It has been long debated whether the general counsel should report to the CFO or the CEO. Ben Horowitz, cofounder and general partner at the venture capital firm Andreessen Horowitz and author of the New York Times bestseller, “The Hard Thing About Hard Things,” makes a compelling case for why the GC should always report to the CEO and not the CFO in his blog post, Why I Did Not Go to Jail. According to Horowitz, the GC should report directly to the CFO to “guard against employees purposely or accidentally breaking the law in pursuit of their goals.”
In his blog post, Horowitz recounts a time when his new CFO reviewed his company’s practices and processes to ensure that they were both compliant and competitive. After completing that review, his new CFO made some suggestions regarding how his company could modify its stock option granting process to be more competitive. His CFO not only took the position that the proposed process was compliant with the law, she doubled down by asserting that the outside counsel for her former company had designed the process and that the auditors of her former company had also approved it. Before moving forward with the change, Horowitz checked in with his GC, who recommended against it because he felt it exceeded the bounds permitted by law. Because of his GC’s advice, Horowitz did not move forward with the policy change.
As it turns out, it was a good thing. Almost two years later, the SEC announced that it was investigating his CFO’s previous company for stock option accounting irregularities and that it would be launching an investigation into all of the Silicon Valley companies and their stock option accounting practices. When it was all said and done, the SEC found 200 companies guilty of some sort of irregularity and Horowitz’s CFO actually spent three and a half months in jail for the part she played in her former company’s stock option practice.
For the Association for Corporate Counsel (ACC), there is no debate — the GC must report to the company CEO. As Veta T. Richardson, ACC president and CEO, observes in her article, What Happens When GCs Aren’t Empowered, “[c]ompanies that fail to position their general counsel properly do so at their peril — exposing themselves to the dangers of corruption, scandals, and lawsuits.”
Using the resignation of the Danske Bank CEO following a billion-dollar money laundering scandal as her example, Richardson makes the case that making sure the “GC has a ‘seat at the table’ is no longer a good idea — it’s good business and good governance.” She goes even further and not only argues that boards “should pay greater attention to the role and positioning of the GC” but also argues that boards should see the GC’s absence from the executive team as “a red flag that could indicate that laws, ethics, and compliance are insufficiently prioritized by the company.”
Richardson also observes:
“GCs must be properly positioned on the executive team in order to effectively serve their organization.”
“While we may debate different governance models, most GCs agree that at the very least, a direct reporting line to the CEO — and exposure at the board level — elevates their credibility and stature within the organization, empowering general counsel to impact company culture, while demonstrating the company’s commitment to ethics and compliance.”
“General counsel are allies to the executive and, more importantly, to the board — the body charged with an organization’s ethical leadership.”
“The GC’s positioning within the company truly impacts the cultural tone of the organization.”
I hope you read this blog post in full and see these two cases as cautionary tales. If you know of a GC or if you are a GC who reports to anyone other than the CEO, reach out to ACC for resources, starting with acc.com/governance.
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 email@example.com , connect with her on LinkedIn (https://www.linkedin.com/in/lawyerlisalang/) or follow her on Twitter (@lang_lawyer).