Professionalism in the 21st Century

Volume 1 • Issue 3 • March 2015
Cover
Main Article Image

Doing Good While Doing Well

Balancing business and ethics in legal services

It’s well known that in September 2008, AIG—the world’s biggest insurer—declared bankruptcy. Less remarked is that lawyers played a role in its downfall.

The lumbering giant’s fall came as a result of selling investments, known as collateral debt obligations, or CDOs, that contained subprime mortgages—the mortgages of people with bad credit who were likely to default on their loans. AIG knew the CDOs were risky bets, so they began to insure them with a product called a credit default swap.

When the mortgage crisis hit in the summer of 2008, suddenly AIG saw itself facing billions of dollars in claims on risky investments it had first sold, and then insured. All of the actions leading up its fall were rubber-stamped by lawyers. “Somebody had to give somebody a legal opinion that not only was this probably ethical and right and legal, but that it’s probably good business,” says Derek Davis, executive director at the Center on the Legal Profession. “And lawyers played a role in that.”

“Our actions and our clients’ actions have consequences,” the Center on the Legal Profession’s Davis says. “We saw that very prominently in the financial crisis.”

After the 2008 economic downturn, the role of some lawyers in facilitating corporate wrongdoing has been increasingly highlighted.

“Our actions and our clients’ actions have consequences,” Davis says. “We saw that very prominently in the financial crisis. We are the engineers—maybe not the architects—of laws and regulations, but we sometimes facilitate those who in engage in bad behavior.

“But you have to think about your obligation to the rule of law and to society in upholding the rule of law. In essence, if you begin to engage in action which facilitates illegal behavior, that undermines the rule of law. Part of what being a lawyer means is recognizing that you have responsibilities not simply to your client, but also to society as a whole and broader conceptions of justice.”

It’s not easy to establish and maintain high ethical standards in the fast-paced world of the global economy. Yet it’s essential, says Ben W. Heineman Jr., author of High Performance with High Integrity (Harvard Business Review Press, 2008). Heineman served as general counsel of GE for 20 years and is now a distinguished senior fellow at the Center on the Legal Profession.

Companies are facing unprecedented ethical questions in the wake of globalization and the economic downturn of 2008, Heineman says. “I think businesses just by the nature of what’s happened are being forced to deal with public policy, regulation, ethics, all over the world.” Yet, he says, “the foundation of capitalism has to be high integrity. … The company has to exist on good values, or it will implode.”

That’s not an understatement. Following the 2008 financial crisis, the federal False Claims Act was amended to make it easier to prosecute qui tam (whistle-blower) cases. Its potential penalties are so huge they could bankrupt a company—since 2009, the Department of Justice has collected a whopping $23 billion in settlements for fraud claims under the act. Said Assistant Attorney General Stuart Delery at the American Bar Association’s National Institute on the Civil False Claims Act and Qui Tam Enforcement in 2014: “The FCA works because it provides powerful incentives for companies to do business the right way.”

There are ways to ensure compliance, limit wrongdoing, and cultivate a culture of integrity in legal practice. Below, we provide recommendations for doing so from Heineman and the Center on the Legal Profession.

Legal counseling for leaders

High integrity starts with smart legal analysis. In “Lawyers as Professionals and as Citizens: Key Roles and Responsibilities in the 21st Century,” co-authors Ben W. Heineman Jr., William F. Lee, and David B. Wilkins offer the following advice regarding legal counseling.

The issue of what is right may turn on prudential grounds—what is in the client’s enlightened self-interest—or it may be some combination of prudential considerations and moral concepts such as loyalty, transparency, fiduciary duty, or respect for individual dignity.

  1. Take a broad approach. The ultimate question is not what should be the “right” legal course of action under current law and circumstances, Heineman, Lee, and Wilkins write, but rather what a law, policy, or norm ought to be in future. Should a client seek to overturn a regulation or propose a new one? When a senior leader violates an institution’s core ethical standards, should that violation be weighed against past performance in deciding whether to terminate—or is the fact of violation sufficient cause by itself for firing? Rather than examine potential business moves on the narrow basis of what is legal, ask what is right—and offer clients your analysis.
  2. Examine outcomes from multiple viewpoints—and be willing to dig in. To make effective recommendations, appeal to knowledge from other disciplines—psychology, sociology, economics—to describe institutional, social, or political realities, both present and possible. In addition, look to political, policy, reputational, ethical, geopolitical, or media and public relations factors to examine potential outcomes and consequences.
  3. Seek deeper goals. The issue of what is right in the “ought to be” sense may turn on prudential grounds—what is in the client’s enlightened self-interest—or it may be some combination of prudential considerations and moral concepts such as loyalty, transparency, fiduciary duty, or respect for individual dignity. Such counseling requires an understanding of the client’s deeper explicit or implicit goals—or may require suggesting alternative goals to the client rather than just devising or recommending a purely legal solution.

In-house ethics

In-house legal teams can aid business leaders by asking searching questions about a company’s strategy while keeping overall business goals in mind. Though any searching analysis will involve finding an appropriate course between what is feasible and what is desirable, in-house lawyers should consider the following points.

To make effective recommendations, appeal to knowledge from other disciplines—psychology, sociology, economics.

  1. Practice organized listening. Have a robust process for evaluating demands made by internal and external constituencies. Examine issues raised by critics, the practices and ethics of other peer companies, such as multinationals, and guidelines from multilateral organizations and nongovernmental organizations.
  2. Triage, and don’t discount long-term benefits. Consider whether an issue is important enough to warrant extensive research, analysis, and development of options. Then, in making recommendations, view expenditures in implementing decisions as an investment, not simply as a cost. The accounting period for benefits may also be years, not just next quarter.
  3. Realize the limits—as well as the responsibilities—of your role. Although the general counsel and inside lawyers may have an important role in defining and debating standards, the CEO and board of directors will often make the ultimate decision. Lawyers have no monopoly on the ultimate judgment about what is in the best interest of the company in relation to its stakeholders and society—and, more broadly, about what should constitute corporate citizenship. Yet this doesn’t mean they are absolved of the responsibility to accurately and searchingly lay out the options and consequences of particular actions.

Creating an integrity culture

Law firms—so a common quip goes—are some of the worst-managed businesses in the world. Large corporations, which employ far more people, consciously take steps to create shared cultures. Firms can promote collegiality and a culture of integrity by following these tips:

Make being a “good citizen” an essential part of performance evaluation—and tie it to bottom-line compensation.

  1. Emphasize ethics. Communicate that integrity is a cornerstone of your culture by including it in mission statements, company documents, and employee meetings. “There is no chance of fusing high performance with high integrity unless all executives understand that this is their most fundamental leadership task,” Heineman writes in High Performance with High Integrity. Heineman describes how both Jack Welch and Jeff Immelt, successive CEOs of GE for 20 years, emphasized integrity at the company’s twice-yearly meetings of executives. “Every senior leader in this room is personally accountable for the integrity of the company,” Welch and Immelt told the room in a statement they repeated at every such meeting. “No cutting of corners for commercial considerations will be tolerated. Integrity must never be compromised to make the numbers.”
  2. Create a wide-scale compliance program. If you don’t have a compliance general counsel or conflicts committee, institute them. Then, says CLP’s Davis, train everyone else to pick up the phone and call them: “Take it out of the hands of a managing partner or an individual lawyer whose interests may be in conflict with the greater firm.”
  3. Incentivize ethics and broaden evaluation criteria. Make being a “good citizen” an essential part of performance evaluation and tie it to bottom-line compensation. And reduce the “eat-what-you-kill” mentality by emphasizing elements of professionalism other than billable hours in evaluations, bonuses, and promotions, such as client service, teamwork, leadership in pro bono projects, and mentoring. Under Welch, Immelt, and Heineman, GE had a zero-tolerance rule for lapses. “You can miss the numbers and survive,” the company’s message to executives read; “you cannot survive when you miss on integrity.” Sustained infractions of established ethical guidelines should be grounds for dismissal. At the same time, communicate a positive message and recognize positive contributions. Institute awards and public recognition for professional values you want to support.
  4. Embody the values you wish to cultivate. Remember that change starts at the top. To encourage diverse, creative problem solving throughout the firm, for example, create diverse leadership teams. Firm leaders should take on community service or keep billing within reasonable limits if they wish to send a message that these actions are encouraged throughout the firm.

Ultimately, companies—and the firms and lawyers advising them—face ethical decisions every day, Heineman says. Firms should be asking, both of themselves and their clients, “What do we do as a matter of ethics? What things do we choose to do voluntarily that are not imposed on us from third parties externally? … Vast numbers of issues come at you all the time that you have to make ethical choices about. Are you going to act voluntarily, even if it’s not mandated by either the financial or legal rules?”

The message of the 2008 downturn, one that may be indelible: such practices are not just good ethics—they’re good business.

1 2 3 Single Page

Professionalism in the 21st Century Volume 1 • Issue 3 • March 2015

Cover