Inside Lawyers: Friends or Gatekeepers?
32 Pages Posted: 2 May 2016 Last revised: 25 May 2016
Date Written: May 2, 2016
A decade ago, a wave of corporate scandals involving reprehensible behavior but stunning examples of lawyer passivity motivated me to write about the role of inside lawyers. In a series of articles, beginning in 2005 with The Banality of Fraud: Re-Situating the Inside Counsel As Gatekeeper, I suggested that it was improper for lawyers to be mere bystanders while their client representatives violated their legal obligations, especially when such violations were directly responsible for gross harm inflicted on shareholders, employees, or third parties. In The Banality of Fraud, I presented a diagnosis of the problem of inside lawyer acquiescence in corporate fraud, criticized the reforms ostensibly enacted to address the problem, and offered an alternative reform, which I believed squarely addressed the structural deficiencies identified in my diagnosis.
In making my arguments, I invoked the notion of a “gatekeeper,” which in the capital markets context I defined as a “private intermediar[y] who can prevent harm to the securities markets by disrupting the misconduct of [his or her] client representatives.” At the time, it was widely recognized that outside professional services providers, such as investment bankers, auditors, securities analysts, outside securities attorneys, and credit rating agencies, could perform gatekeeping functions that would benefit the securities markets. Less acknowledged and examined was the fact that inside lawyers could act as gatekeepers and possessed the capacity to stop corporate misconduct in its tracks, as Ronald Gilson first observed in his seminal article.
Using the GM ignition switch scandal as a point of departure, in this Article, I answer some of the complaints and criticisms that have been lodged against my proposal. In particular, I address the complaint that, under my proposed reform, “general counsel would lose the benefit of the informal communications from senior managers that invariably emerge in the context of a relationship of trust and confidence.” I argue that the empirical assumptions underlying this complaint are not only unsupported and speculative but also reflect a poor understanding of corporate environments. And even if we assume that such a prediction about general counsel’s access to information bears out, it is unlikely that the predicted costs would offset all other benefits to be gained from my reform, in particular, the enhanced willingness of inside counsel to interdict wrongdoing in serious cases. In addition, I criticize the repeated reference to the “lawyer as friend” analogy as a model for inside lawyers’ relationships with senior managers. I argue that the notion of friendship elides the gravity of the relevant factual context and thus cannot provide useful guidance for how inside counsel should conduct themselves in the face of serious corporate wrongdoing. “Friendship” also mischaracterizes how employees ordinarily interact with one another in organizational settings and grossly misrepresents how some general counsel perceive their relations with senior managers and understand their fiduciary obligations to the corporate client. I conclude that as a model for inside counsel, the friendship analogy is strained, inapt, and should be avoided.
Keywords: In-house counsel, accountability, compliance & ethics, confidentiality, general counsel, General Motors, information environment, inside counsel, inside information, management, misconduct
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