lawyers. "Nonetheless the practice of keeping general counsel out of the loop is dangerous," he says. "The passivity of the general counsel is certainly going to be up for criticism."
The potentially devastating consequences of a weak in-house team were revealed in the scandal that has engulfed the Italian food giant Parmalat, dubbed "Europe's Enron". Bruno Cova, a former head of legal at Fiat and immediate past chair of the International Bar Association's corporate counsel committee, was appointed special counsel to Parmalat by Enrico Bondi, the government-appointed chief executive. He believes the company's general counsel was in effect powerless to uncover the widespread fraud. "My personal view is that there are a set of minimum requirements for anybody to consider before they accept the position of general counsel in a listed company," he says. First and foremost, Cova reckons the head of legal should have total control of internal and external lawyers. Gian Paolo Zini, Parmalat's legal adviser and the name partner of well-regarded Zini & Associates, is under arrest in connection with the financial meltdown of the company. Cova also insists that any general counsel should not be "buried somewhere" in the business - for example, reporting to the chief financial officer - but have direct access to the board. "I wouldn't accept any job unless those conditions were met," he adds.