The greatest challenge for the in-house lawyer today is reconciling the role of being a corporate business partner with the role of being the corporate guardian. Balancing these roles can be fraught with ethical pitfalls. To navigate these pitfalls, it is important for the in-house lawyer to know and understand the ethical rules that have been adopted to guide their work and why they have been adopted in the first place.
Background
The modern corporate in-house counsel faced significant criticism during the early 21st century in the wake of scandals that involved the collapse of corporate giants like Enron and WorldCom. The failures of in-house lawyers during this period were largely the result of their inability to effectively serve as ethical gatekeepers, a responsibility that should have helped prevent the fraudulent activities that led to these catastrophic corporate downfalls.
The Wave Of Scandals
Enron’s collapse was a result of widespread fraud, particularly through the manipulation of accounting practices and the creation of off-balance-sheet entities to hide debt. The in-house lawyers at Enron failed in several critical ways:
- Failure To Challenge Questionable Practices. Despite clear evidence of unethical and illegal practices, such as the creation of complex financial structures designed to mislead investors and regulators, the in-house lawyers did not take meaningful steps to challenge or stop these practices. In fact, the in-house lawyers often worked to facilitate these schemes, interpreting the law in ways that allowed the company to conceal its financial problems.
- Conflicted Loyalties. The general counsel (GC), as a senior executive, had a duty to the board and shareholders to protect the integrity of the company. However, the GC at the time appeared to prioritize the interests of the CEO and other senior executives over the interests of shareholders and the company’s long-term health, creating a conflict of interest.
- Ethical Blind Spots. The in-house lawyers failed to recognize or act on the broader ethical implications of the company’s actions, focusing on legal technicalities rather than the spirit of the law or the company’s ethical responsibilities.
WorldCom’s scandal involved the fraudulent inflation of assets by $11 billion, which led to the largest bankruptcy in U.S. history at the time. The failure of WorldCom’s in-house lawyers highlighted similar issues:
- Lack Of Oversight. WorldCom’s in-house lawyers failed to establish or enforce appropriate oversight mechanisms within the company where the fraud was taking place.
- Failure To Protect Whistleblowers. Employees who had suspicions about WorldCom’s financial practices found little support from the in-house lawyers who were responsible for ensuring that whistleblower protections are enforced. This lack of support contributed to a culture of silence, which allowed the fraud to grow unchecked.
The Enron and WorldCom cases were emblematic of a broader crisis of corporate governance, where in-house lawyers failed in their role as ethical stewards. Several common factors contributed to these failures:
- Overemphasis On Legalism Over Ethics. In-house lawyers during this era tended to focus on what was legally permissible rather than what was ethical or in the best long-term interest of the company and its stakeholders. Many of the financial maneuvers used by companies like Enron, WorldCom, and others might have been legally defensible but were deeply unethical and unsustainable.
- Weak Or Compromised Independence. In many companies, in-house lawyers were heavily influenced by the executive team and did not have the independence necessary to stand up to improper or unethical demands from CEOs or CFOs. This compromised their ability to serve as independent guardians of corporate integrity.
- Lack Of Communication With The Board Of Directors. In-house lawyers often failed to adequately communicate legal and ethical risks to the board, either because they were sidelined or because they downplayed risks in favor of short-term financial performance. In some cases, in-house lawyers were complicit in keeping boards in the dark about major red flags, such as significant off-balance-sheet liabilities or aggressive accounting practices.
Response To The Wave Of Scandals
The Enron and WorldCom scandals prompted the American Bar Association (ABA) to tighten its ethical rules by clarifying the in-house lawyer’s duty to the organization, strengthening reporting obligations, and emphasizing the in-house lawyer’s role in preventing corporate fraud.
Impact Of These Changes
Prevention Of Future Scandals. The ABA sought to prevent lawyers from becoming complicit in corporate fraud by imposing clearer reporting duties and enabling in-house lawyers to break confidentiality in certain cases.
- Increased Accountability. The ABA sought to hold in-house lawyers more accountable for addressing and preventing misconduct within organizations.
- Stronger Ethical Culture. The ABA’s rule changes were part of a broader movement toward enhancing the ethical culture within both the legal profession and corporate America, emphasizing transparency, integrity, and the in-house lawyer’s role as a gatekeeper.
In-house lawyers play a crucial role in driving business success, but they also bear the weighty responsibility of safeguarding the organization’s ethical integrity. While it is essential to support innovation and growth, the in-house lawyer has an ethical duty to protect the company, a duty that can never be compromised. In-house lawyers must always remain vigilant, ready to speak up when legal or ethical boundaries are crossed. When necessary, in-house lawyers must even speak out to ensure the organization’s long-term health and compliance. Staying grounded in the ethical rules is not just a professional obligation — it’s a critical safeguard for the organization and the lawyer’s career. Ultimately, failing to uphold these responsibilities could result in more than just a business failure — it could cost you your bar license.
If you are interested in hearing more on this topic check out Ethics for In-House Counsel: Navigating the Ethical Responsibilities of In-House Counsel to the Organization’s President, Board of Directors, and Employees, available only via IHC On Demand (with CLE!).
Lisa Lang is an in-house lawyer and thought leader who is passionate about all things in-house. She has recently launched a website and blog Why This, Not That™ (www.lawyerlisalang.com ) to serve as a resource for in-house lawyers. You can e-mail her at lisa@lawyerlisalang.com , connect with her on LinkedIn (https://www.linkedin.com/in/lawyerlisalang/) or follow her on Twitter (@lang_lawyer).
For more of the latest in litigation, regulation, deals and financial services trends, sign up for Finance Docket, a partnership between Breaking Media publications Above the Law and Dealbreaker.
