Companies Achieve Better Legal Outcomes When CLO Is Corporate Secretary

From protecting shareholder value to helping ensure the sustainability of the entire economy, good corporate governance practices are a foundational element for all companies. A key component to developing a sound governance culture is to define management and board reporting structures that encourage communication, openness, and an environment that welcomes all ideas, as popular or difficult as they may be. Directors play a critical role in corporate governance through their oversight of an organization’s risk management. The management team shares this responsibility, along with the role of implementing good governance practices.  

One leader who plays a central role in any good corporate governance strategy is the chief legal officer (CLO). CLOs are frequently on the front lines of establishing proper corporate governance structures and ensuring that they are in place at their organizations, and for good reason: their legal expertise positions them to advise organizations on the vast array of laws and regulations that govern a company’s activities. Central to this effort is the CLO, who possesses a unique combination of knowledge and perspective to effectively provide boards with the advice they need to build a culture of trust, openness, and accountability.  

How a CLO is positioned within the management structure can play a significant role in the company’s corporate governance practices. However, a definitive understanding of the importance of the management reporting structure is limited by a lack of research. 

To remedy this, the Association of Corporate Counsel (ACC) partnered with the University of Delaware’s John L. Weinberg Center for Corporate Governance to launch a formal call for papers to help build a better understanding of management reporting structures, particularly in regard to the CLO. The first winning paper of the Carl Liggio Memorial Paper Competition offers insight into one particular management structure that contributes to better corporate governance outcomes: the relationship between the board and the CLO.  

Letting Data Tell the Story 

In the United States, the wide-ranging expertise of the CLO is generally well recognized. According to the 2024 ACC Chief Legal Officers Survey, 80 percent of CLOs in the United States have a consistent presence in the boardroom and 82 percent report directly to the CEO. However, there is a significant contrast when looking internationally. Outside of the United States, the percentage plummets to just 63 percent of CLOs reporting to the CEO and 70 percent having a consistent board presence. A little more than half (54%) of respondents reported that they hold the corporate secretary role or that the role reports to them. Within the United States, that number is significantly higher for large ($1 billion or more in revenue), publicly traded companies, where 73 percent hold both roles.  

The inaugural winning paper, Independent or Informed? How Combining the Roles of Corporate Secretary and Chief Legal Officer Impacts Legal Risk by Jagadison K. Aier, Justin Hopkins, and Syrena Shirley, provides an empirical analysis of organizational legal outcomes where the CLO also serves as the corporate secretary. The authors initially present two competing scenarios for how legal outcomes are impacted when the CLO and corporate secretary roles are combined. First, a well-informed, legally knowledgeable individual might be expected to help reduce a company’s litigation exposure. Second, and conversely, the authors hypothesize that a CLO who is also a corporate secretary may use their legal expertise to obfuscate or even mislead the board, thereby increasing the chances of adverse legal outcomes.  

To reach their conclusion, the authors analyzed a sample of nearly 1,500 companies covering a 17-year period (2003–2019) using data in BoardEx, a global data company, to examine the relationship between the combined CLO-corporate secretary role and the frequency and extent of shareholder litigation, regulatory violations, and regulatory penalties. The analysis revealed that when the CLO also serves as the corporate secretary, their companies are less likely to experience negative legal outcomes; specifically, they are less likely to experience shareholder lawsuits and regulatory violations and more likely to receive lower penalties for regulatory violations than companies that do not have the CLO and corporate secretary roles combined.  

How Data Help Directors 

Boards are increasingly charged with overseeing a company’s risk landscape. With myriad laws and regulations facing organizations, the obligation to oversee risk management can be daunting. The potential for negative, expensive consequences is very real. With regulations continually changing in jurisdictions around the world in which multinational companies conduct business, it is imperative to set the proper tone from the top when it comes to compliance and ethical oversight.  

Along with tone from the top, boards oversee the processes and policies necessary to ensure good corporate governance. Many boards and executives have adopted a checks-and-balances approach where roles and responsibilities are clearly defined and accountability to perform is a critical tool. 

A wide range of practices can be used to facilitate the clear delineation and implementation of the checks-and-balances approach. These include holding regular board meetings, instituting strong internal controls, and designing specific ethics training programs for senior management. Above all, whatever elements an organization decides to include in its checks-and-balances program, the purpose is to ensure compliance with all legal and ethical obligations.  

Boards that enjoy a close working relationship with the CLO have a built-in advantage because of the executive’s expertise in legal and ethical compliance regimes. As Independent or Informed? notes, this relationship can often be formalized through the CLO serving as the corporate secretary, and with favorable results. Organizations that do not have the benefit of a close relationship between the board and the CLO run an increased risk of unchecked noncompliance.  

The importance of this relationship is best underscored by Danske Bank of Denmark. In 2007, Danske Bank acquired new branches in Eastern Europe and subsequently reorganized its management structure. Post-reorganization, the CLO reported to the chief financial officer (CFO), rather than directly to the CEO, and had limited access to the board. One of the branches in Eastern Europe began to engage in money laundering, which the CFO neglected to investigate despite warnings from the bank’s legal department. Eventually, a whistleblower brought the authorities’ attention to the illegal activities. As a result, multiple countries have pursued enforcement actions against Danske Bank, including the United States, which levied a $2 billion penalty in late 2022. The CEO and CFO were forced to resign, and the bank lost half the value of its shares.  

Strong, independent boards are critical as the authors of Independent or Informed? found in their research as well. A good place for directors to look to best position the board and themselves is the NACD Blue Ribbon Commission Report on Culture as a Corporate Asset which advises that “directors should … pay close attention to the way in which the roles of the chief legal officer/general counsel and leaders of other key functions such as internal audit and risk management are defined and positioned within the organization.” In its resources section, the report also references an ACC white paper, Leveraging Legal Leadership: The General Counsel as a Corporate Culture Influencer.  

The white paper lists five indicators a board can use to assess whether the CLO is positioned to have a positive effect on corporate governance and culture. These indicators are: 

1. The CLO reports directly to the CEO and is considered part of the executive management team. 
2. The CLO has regular contact with the board. 
3. The CLO is viewed as independent from the management team. 
4. The general counsel advises on issues outside the traditional legal realm. 
5. Business units regularly include the legal department in decision-making. 

These indicators provide directors with a bright-line test to evaluate the extent to which the positioning of the CLO contributes to effective corporate governance. Such indicators, coupled with data from research found in Independent or Informed?, provide directors with solid footing to ask difficult but necessary questions of companies that choose to take their management and oversight structures in a different direction. The pace and complexity with which the business environment is evolving only continue to accelerate, be it through regulations, technology, or geopolitical risks. Organizations must be agile and willing to apply data-driven insights to improve how they operate at every level, even when those findings conflict with long-held assumptions. ■

This article is from the Fall 2024 issue of Directorship.