Counsel to Counsel Forum - Shanghai
In-house counsel and corporate governance
Session co-hosts:Dan Roules and Amy Sommers, Squire Sanders
Peter Corne and Steve Yu, Eversheds
Jane Newman and Jili Jang, Simmons & Simmons
Session facilitators:
Derek Benton, director of international operations, LexisNexis Martindale-Hubbell
Ralph Ybema, president, Hong Kong Corporate Counsel Association
For those who suspect that attempts to enhance corporate governance procedures are a largely Western phenomenon, the recent C2C session in Shanghai offered an alternative perspective. It is certainly true that some legal issues – such as whether the gift of “Moon Cake” amounts to corruption – are unique to the region. However, as the Shanghai session demonstrates, many corporate governance concerns are shared by corporate counsel the world over.
Balancing riskSeveral counsel at the meeting engaged in a lively debate about whether they should have the final say in vetoing projects which may not pass the ‘good corporate governance’ test. While one speaker recommended that counsel should generally avoid acting as 'deal killers', others may have positive operational responsibility to fulfil that role. Where the legal function acts is obliged to "sign off" any major deals for compliance purposes, counsel must be willing to tell business managers to say "no". In these instances, it is also essential that counsel have the mechanisms to enforce their decision.
Of course, whether a counsel can - or should - ‘kill’ a project will often depend on a variety of factors. Most obviously, it will depend on whether they have the legal authority – and the personal standing – to perform such a task. In addition, their decision may well be influenced by the company’s culture – in particular, its approach to risk itself. Some companies may be far more cavalier than others in their approach to legal risk – and counsel should consider this factor when coming to their decision.
Assuming counsel have the power to ‘kill’ projects, counsel were split over what criteria they should use when coming to their decision. At the more cautious end of the risk spectrum was Ralph Ybema, who sits on the board and audit committee of CSMC Technologies Corp, a PRC chip manufacturer listed in Hong Kong. He suggested that the company’s management should mentally fix a notional danger ‘line’ for regulatory risk, and then ensure their advice remains firmly on the correct side of it. This, he reasoned, would ensure the company never attempted to push the regulatory envelope, and expose itself to unnecessary dangers. Several other speakers endorsed this approach, saying there were certain activities – particularly in relation to possible corruption – should never be endorsed. For them, this was an absolute position, irrespective of the likely cost of any potential liabilities, or the danger (however remote) that the illegality would be discovered. Summarising this position, one speaker said: ”Compliance is a zero sum gain, irrespective of the cost.”
Moving along the risk spectrum, other counsels said they preferred to give their senior management a ‘dollar value’ of the legal risks involved in a proposed venture, and then let them make the final decision. Here, the dollar value can be quantified by reviewing the likelihood that a particular activity will violate local laws, plus the expense of any subsequent court ruling or fine. Here, the counsel was confident that their company’s compliance training regime had given its managers sufficient skills they need to make an informed decision.
A carrot or stick approach?
In an ideal world, counsel should not have to make difficult ‘judgment calls’ over the legality of new proposals, because their fellow employees would never behave in a way breached corporate governance codes. Of course, counsels do not live in an ideal world, and nor do their employees. With this in mind, a significant proportion of the Shanghai C2C session focused on one of the most difficult aspects of corporate governance: ensuring company employees were aware of the rules - and obeyed them.
At the conference, some speakers advocated the use of humour during staff training, in order to make the programme memorable. Others, though, preferred a more hard-line approach. Indeed for some speakers, the only way to ensure their employees obeyed their employers’ corporate governance policies was to deploy a ‘top-down’ approach. For multinational companies, having company-wide compliance policies is often the best way to ‘iron out’ cultural differences, and bypass inconsistencies in local law requirements. In addition, making high level officers personally responsible for signing off compliance initiatives and training regimes adds an important level of managerial accountability to the entire process.
Sharon Chen, regional legal counsel of AIU Insurance said that, in her company, compliance training was compulsory for all staff. What is more, attendance was actively monitored by the company’s human resources (HR) department. To ensure that new employees did not ‘slip through the net’ between training sessions, they were obliged to undergo a formal training programme in relation to the company’s code of conduct within three months of joining the company. For Ms Chen, one of the key criteria of the training programme was that it should not be “boring”. “We discuss scenarios that reflect employee’s daily situations,” she says. And, because both management and junior staff are involved in the training events, employees were more likely to pay attention.
Determining the number of training sessions employees require will, of course, depend on a number of factors. The most obvious is the level of resources available for training. However others, such as staff turnover, and the level of legal risk the business is exposed to, with also be an important consideration. On occasions, ambitious plans will have to be scaled back, as the true costs of the project become apparent. For example, Ms Chen said that her company originally intended to provide compliance training on an annual basis, but had subsequently slipped back into an 18 month delivery cycle.
However, even where scaling back of formal training activities does occur, some low-cost projects can keep the compliance message alive between training sessions. Ralph Ybema, who is also president of the Hong Kong Corporate Counsel Association, said that at CSMC it is not possible for new employees to activate their email accounts unless they clicked on an on-screen icon confirming they had read the company’s official code of conduct, including its compliance policies. On a similar topic, one private practice participant suggested implementing ‘pop up’ messages on employees’ computer. From a more legal perspective, some speakers recommended the use of legal document templates for employees to use when negotiating deals with clients. These templates helped reduce the risk that agreements they signed would breach the company’s corporate policies. Other speakers also endorsed the model contacts as a practice and cost effective way of ensuring consistency in legal documentation.
CorruptionWherever they are in the world, counsels dread dealing with allegations of corporate corruption. Even unproved allegations of graft can damage the company’s reputation, share price and future business prospects. What is worse, its clandestine nature invariably makes corruption extremely difficult to detect.
At the meeting, one of the most important aspects of anti-corruption compliance was not, as one might suspect, local laws on this issue. Instead, the key issue was the extra-territorial application of the US Foreign Corrupt Practices Act. The Act, which applies to all US companies - public or private - outlaws the payment of government officials in return for obtaining or retaining business. The penalties for non-compliance can be severe, and includes fines, prison sentences, access to government contracts, export bans and, ultimately, denial of access to the US securities market. “It’s quite possible that executives may be subject to the FCPA provisions without them - or indeed their in-house lawyers - being aware of it, in particular if they’re not working for a US company,” HKCCA president Ralph Ybema told the meeting.
As the meeting progressed, various counsel posed “what if” scenarios for counsel to consider in relation to corporate corruption. For example, the question was posed whether counsel would advise their company’s senior China managers against attending a lavish banquet, hosted by key officials of a proposed state-owned joint venture partner, shortly before the JV contract was signed. “What happens if you decided to have a meeting with the other side of a transaction in Las Vegas, where the foreign party agreed to meet all the expenses – including the expenses of all the attendee’s partners,” asked Amy Sommers, a corporate partner at US law firm Squire Sanders. A rather more straightforward example of corruption was given by another in-house counsel. They cited the example of a Chinese official being invited to attend an English-language conference in a desirable location - despite not being able to speak English. Not surprisingly, the request was denied.
Giving the debate a more Asian-pacific flavour, several speakers asked whether the giving or receiving of traditional ‘Moon cakes’ or attending ‘Moon Festival’ events would fall within the aspects of the FCPA. Another Chinese twist on the FCPA debate relates to who is covered by the Act’s provisions. One of the key characteristics of the FCPA is that it attempts outlaw payment to government officials. However, as Squire Sanders’ Amy Sommers reminded the meeting, the definition of what constitutes a government official may be must wider in the China than in other countries. “In China, doctors may be regarded as officials if they work for a government hospital. You might think you’re dealing with a business person but you’ll be dealing with an official for FCPA purposes,” she said.
Nevertheless, some counsel were sceptical as to whether, given more pressing local demands on their time, they should pay much heed to the FCPA provisions. Here, the external law firms were emphatic. In response to a question about whether, realistically, the FCPA had extra-territorial effect outside the US, Ms Sommers said it clearly did. “There was recently a case involving an FCPA violation in Kazakhstan which resulted in the violator receiving a US$44 million fine,” she said. A private practice participant added: “It’s not just a case of FCPA compliance, the company may be in violation of local laws, or company-wide policies,” they said. “As counsel, it’s your job to see that these laws and policies are upheld.”
The use of hotlinesAs compliance procedures become more established internationally, counsel are beginning to develop a greater understanding of which tool are – and are not – effective. At the Shanghai event, the use of ‘whistle-blowing’ hotlines provoked one of the more lively debates. Around half of the participants at the meeting said their company now operated hotlines – a surprising large number.
Around the table, there was a general consensus that employees were not using whistle-bowing hotlines in the expected manner. Having initially installed hotlines to encourage the reporting of corporate malpractice, several counsel told the meeting that they were, instead, being used to settle scores between staff. “Local staff aren’t reporting non-compliance, they’re using it to complain about managers,” says one of the counsel.
Accepting that this development may be inevitable, some counsel told the meeting that they had begun to ‘layer’ the reporting lines for hotline complaints, by using intermediaries to filter inappropriate calls. “Our hotline initially goes through to the HR function,” said Ralph Ybema. These complaints are then ‘filtered’ by senior managers who deal with the more serious matters directly. If the complaint is about senior managers themselves, the matter is referred through to the company’s audit committee and eventually the full board.
Obviously, this requires a ‘judgment call’ by the intermediate management layers, who will require comprehensive training in order to understand which issues are sufficiently serious to warrant audit committee attention. However, here, as with other companies, the use of hotlines causes an impossible dilemma if each complaint is investigated with the same degree of seriousness, they risk swamping senior executives with trivial matters. Alternatively, if they introduce a filtering system, they do so on the implicit understand that, occasionally, serious complaints will not be reported to senior management.
Interestingly, despite these problems, some companies operating in China have extended the hotline programme to also include suppliers. According to Dan Roubles, a corporate partner at the Shanghai office of Squire Sanders, the intention of this scheme is to give suppliers the opportunity to report any suspicious activities perpetrated against them by a company’s own staff. To reinforce this position, the company’s chairman had written to all the company’s customers and suppliers, spelling out the company’s anti-corruption policies. Developing this scheme still further, a local in-house counsel recalled how they had included the company’s commitment to FCPA compliance in the company’s standard service level agreements. In addition, the company had regular meetings of its operations staff, where all interested parties could discuss any concerns over FCPA compliance.
Takeaways■ Counsel must decide their approach to legal risk, and be prepared to defend their position. Some companies may be more willing to take legal risks than others, but counsel should have fundamental “red lines” that should not be crossed.
■ Compliance training can be expensive and time consuming, and many employees may resent the central message being delivered. To ensure the compliance message is being taken seriously, consider incorporating it within the employee appraisal process.
■ The Foreign Corrupt Practices Act is a live legal issue in China. Ensure your employees obey its provisions – even when it contradicts established local business practices. Consider making suppliers and clients aware of your anti-corruption provisions – they may be able to provide an invaluable early warning of potential problems.
■ Compliance hotlines will invariably be used by employees to air their grievances. Accept this as a reality, and consider using a ‘filtering scheme’ to ensure senior managers focus on the most important issues.
Last updated -23 October 07