Should the Roles of Corporate Secretary and General Counsel be Separated?

Prior to the enactment of the Sarbanes-Oxley Act (“SOX”) in 2002, most companies treated the role of the corporate secretary as a part-time role designed to satisfy the state corporate law mandate that an officer of the corporation record the proceedings of board and shareholder meetings and keep custody of the corporate seal.   This general description of limited responsibility is what made its way into most companies’ bylaws and likely caused boards to attach the “Corporate Secretary” title to the title of General Counsel rather than appoint an independent Corporate Secretary. However, considering developments in the law concerning attorney-client privilege and the evolution of the broad-based responsibilities of today’s Corporate Secretary in this time of heightened concern for corporate governance, it is now, more than ever, appropriate for Chairs of boards and CEOs to question why the role of Corporate Secretary is still typically combined with the distinctly different role of General Counsel.

Misconceptions About the Attorney-Client Privilege Can Destroy It.   We often hear from attorneys that the General Counsel should be the Corporate Secretary because it allows the General Counsel to assert attorney-client privilege over sensitive discussions that take place at board meetings while the General Counsel takes meeting minutes.  However, this assertion is based on a misconception of the law concerning the preservation of attorney-client privilege as it pertains to the General Counsel.  Since 2007, federal courts have drawn a distinction between communications between a lawyer at a law firm and his client and an in-house lawyer and his client.  The distinction lies in the fact that a General Counsel often provides business advice in addition to legal advice.  This is particularly true of the General Counsel whose CEO expects him or her to provide value above and beyond what traditional lawyers provide.  Indeed, today’s General Counsel is expected to be a key member of the management team and to provide strategic business advice to the management team and the board of directors.  Consider a recent survey jointly conducted by NYSE Governance Services and the executive search firm Barker Gilmore.  The title of their resulting report, The Rise of the GC: From Legal Advisor to Strategic Advisor, alone illustrates the point.  However, in 2007, the Federal District Court for the Eastern District of Louisiana found that, when a GC’s communication is not comprised primarily of legal advice, the contents of the entire communication, whether it be a memo, an e-mail, personal notes or a phone call, may be discoverable by opposing counsel or a regulatory agency.  This became known as the “primary purpose” test for determining whether an in-house lawyer’s communication to his or her corporate client is discoverable.  It was an important legal development because it called into serious question those communications that a General Counsel makes with respect to his or her role as Corporate Secretary, which is managerial, administrative and operational in nature and does not involve the rendering of legal advice.  It is worth noting that European courts have held that in-house attorneys should not be afforded the attorney-client privilege as they generally are in the U.S.  Whether the European model is one that the U.S. will ultimately adopt remains to be seen, but the “primary purpose” test certainly takes the U.S. one step closer to it and justifies a concern for the comingling of the General Counsel’s business-oriented advice and legal advice. 

The “primary purpose” test recently played out at the Securities and Exchange Commission (“SEC”) during its investigation of a NYSE-listed company.  The underlying facts were that a sales-oriented lawyer became employed by a company that was in need of a General Counsel, but he demanded that his title be “Executive Vice President of Business and Legal Affairs” (the “EVP”) even though he would be the company’s acting General Counsel and Corporate Secretary and his salary would be paid from the company’s legal department budget.  In addition to, on rare occasion, rendering actual legal advice, the EVP participated in sales calls to sell the company’s products and services, participated in business development initiatives and provided general business strategy-oriented advice to his colleagues on the management team and to the board of directors.  When it came time for the SEC to demand documents and depose witnesses as part of its investigation into the company, the SEC took the position that this EVP’s role was not primarily that of lawyer and, therefore, his communications, even those that included some legal advice, should be handed over to the SEC.  As such, the SEC demanded the EVP’s documents and his testimony concerning his interactions with the board of directors.

The takeaway from the courts’ “primary purpose” test and its effect on the discoverability of General Counsel communications that contain non-legal advice should cause CEOs and boards to reconsider coupling the company’s Corporate Secretary role with the General Counsel’s role and to consider vesting the Corporate Secretary role in another individual who is not acting as the company’s lawyer.  Because the role of the Corporate Secretary is a predominantly managerial and administrative one, a strong argument can be made that the General Counsel who also wears the Corporate Secretary hat jeopardizes his or her ability to assert attorney-client privilege in one of the most important forums for which the privilege must be preserved – the board room.[1]  

Performing the Corporate Secretary’s Responsibilities Detracts from the Value the General Counsel is Expected to Provide.   With today’s increased focus on corporate governance stemming not only from SOX, but also from activist shareholders and stepped-up regulatory enforcement efforts, the role of the Corporate Secretary has evolved to include the management of a variety of corporate governance-related workflows.  These workflows include supporting boards and their committees (e.g., maintaining agendas, preparing meeting materials, taking meeting minutes and drafting resolutions and unanimous written consents), coordinating annual shareholder meetings, drafting and preparing the company’s proxy statement, dealing with shareholder proposals and managing shareholder communications, maintaining the stock ledger, complying with local jurisdictions for all corporate entities, managing relationships with key vendors such as stock transfer agents, proxy solicitors and inspectors of elections, and driving a host of other governance-related processes that cut across the organization.  These responsibilities, while predominantly managerial and administrative in nature, are demanding and cannot be adequately performed if they are assigned to the General Counsel or another corporate officer who has a separately demanding role. [2]

The General Counsel is typically responsible for a myriad of legal matters affecting the company, including leadership of a robust compliance program, defense of products liability, securities class action, shareholder derivative and other types of lawsuits, investigations by relevant regulators, tax, labor, intellectual property and other matters for which management and the board expect guidance from the General Counsel.  Having to manage the administration of board meetings and related corporate governance matters in addition to this myriad of other responsibilities would cause any General Counsel to be distracted from providing the value he or she is otherwise expected to provide.  Think for a moment about the absurdity of having the company’s lead lawyer, or even his or her deputy, laboring over a binding machine (or the digital equivalent) to assemble, collate and distribute board meeting materials, ordering lunch for the board, assisting a board member with travel arrangements, or ensuring that a board member is paid or reimbursed.  Believe it or not, this happens even at well-heeled public companies because, after all, cost centers such as the legal department are consistently operating leanly and under budgetary constraints.  This disconnect between the administrative nature of the Corporate Secretary’s work and the non-administrative value the CEO and the board expects the General Counsel to deliver provides additional cause for CEOs to consider decoupling the Corporate Secretary’s responsibilities from the General Counsel’s responsibilities and finding a more cost-effective and value-added solution such as hiring a non-attorney Corporate Secretary or outsourcing the company’s Corporate Secretary responsibilities in whole or in part to a Corporate Secretary support firm.

Many GCs Do Not Have the Experience Necessary to be the Corporate Secretary.  Often, attorneys who are hired to be General Counsel are hired because of their experience with litigation or subject matters that are of particular importance to the company’s business, such as intellectual property or a particular regulatory compliance concern.   For example, when private middle-market companies hire their first General Counsel, they typically hire an attorney who can support the company’s operations in the most basic way, such as drafting and negotiating agreements for the sale of the company’s products and services, managing labor law issues that arise in the hiring and termination of employees, managing legal issues pertaining to real estate and protecting the company’s assets.  These attorneys typically come from law firms or other companies with similar characteristics and do not have the managerial skills and experience necessary to perform the role of Corporate Secretary.  As the company moves closer to an initial public offering of stock, the company quickly outgrows its then existing General Counsel because he or she is not attuned to the issues that will face the company in the public company realm and the evolving needs of a more active and engaged board of directors.  The story then plays out in one of two ways.  The General Counsel may rely on the company’s lead outside attorney to serve as the company’s Corporate Secretary and support the demanding requirements of the board.  That is certainly an expensive proposition and it is not effective in circumstances where the outside attorney has not previously served as a Corporate Secretary in a corporate environment.  Alternatively, the General Counsel sails the company into public company waters in blissful ignorance of the dangers that await a company that has not taken significant and appropriate corporate governance-oriented improvement initiatives. 

The dangers of having a General Counsel inexperienced in public company governance obligations guiding a company through the initial public offering (“IPO”) process recently played out like this:  not having confidence in his General Counsel, the Chief Financial Officer of a company preparing for an IPO invited an experienced public-company General Counsel to speak to his company’s management team, including the company’s sitting General Counsel, about what they should be thinking about as they prepare for public company life. The General Counsel guest provided a brief overview of what the company can do to prepare the board, the management team and certain key operational functions. The company’s sitting General Counsel remained silent during the entire presentation, presumably wondering if he was about to be fired.  The next day, the company’s sitting General Counsel called the General Counsel guest and said, “your presentation yesterday was a real wake-up call for me.”  The General Counsel guest responded, “I barely scratched the surface of the things the company should have already done and you are three months from an IPO.  God help you.” It’s worth noting that the company’s sitting General Counsel relied entirely on outside counsel to serve as Corporate Secretary and to manage the affairs of the board.  Naturally, relying on outside counsel did nothing to change internal operations and administration.  Regardless, it turns out that God did help him, and the dual transactional track that the company pursued led to a sale of the company rather than an IPO.

The GC Should Also be the Corporate Secretary in Limited Circumstances, But Consider the Alternatives.  Some companies may have no choice but to take the risks with respect to potential loss of attorney-client privilege, distraction of the General Counsel from his or her core duties and General Counsels who are not familiar with public company readiness controls.  This might be because the CEO or the Chairman does not believe these risks are high enough to warrant the additional expense associated with hiring a separate Corporate Secretary.  In such a scenario, the CEO and the Chairman should, at least, talk with the General Counsel about the risks outlined above and request that the General Counsel think of other ways to mitigate them.  For example, the General Counsel could be encouraged to create an “Ethical Wall” between the two functions even though they are shared by the same individual or group of individuals.  This is easier said than done when business and legal discussions are intertwined, but thinking along these lines will inevitably lead to a General Counsel who is more conscious of the nature of his communications and better prepared to separate his business advice from his legal advice, even if it means calling two separate meetings or drafting two separate documents on the same topic.  Alternatively, the CEO might consider outsourcing the Corporate Secretary function to a cost-effective third-party provider of managed professional services.  Doing so could prove to be a better solution than hiring another employee or group of employees because a managed professional services firm might be able to provide additional value that an employee may not be able to provide on his or her own.  This could also mitigate all of the risks outlined above.

Conclusion.  The roles of the General Counsel and Corporate Secretary are evolving due to a variety of factors including changes in the law concerning attorney-client privilege for in-house attorneys, greater concern for corporate governance and higher demand for value-added service.  While some General Counsels have a remarkably broad capability, a General Counsel cannot - and should not - be all things to all people.  CEOs and Chairs of boards should consider separating the roles of Corporate Secretary and General Counsel as a first step toward a separation of powers that is in the best interest of the organizations they are managing and overseeing.  

[1]   The authors reserve for another time a discussion of the General Counsel’s participation in other business matters, but CEO’s and Chairs of boards should also consider whether the unique perspective a lawyer brings to business strategy discussions needs to have the General Counsel title attached to it. 

[2] The authors believe that, if the roles of the Corporate Secretary and General Counsel are separated, responsibility for corporate governance should generally rest with the Corporate Secretary and/or Chief Governance Officer.   See Corporate Governance – Who Owns It?