GM provides lessons for all legal depts

The  Valukas report on the incident is a ‘solid reminder to in-house counsel of the federal, state and professional ethics rules that govern their responsibilities to their client, the company says Sarah Idelson, who is now a corporate partner at Sherin & Lodgen in Boston and her colleague Debra Squires-Lee in an article in the Idaho Business Review.  They  point out that Sarbanes-Oxley legislation required inhouse lawyers ‘to report evidence of a material breach of fiduciary duty or similar violation “up the ladder” –that is, to the chief legal officer or the chief executive officer of the company, and if there is no appropriate response, then to the audit committee or the board of directors.’

Ethics

However, for companies that are not SEC regulated, inhouse lawyers have a range of professional ethics rules which equate to the SEC rules. Furthermore, many companies impose a broader set of rules, the authors point out.  They give an example from the Valukas report which says that  although GM trained its employees to avoid words such as ‘problem’ and ‘defect’ when writing about safety issues, the legal department did not have a specific written policy on up-the-ladder reporting. The legal department did not tell new hires about this obligation and did not provide appropriate and regular training to its legal staff. By recommending that GM’s product liability lawyers are trained about safety issues and their duty to report them to the company even ‘while defending their obligatons to defend the company in litigation, the report suggests that in-house lawyers are custodians ot the organisation and not simply as lawyers settling cases.

Lessons for legal departments

The authors say that the lessons from GM and the guidance from the Valukas report are clear and applicable to all companies — large and small, public or private. General counsel need to ensure that all staff lawyers understand their obligations to the company and their reporting obligations.The authors recommend that companies have:

• A clear written policy concerning up-the-ladder reporting that is re-circulated and reinforced at least annually;
• Periodic training of all in-house lawyers concerning Sarbanes-Oxley, any applicable state laws, and the applicablestate ethical rules;
•  A process for up-the-ladder reporting that ensures confidentiality, if necessary, and/or job protection for lawyersacting in good faith consistent with their ethical obligations;
•  A culture and tone in which staff attorneys understand their role as fiduciaries for the company, not merely asfunctionaries advancing the interests of one particular department or set of business objectives.

Source: Idaho Business Review