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An admitted lawyer in Australia and Germany, Hajo recently joined Sell and Parker, a private metal recycling company, as their first general counsel. Prior to this role he worked in private practice and held senior in-house positions in the retail, pharmaceutical, waste and health industries. As company secretary in the private and public sectors, Hajo has acted as principal governance advisor to a range of boards and executive teams.

Hajo Duken

GOOD GOVERNANCE: Where are the lawyers?

Here in Australia, it seems as though we’ve been uncovering large scandals at a rate and of dimensions that make us

appear as a third world country. We have former ministers jailed and charged over allegations of blunt corruption, and ministers and MPs who are forced to resign over expenditure claims. We read of developers sitting on local councils in areas where they make a substantial part of their profits, and mayors who are picked up by Federal Police with tens of thousands of dollars in their travel bag. In NSW ICAC again investigates the conduct of councils and councillors. We learn that executives in the not-for-profit sectors treat the monies entrusted in them by the donating public as well as through taxpayers’ grants simply as their personal fortune. Sporting bodies seem like dinosaurs from a different world. The revelations about Certified Practicing Accountants (CPA) Australia, one of the most trusted and most important professional services organisations in this country, are breathtaking and one of the big banks has been accused of facilitating money laundering. Meanwhile, donations to political parties and their internal processes for checking eligibility for public office continue to make headlines.

Revelations about widespread sexual harassment are common in many environments (recently in the Australian start-up community) and there are strong calls in various environments (recently in the medical profession) to end the culture of bullying.

Many people feel that all this might only be the tip of the iceberg. All those apparent or alleged failures have to do with good (or rather bad) governance and it is very hard not to get the impression that Australia is in the middle of a substantial governance crisis in all sectors (private and public, for profit and not-for-profit, listed and unlisted).

In this context I thought it worthwhile to revisit the learnings of the Siemens Group following the Siemens bribery scandal uncovered in 2006. In a keynote speech at a global lawyers’ conference, Peter Solmssen, then General Counsel for Siemens, said that one of the questions the new executive kept asking themselves when looking at the unbelievable mess they found was: “where were the lawyers?”.

My experience in various senior in-house roles in very different industries and environments has led me to believe that the following three components are critical for achieving what is commonly referred to as “good governance”: (a) the right organisational structure; (b) the right

people; and (c) smart systems and processes without creating a bureaucracy. It appears that, if an organisation gets its structure right and is relatively successful in having the right people in the right roles, then the systems and processes will very often fall automatically into place.

Whilst structures at board level appear to be very uniform (a chair plus a certain number of ordinary board members, board committees etc.), it is the executive management structure that makes all the difference. The executive roles, their responsibilities and accountabilities, their respective levels of independence and the relevant reporting lines will to a large extent not only determine the efficiency of the executive but also very much the standard of governance.

Although every organisation is different and large listed companies face different challenges than smaller not-for-profit organisations, the following organisational steps have a very good chance of guaranteeing good governance practice and potentially even turning around the most broken organisation.

When organisations reach a certain size they sooner or later realise that they need to employ a resource responsible for advising on processes and drafting policies, dealing with regulators, conducting internal training and potentially also managing the risk register and the insurance portfolio. This is exactly the point in time when the organisation has the opportunity of getting ahead of their game by making the decision to establish an in-house legal function. The advantages are obvious. The right lawyer(s) cannot only manage all of the above but also immediately take charge of drafting and even negotiating contracts, manage disputes as well as external lawyers and the related budget and also advise on corporate matters.

However, the decision by an organisation to employ its first in-house lawyer will not only be a statement that governance and compliance are being taken seriously but also a real game changer for most organisations. The lawyer will ask difficult questions, challenge the status quo and make suggestions not everybody in the organisation will necessarily be comfortable with. This in itself will take governance to a new level. The lawyer will also educate the

organisation on the lawyer’s primary duty to the court and the need to hold a practising certificate and be truly independent. The organisation will soon learn that a good in-house lawyer is not only the principal legal advisor but also business partner to all decision-makers in the organisation and, we may like it or not, very often informally assumes the role of an internal watchdog.

Governance is best served when the head lawyer reports directly to the CEO and is a member of the senior management team. This gives him or her access to all relevant information and the regular opportunity to address governance issues directly with the top of the organisation. It is surprising that there are still lawyers out there reporting into CFOs, COOs, Heads of Corporate Services or even Heads of HR, who are rarely qualified to guide, manage or mentor lawyers nor do they have the authority to make all relevant decisions on behalf of the organisation. As an in-house lawyer has a professional duty to act in the best interest of their organisation as their (only) client, it is only logical (and appears to be best practice) that the head lawyer takes instructions only from the one person that has the most comprehensive authority to speak on behalf of this client. Such a clean structure also avoids uncertainties and conflicts that could arise whenever the lawyer wishes to not go through his or her immediate manager when raising a legal, compliance or governance issue.

It is no surprise that one of the first steps the new Siemens Group CEO took in 2007 was to establish a centralised executive team including the new general counsel.

I have no doubt that a relatively small executive team headed by the CEO and including the CFO, the head of HR and the general counsel is not only best practice but also enhances good governance in every organisation.

The next logical step is that the head lawyer is also appointed company secretary of the organisation. Many organisations have come to accept that the role of company secretary has over time evolved from a mere administrative function into a manager of board affairs and principal governance advisor. The core skills required from a company secretary include an excellent working knowledge of the Corporations Act, strong experience in dealing with sensitive and confidential matters, outstanding drafting skills (minutes of board and shareholder meetings are probably amongst the most important documents an organisation produces) and a

high degree of diplomacy. Who would be a better candidate for this job than the already trusted head lawyer of the organisation?

As the company secretary will always report directly to the board (often through the chair), the head lawyer/company secretary will end up with (at least) two reporting lines. Most global (listed) organisations have long discovered the advantages of dual reporting lines for their key support functions. It is very common for an international organisation to have their head country lawyers report into the commercial head of the region/country as well as the global head lawyer (e.g. the global general counsel). Similar structures exist for other critical support functions like CFOs and HR heads.

Any board (and in particular the chairs of the board and its committees) committed to transparency and good governance will welcome dual reporting lines. They would want to reserve their right to seek and hear from time to time advice from the head lawyer/company secretary without the CEO being involved and the CEO will very much appreciate his or her advice in relation to the CEO’s dealings with the board (in particular in relation to board reporting).

relate to the definition according to which a professional is a member of a group of individuals with a similar skill set who agree to be bound by standards that are significantly higher than those applicable to the general public. I would add that the members of such a group are likely to be answerable to independent (often self-governing) bodies that have the power to investigate any form of professional misconduct and can initiate proceedings that may lead to a member being struck off a roll or otherwise have a member’s licence to operate revoked.

Professionals (members of their respective professions) will bring their higher ethical standards into an organisation and a healthy number of professionals will often automatically lift the compliance and governance culture of an organisation.

In 2008 the new incoming Siemens Group CEO reportedly caused an uproar when he publicly stated that Siemens was “too male, too white and too German”. The same can easily be said of many Australian organisations only replacing 'German' with 'Anglo-Saxon/Celtic'.

In theory, it appears to be established that diversity on board and executive levels enhances good governance whilst lack of diversity is a substantial threat to good governance. However, the reality is still not looking bright.

Gender diversity should be the most obvious starting point. Despite sufficient research indicating that organisations with a healthy representation of women on boards and executive teams simply perform better, the reality is that women are still vastly underrepresented. The first simple principle for every executive recruitment process should therefore be: when in doubt, employ the woman!

Very delicate topics are age diversity and length of tenure. In my experience, executive teams have the best chance of performing well above average when each age group from the thirties to the late fifties/early sixties is more or less evenly represented. Whilst older executives can bring their enormous (life) experience to the table, younger guns are needed to constantly challenge entrenched views and they are also much closer to the trends (and also the technology) of modern times. From a governance perspective, I consider the age composition of Australian boards a particular challenge. It is not uncommon that professional directors gained C-suite experience at a time when governance and compliance cultures were still in the dark ages. Directors are often quite old when they (often as a path into semi-retirement) transition onto boards. It has been said that directors under the age of forty

Again, the Siemens bribery scandal can serve as an interesting case study. Within months of taking over, the new CEO replaced 80% of tier 1; 70% of tier 2; and 40% of tier 3 managers.

Whilst the composition of both the board and the executive team is very important I would argue again that having the right people on the executive is even more important than the skill set at board level.

Here are a few criteria which, in my experience, have the tendency to take the overall quality of decision-making to new levels and therefore also enhance governance:

In this context I am less referring to candidates who define themselves as professionals (there are many of those out there) but more to members of a profession. I can very much

A) THE RIGHT ORGANISATIONAL STRUCTURE

Establish an in-house legal function

Make your head in-house lawyer report directly into the CEO

Make your head in-house lawyer the company secretary

Recruit professionals

Diversity

B) THE RIGHT PEOPLE

Hajo Duken, General Counsel at Sell and Parker explores the key components of 'good governance.'

Making the head lawyer also the company secretary enhances the lawyer’s independence and also ensures his/her oversight of the most critical processes like board and external reporting as well as contract execution and record keeping.

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the invaluable contribution members of this group can make at the board and executive tables (through fresh ideas and different ways of thinking as well as their multicultural experiences) I would recommend that Australian organisations specifically target this group in their executive recruitment and board appointment processes.

In addition, I found that often too much weight is given to industry experience of senior candidates. Industries tend to be incestuous by nature and practices are often copied from other players in the industry without being aware that the rest of the world has long moved on. A very efficient way of learning about better practice could be through employing executives and professionals with backgrounds in different industries.

We are already heavily involved in establishing the framework for the recruitment of executives and the appointment of board members. We draft employment contracts (and give advice in relation to critical provisions like term of the contract, termination rights, probation period and a potential reference to policies and procedures). We guide the organisation through performance management and disciplinary processes and manage employment related litigation. We also draft constitutions and shareholder agreements and deeds of indemnity and may also manage the D&O insurance portfolio. This all leads to numerous opportunities for us to strongly suggest solutions and pathways that enhance good governance.

However, we can still do more. We can play

a much stronger and visible role in the recruitment process itself. We can suggest to CEOs (and boards) that we play a part in the selection and interview process in order to directly test candidates’ views and attitudes in relation to governance and compliance. It is not unusual that a trusted company secretary is asked to assist the nominations committee of a board in setting up a shortlist of candidates for board appointments and even provide advice in relation to individual candidates.

Additionally, lawyers should have a particular radar for sensing inappropriateness and nepotism or other conflicts of interest. We have all heard statements like “we go through the process but I already know whom I want”, “we went to school together”, “we are members of the same club”, “he/she has once done me a favour” or “my wife/son/daughter/neighbour can do this job”. In those circumstances it may well be upon us lawyers to strongly push for proper process being adhered to.

It is widely acknowledged that an organisation should have a certain portfolio of documented systems, policies and procedures, in particular in the workplace health and safety, anti-bullying, anti-harassment, anti-discrimination and increasingly in the whistle-blower protection spaces. However, it appears to be equally true that many organisations respond to perceived governance and compliance failures or insufficiencies by (only) introducing a new policy or procedure which often leads to internal overregulation that may have a more crippling impact on an organisation than government regulation. Executives regularly tend to admit that in their organisation’s

policies and procedures are contradicting each other and the total number is so high that no employee has the chance to read them all let alone being trained on them or fully comprehend them. Somebody once described such a situation as “death by policy”. I know of organisations that have gone through the trouble of counting their policies and procedures and have come up with numbers in the thousands. Such a situation can be more damaging to the organisation than having no formally documented policies or procedures at all. Here are a few tips that could help an organisation to strike the right balance and enhance governance rather than hindering it:

There are governance documents that are intended to fully bind all employees (and possibly contractors). In the event the organisation wants or needs to enforce against employees (in disciplinary proceedings) or contractors (through contractual remedies), the organisation wishes to use as a defence when investigated or prosecuted by regulators (e.g. as an argument in favour of a positive compliance culture) or the mere existence of which is a requirement under legislation or licence or grant conditions (Primary Governance Documents). There are also documents that are only assisting the organisation in relation to the induction of new employees, training and/or administratively (Secondary Governance Documents).

Given the purpose of those documents, they should be clear and concise and drafted carefully. Most of the drafting principles for contracts would also apply here. I have seen policies and procedures that try to summarise various pieces of (primary and secondary) legislation, read more like a legal textbook and are simply incomprehensible. The reoccurring discussion of what is the difference between a policy and a procedure is in my view obsolete. The content is what counts and the best documents cover a topic comprehensively by including general policy statements, the 'musts' and 'must nots' and procedures available in the event of a breach. It is therefore logical that primary governance documents are drafted by lawyers like all legal documents and in-house lawyers should insist on their involvement.

Even if the organisation does not want to extend any rights to employees under their employment contracts, the organisation should make sure that it always complies with its own policies/procedures and enforces them whenever a breach is discovered. No, or only sporadic compliance or enforcement, can be detrimental to the position of the organisation when it eventually needs to rely on the document. The in-house legal function is certainly best placed to guide an organisation through this process.

The many and severe failures of Australian organisations reported in recent times strongly indicate that Australia is in the middle of a massive governance crisis. Furthermore, it’s apparent that many Australian organisations across the public and private sectors are falling well short of best governance practice, with structure and diversity (including but not limited to gender and age diversity) being the most pressing issues.

A proposed solution and indeed a giant leap forward for many organisations is the establishment of an in-house legal function reporting directly into the CEO. In-house lawyers are best suited to take ownership and give strong guidance to their organisation on all aspects of governance. They should step up and use all the tools available to them to take governance in their organisations to new levels and thereby contribute significantly to the organisation’s overall success. Areas such as recruitment, discipline, internal policies and accountability could be streamlined and improved with the input of an experienced in-house counsel. Critically, with this early and ongoing involvement, no organisation should then be required to ask itself: 'where were the lawyers?

are much harder to find than directors over the age of seventy. This can’t be healthy despite some voices seeing signs of a slow change at least in the ASX 100 space. One simple and obvious answer is again: when in doubt, choose a candidate from an age group that is not yet represented!

Limitation of tenures (both at executive and board levels) could also be one of the answers. During the tenure of all leaders (in particular CEOs and board chairs) there comes a tipping point when an organisation becomes more driven by what the leader always wanted (the way things have always been done) than by (best) standards and practices that have developed over time (globally, nationally, in a specific industry or otherwise). The healthy length of any tenure will certainly depend on many factors like the nature of the role, the industry and the regulatory framework an organisation is embedded in. In some cases three years may be enough and in others five or even eight or ten years may be appropriate. However, if an organisation has been led by the same CEO and/or chair for more than ten years I would almost automatically have the suspicion that the organisation has serious governance issues and possibly a few skeletons in the closet.

However, diversity does not stop here. We know that more than 28% of Australians were born overseas. Whilst many from this group would have come to Australia as children and then enjoyed an Australian education, there is still a not insignificant number amongst us who are dually qualified (with degrees from more than one country), multilingual and/or have gained significant high-level work experience in different (possibly non-English speaking) countries. Having experienced first-hand

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a

What can lawyers do?

C) SYSTEMS AND PROCESSES

Clearly define the purpose of a governance document

Draft primary governance documents like a legal document

Compliance and enforcement

Conclusion