Can You Trust Your Law Firm?
On February 6, Boston University law professor Susan Koniak put a pointed question before the U.S. Senate Judiciary Committee: What were Arthur Andersen’s lawyers doing while Andersen’s accountants and staff were shredding Enron documents? Koniak, who has written extensively on the law governing lawyers’ conduct, put a spotlight on the relationship between companies and their legal counsel—and the potential dangers in that relationship. In a conversation with HBR’s Bronwyn Fryer, edited here for clarity, Koniak urges executives to manage their lawyers with care.
Most executives aren’t trained in the law. So how can they know whether their legal counsel is giving them good advice?
It doesn’t take legal expertise to direct one’s lawyers to act in accordance with the law and to spell out legal risks clearly. You’re not paying lawyers to be creative; you’re paying them to monitor what’s legal and what isn’t. Executives must not press lawyers to find and finesse every legal loophole. When a corporation retains a law firm, it should make clear, in writing, that the firm’s responsibility is to keep the company out of legal hot water. The company should request that all legal judgments be accompanied by a statement detailing the potential legal risks of pursuing the strategy the lawyers have okayed.
You need to know, in particular, just how legally vulnerable every transaction or plan you’re considering is. Whenever a lawyer says, “This is legally okay, in our opinion, but vulnerable on the following grounds” you need to get the reasons behind the lawyer’s thinking in writing. Lawyers may resist spelling out legal vulnerabilities on paper; in fact, they’ll probably warn you not to write bad stuff down. Don’t listen. Writing down explanations of legal vulnerabilities actually protects you. It shows that you and your board did not intend to break the law—that you carefully took into consideration the law’s demands before you acted.
It’s also important to get a second, independent legal opinion about legally risky moves. You always want to have a clear view of the worst-case scenario. Lawyers are trained to give all sides of an argument. You should take advantage of that training and get fully informed advice.
Finally, a CEO should demand to be informed immediately if the company lawyers suspect illegal activity on behalf of the corporation—or against it—by any member of management. And the CEO, in turn, must inform the board of any credible evidence of illegality that could harm the company. Every board should have a legal committee of independent directors empowered to receive such reports from management—or from the legal team directly if management refuses to investigate or stop the possible illegality.
But don’t you want your lawyers to be aggressive in helping you gain the greatest advantage within the bounds of the law?
Yes, but you should be wary of attempts to push those bounds. The great legal thinker and Supreme Court justice Louis Brandeis once described how good lawyers find the safe course for their clients. He said that if you insist on walking alone along a precipice, you may stumble on a loose stone, slip, and go over. No lawyer can predict when disaster will occur—or protect you from it. But all competent lawyers can tell someone where she can walk safely, within view of the edge but not on it.
The only way for executives to know whether their lawyers are providing good advice is to demand an answer to the question, “Where is the precipice?” No executive should find out after the fact that she was walking on it and that her lawyers did not warn her. Likewise, no board of directors should be caught unaware that management and the company’s lawyers thought walking on the precipice was in the company’s interest. Long term, it never is.
A good lawyer will make the law clear to you. In cases of legal interpretation, executives should demand jargon-free explanations. If your lawyers have to resort to all kinds of technicalities to explain why something is legal or not, you need to get a second opinion or ditch the plan. Remember, if you are ever put before a jury of ordinary folks, the simple explanation is likely to reign.
What do you do if your lawyers themselves step over the precipice? Fire them?
Not only fire them, but sue them. It should go without saying, but the fact that lawyers know the law doesn’t mean they’re above the law. Executives must be prepared to sue their lawyers for malpractice if they receive inappropriate counsel. During the savings and loan crisis in the 1980s, the government became the trustee for the failed banks and recovered billions by suing for malpractice on behalf of the banks, which the government now ran. Your company hires lawyers to prevent legal nightmares. It should not take a legal beating and have its legal advisers get off scot-free.
Companies don’t sue, in part, because they fear that the lawyers will insist the law-breaking was management’s fault, not theirs. That’s why it’s all the more important that you get legal advice in writing, record any oral communications from your lawyers in contemporaneous private memos, demand in writing that your lawyers inform you of suspected illegality, take action to investigate and stop that illegality, and keep your board informed. If you don’t take those basic precautions, you’re asking for trouble.
