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25 November 2013

Shaping Corporate Culture: How Lawyers Can Influence Good Governance and Compliance

Published on 25 November 2013
Too often in business in-house lawyers are viewed simply as business risk managers, or even naysayers who exist to respond to threats or hinder progress. But what if in-house counsel were considered proactive contributors to the business – strategic partners who could help reduce costs in the long term?

That’s the case in some high-performing businesses and it can be the reality for many more, according to College of Law Master of Applied Law (In-house) adjunct lecturer Allan Luu. As senior counsel for Fletcher Building Australia and a regular presenter at the Governance Institute, Luu says corporate counsel can influence good governance and compliance by being leaders who promote a high integrity culture.

"From their unique position of being across all parts of the business, in-house counsel can influence corporate governance positively,” Luu says.

This is important, because a culture of good governance can help businesses survive longer and be more prosperous in the long term, making it a worthwhile pursuit for in-house counsel.

“Businesses that cultivate a reputation for integrity ultimately win the trust of customers and lower compliance and investor risk.”   

Research has shown support for the view that good governance is linked to better business outcomes. In a 2009 study, Treasury found that “companies with better corporate governance outperform poorly governed companies”. The study concluded that companies that were more highly compliant with the ASX Principles of Good Corporate Governance and Best Practice Recommendations actually performed better financially – on measures of earnings per share, return on assets and one-year sales growth – over a three-year period.

While a good governance framework cannot in itself prevent corporate failure or poor decision making, Luu says it can promote better decision making and foster higher levels of staff morale, leading to better business outcomes.

The corporate governance landscape

It’s perhaps no surprise then that recognition at a company level about the importance of compliance is growing. A 2012 survey of 350 corporate counsel by King & Wood Mallsons found that 84 per cent of respondents believe the compliance culture within their organisation has increased in the last five years. King & Wood Mallesons says this mirrors a wider shift in Australian business culture towards increased compliance.

In fact, senior corporate counsel are more involved than ever before in assisting businesses to achieve cost savings, and also have a broader responsibility over governance and compliance, according to 2013 research by legal recruitment firm Mahlab.

Overcoming challenges to good corporate governance

As advisors to the board, in-house lawyers are uniquely positioned to positively influence corporate culture. And they should, not only to align their success with that of the business, but because this approach also naturally aligns with all lawyers’ overriding duty to the court.

However, doing the right thing can come at a cost. One difficulty for in-house counsel comes with the need to balance their duties and desire for good governance with overarching business objectives.

“In-house counsel must balance the need to practice good governance and compliance with the need to deliver projects on time and on budget.”

In cases where striving for good governance slows down commercial timetables, who wins out? To reconcile these conflicts it’s essential for in-house counsel to have the confidence and trust of the business in order to influence good governance behaviour.

“Skilled in-house counsel can reconcile conflicts between commercial goals and business compliance, by educating executives on how good governance positively affects profits.”

In addition to the bottom line, in-house counsel must also overcome the challenges raised by internal politics, such as the desire to maintain relationships within the organisation at the cost of doing the ‘right thing’.

Luu recommends in-house lawyers work to build strong relationships with colleagues that can be drawn upon, rather than interacting only when there is a problem.

“Good in-house counsel will… develop a reputation as ethical, clear decision makers and trustworthy advisors. Advise with integrity, for example complying with the spirit of the law instead of mere technical compliance. Treat counterparties respectfully, cultivate credibility by applying commerciality to each problem instead of always saying no, and stay independent despite competing commercial interests.”

Influencing good governance can also become more difficult in times of economic hardship. In today’s tight market, corporate directors are under increasing pressure to reduce costs, including their legal spend.

As one respondent in a King & Wood Mallesons survey of corporate counsel notes, “A tight economy increases the tension between the legal team’s desire to manage risk and the needs of the business to seek out more risky work.”

Ultimately, Luu advises that lawyers need to understand they are first and foremost a guardian of the company’s best interests, and secondly a facilitator of the organisation’s commercial interests.

A culture, not a catchphrase

While the board is ultimately responsible for governance and compliance, in-house counsel have both the expertise and business-wide exposure to promote good governance practices at all levels. To do so involves building strong working relationships and winning the confidence of key parties within the organisation.

Corporate counsel are in the fortunate position of being able to do more than simply write legal opinions. They also have a unique opportunity to influence good governance behaviours that are beneficial to the organisation in the long run. This in the end leads to better business outcomes, greater prosperity and good corporate citizenship for organisations.

What challenges have you faced when promoting good governance within your organisation? Do you agree that corporate counsel has a responsibility to shape corporate governance for the better?