After the deluge

The Enron scandal has put the spotlight on in-house legal departments.

Lawyers can see this as an unwarranted intrusion - or an opportunity to prove their worth, writes Philip Hoult

The collapse of Enron and Big Five accountancy firm Arthur Andersen has put the role of in-house lawyers centre stage.

When a US jury found Andersen guilty of obstruction of justice last month, it based the conviction on a short e-mail which had been sent by Nancy Temple, the accountancy firm's in-house counsel.

In that e-mail, sent on 16 October 2001, Ms Temple had proposed changes to a memo being prepared by an Andersen partner about Enron's third-quarter results and an associated press release.

Among her suggestions was 'deleting some language that might suggest we have concluded the release is misleading'.

Ms Temple also suggested deleting reference to consultation with the legal department because it might have been construed as a waiver of attorney-client privileged advice, adding 'and if my name is mentioned it increases the chances that I might be a witness, which I prefer to avoid'.

It was these comments, rather than the more publicised e-mail Ms Temple wrote about the firm's document shredding policy, that was to bring about its downfall.

Andersen has appealed against the judgment, and there are many people - and not just those within the accountancy firm - who maintain that the finding was wrong and that Ms Temple had done what many other in-house counsel would have done.

But the sudden interest by US regulators and the press in the role of in-house lawyers is not limited to interest in the actions taken by Ms Temple and her employers.

Instead there has been a great deal of press comment in the US about the relationship between Enron's general counsel and deputy general counsel, James Derrick Jr (now retired) and Robert Walls.

Given that Enron's outside legal adviser, Vinson & Elkins - one of the largest firms in the US - derived an estimated $17 million (7% of billings) in revenue from its client, the use of Vinsons to review the legality of dealings at the heart of Enron's troubles has been called into question.

But it should be noted it was never part of Vinsons' legal brief to second-guess the accounting advice and treatment provided by Andersen, and nor was it expected to perform a detailed analysis of every transaction.

In witness testimony to the congressional committee investigating Enron, Derrick said that Vinson & Elkins was chosen because it had institutional knowledge and it would have taken too long for another law firm to get up to speed on the issues.

Also in testimony, Vinson's managing partner, Joseph Dilg, stated that the firm's professional responsibility committee had reviewed the work and found no improprieties.

He told Business Week, 'Everything that the firm's lawyers who have represented Enron have done has been accomplished in a completely professional, competent and ethical manner'.

The reaction of in-house lawyers to the Enron affair - and indeed crises at other leading US companies - was put succinctly by the chairman of the American Corporate Counsel Association.

In a recent message to members, William Lytton, general counsel at the International Paper Company, wrote: 'Faced with an ever-increasing regulatory environment, an explosion of litigation and reflecting on the current Enron situation, who among us has not thought: "There but for the grace of God go I"?'

It is a sentiment which will be shared by many UK in-house lawyers.

That said, it is clear that there are already lessons that can be learned from the debacle.

Paul Gilbert, who represents the Commerce & Industry Group on the Law Society Council and is a former head of legal at Cheltenham & Gloucester building society, says that the Enron affair is a wake-up call for in-house lawyers.

Mr Gilbert says that the Andersen case underlines the importance of Law Society practice rule 1, which states the general principle that a solicitor must act in the best interests of the client at all times.

It is the entity itself that is the client, he says, rather than particular levels of management such as the current chief executive officer or internal business clients.

'If you take that step,' he adds, 'it is almost a 24/7 commitment.'

Richard Wiseman, general counsel at Shell UK, is another who says the case reaffirms basic professional principles of what being a lawyer means.

He argues that it shows the need for in-house lawyers to exercise a proper degree of independence from the business and their internal clients.

'My view is that lawyers have got lots of skills, including commercial skills, but we need to remember which job we are doing,' Mr Wiseman says.

'It is difficult to do both at the same time.

'People are attracted to the idea of being clever businessmen - it sounds better than being a lawyer,' he adds.

'But that does down what we do and in most major organisations our contribution is now recognised.'

The collapse of Enron - and troubles at other companies - has put corporate governance high on the political and business agenda both in the US and the UK.

Worryingly, in the US, there is evidence of a major change in the way federal authorities view in-house counsel as a direct result of these scandals.

According to some US delegates at the recent Global Corporate Counsel Association's conference in Versailles, government officials see in-house lawyers as businessmen who in some cases obstruct the course of justice (see [2002] Gazette, 27 June,3).

Joseph Speelman, associate general counsel of Lyondell Chemicals, expressed the fear that these difficulties will spread to Europe.

'We can't do the job we've done in the past,' he told fellow delegates.

'We need a quantum leap in what we do and the way we do it.'

Several senior general counsel maintain that, as well as being a wake-up call, this changed environment actually provides in-house lawyers with a tremendous opportunity to prove their worth.

Laurie Adams, general counsel at ABN AMRO, says investors will now reward companies that show good corporate governance and adhere to high standards.

'The importance of proper checks and balances is critical,' he says, 'and the lawyers - both internally and externally - have got an obvious part to play in that.'

By ensuring that internal processes are sufficiently robust, Mr Adams says, in-house lawyers can reduce the risk of these events happening, although of course they cannot eliminate it.

The problem, according to Paul Gilbert, is that general counsel have in the past shied away from being influential at this high level.

'Too often they have not assumed the role of the genuine general counsel who looks at the overall direction of the business and risk management,' he says.

'People hide behind being an employment lawyer or a transactional lawyer.

But they are in a great position to fulfil the wider role.'

Mr Gilbert argues that in-house lawyers have the skills, work ethic and integrity that the new business climate demands.

'Most people when they actually work with lawyers respect what they do,' he adds.

'It should be the next stage of development in the role of in-house lawyers and I hope it comes about.'

However, this redefinition of the role of general counsel is a challenging one and there are some who say it is a step too far.

'We are a transactional department,' comments one head of legal at a FTSE-100 company, who asked to remain anonymous.

'We are asked to advise on transactions and will object to anything illegal if we come across it but we are not a whistle-blowing department.'

Another outcome of the Enron affair is that it has led to a re-examination of the nature of the relationship between companies and their external advisers.

The fact that Andersen obtained more money from providing non-audit services to Enron has led some to speculate that this hampered its independence - as well as its ability to say no.

In the legal arena, this charge could be extended to situations where either the general counsel or members of the legal department used to work for one of the outside law firms or where the law firm derives a significant amount of its income from any one client.

Alvin Shuttleworth, head of legal at energy company BNFL and a former chairman of the Law Society's Commerce & Industry Group, says there are obvious advantages in having close relationships with law firms where a general counsel has previously worked or been a lawyer, not least in an understanding of how they operate.

However, he argues that there should be no room to question objectivity when it comes to selection.

In his message to US general counsel, ACCA chairman William Lytton got it about right.

'We cannot yet identify everyone who will be marked as the heroes and villains in this sad saga,' he wrote.

'But we can expect laser-like focus on how well the in-house lawyers performed.'

Philip Hoult is a freelance journalist