Buying into business ethics

Akhil Prasad and Manoj Kumar Agarwal explain why general counsel should make corporate sustainability a priority

General counsel around the world are increasingly being called upon to play a new and more central role in determining a company’s approach to delivering sustainable value to stakeholders (including employees, local communities, governments, NGOs and shareholders). The value of proactive general counsel in the design, implementation and management of corporate responsibility-related policies, processes and initiatives is becoming more widely recognized.

Corporate sustainability refers to the combination of value creation and corporate responsibility. It involves both risk management and opportunity creation. Corporate sustainability goals are pivotal for businesses and are rising up to the top of many company agendas. Counsel who prioritize corporate sustainability can contribute to an organization in a variety of ways.

The United Nations Global Compact (UNGC) in partnership with Linklaters recently developed a Guide for General Counsel on Corporate Sustainability (G4CC), which provides practical tools drawn from experiences and global best practices to enable corporate counsel to become leaders in this area. An advisory board for the G4CC was constituted to help UNGC and Linklaters with the G4CC (see G4CC Advisory Group at the bottom of this page).

This article examines the concept of corporate sustainability, requirements under India’s Companies Act, 2013, in this area, and why general counsel should view this as a chance to enhance value for stakeholders.

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Defining corporate sustainability

UNGC defines corporate sustainability as a company’s delivery of “long term value in financial, social environmental and ethical terms”. Today’s dynamic, interconnected and demanding world combined with a company’s desire to grow, particularly in new markets and economies, has put general counsel under the spotlight. Many issues that were not historically core to the viability of an enterprise have become core, and a number of these issues now fall within a general counsel’s expanding remit.

Rapid changes in the global economy and in legal and social environments worldwide present challenges and opportunities to boards and senior management for which they increasingly need counsel and advice. This gives general counsel the opportunity to play a more proactive and constructive role in helping to manage risk and deliver stakeholder value through the lens of corporate sustainability.

Corporate sustainability is often considered to have a “green colour” and typically involves focusing on the environment. However, at some companies corporate sustainability includes four dimensions:

Economic

• Assist in fundraising
• Ensure funds are appropriately deployed
• Maintain transparent financial reporting
• Ensure auditor impartiality and unbiased reporting

Social

• Corporate social responsibility
• Guarantee healthy work conditions and well-being of all staff
• Prevent favouritism and unfair treatment
• Ensure safety of women and prevention of sexual harassment at the workplace

Environmental

• Provide transparent environmental disclosures
• Encourage environmental protection standards which are higher than prescribed under law
• Develop policies and procedures and provide training on conservation

Ethical

• Gain management trust to develop whistle-blowing provisions
• Encourage employees to report instances of unethical behaviour
• Take decisive action to prevent unethical behaviour
• Train employees and trade partners on merits of ethical business practices
• Develop matrices and checklists on vendor selection
• Develop framework on employee, contract staff background and antecedent checks

Many general counsel are already using corporate sustainability as a way to achieve their objectives, typically around the management of risk, but also to create value. As a part of corporate reporting, they are often asked to offer support in dealing with both financial and non-financial issues. Corporate sustainability goals empower these professionals to make improvements within an organization to minimize problems associated with both kinds of issues. Their issue-spotting skills are crucial in identifying and managing new risks while guarding an organization’s reputation.

An organization can use corporate sustainability initiatives to grow within a sector. It could also leverage these initiatives to attract and retain top talent, improving its culture and ensuring that both employees and clients reap the rewards.

Taking action

General counsel are a key part of senior management and participate in important decision making. Senior managers see these counsel as trusted partners who will navigate their business through complex regulatory and legal landscapes in various locations. They should simply roll up their sleeves and gain trust with a “can-do” approach.

India’s Companies Act, 2013, includes provisions which give counsel an opening to demonstrate that their role is critical, enables business and supports corporate sustainability. In India, corporate sustainability can be achieved by focusing on the following areas: compliance with all laws; risk management; and prevention of fraud, corruption and money laundering.

Compliance

The Companies Act and most other laws that apply to companies contain penal provisions which can be levied against a company, its directors and key managerial personnel. This makes it vital for companies to devote people, resources and investment to develop a strategy that will ring-fence a company against non-compliance. A compliance programme usually involves several departments with specified areas of responsibility (see table).

General counsel should chair any compliance programme and insist on document-based rather than certificate-based compliance to ensure success. Audit committees and the internal and statutory auditors of a company should review the programme as required. A compliance report should be tabled at every meeting of the board of directors of a company. This will help general counsel gain the trust and respect of senior management.

Risk management

The Companies Act requires all companies to have a risk management policy and framework starting from the financial year 2014-15. The board is required to table its report to shareholders every year and state that the company has implemented a risk management policy which identifies any elements of risk that the board believes may threaten the existence of the company.

The achievement of a company’s business objectives always involves risks. Against the backdrop of the current economic and legislative environment, existing risk management processes may be inappropriate. Today, there is a need for a consistent and systematic process to identify, assess, manage and monitor risks on an enterprise-wide basis at all times. To be effective, the process must incorporate systems for identifying and responding to risk, together with mechanisms for bringing significant risks to the attention of management on a timely basis.

To ensure effective enterprise risk management, general counsel, supported by the company’s management, should take steps to put in place a risk management policy and a risk committee for its implementation. The risk committee should comprise representatives from the board, business, functional stakeholders and others who, depending on the nature of business control, map or manage risks that are critical to the existence of a company.

In addition, general counsel should play a leading role in:

• Setting up a risk management committee with the approval of the board of directors;
• Identifying risks and promoting a proactive approach to treating such risks;
• Allocating adequate resources to mitigate and manage risks and minimize their adverse impact on outcomes;
• Optimizing risk situations to manage adverse exposure on deliverables and bring them in line with the company’s acceptable risk appetite;
• Strengthening the risk management system through continuous learning and improvement;
• Outlining business continuity processes and disaster management plans for unforeseen exigencies and keeping organization constituents prepared to appropriately and adequately deal with such circumstances;
• Complying with all relevant laws and regulations across the company’s areas of operation;
• Communicating the policy to stakeholders through suitable means and periodically reviewing its relevance in a continuously changing business environment.

General counsel have a great opportunity to lead development, operationalize a risk function and gain insights beyond the legal sphere into other facets of the business. A counsel who can highlight key risks which could have an adverse impact on business will gain the trust and confidence of their business colleagues and be viewed as a value creator.

Fraud, corruption and money laundering

Another important aspect of successful corporate sustainability is fraud prevention. The Companies Act includes many provisions to combat fraud, including an auditor’s responsibility to report fraud and investigation by the Serious Fraud Investigation Office. General counsel are expected to play a significant role in preventing fraud and ring-fence the company, directors and key managerial personnel. Although the Companies Act makes it mandatory only for large public companies and listed companies to have a vigil mechanism to report fraud, all companies including private companies should have such a mechanism.

Ethical business conduct is crucial; there should be adequate controls, financial reporting and training so that corrupt practices are discouraged and perpetrators punished. Indian companies have realized they must adhere not only to Indian laws on corruption, but are bound also by legislation such as the US Foreign Corrupt Practices Act and UK Bribery Act. Contractual provisions and corporate policies should ensure that employees, contractors and vendors discourage corrupt practices. Training and development on corrupt practices and money laundering should be mandatory for all stakeholders.

General counsel are well positioned to reassure their company boards and senior management that they will take a lead and tackle issues pertaining to fraud, corruption and money laundering.

Key attributes

The G4CC identified six elements that general counsel saw as necessary to drive a company’s sustainability strategy.

Proactive and connected internally and externally: General counsel must look for opportunities to add value, and be well connected within the business, but also outside of it. The external connections allow them to improve their capabilities, understand and manage risk, and also provide them with the perspective and access necessary to solve problems and help to seize opportunities.

Aligned with corporate vision, purpose and strategy: General counsel must continually ensure that their role is fully aligned to the commercial realities and imperatives of the business. Effective general counsel are grounded in the practicalities of their role and their business. To achieve their objectives, which may include driving change through their function, they must be closely aligned to the business and have a firm understanding of the commercial, financial, legal and regulatory landscape in which their colleagues are operating.

Well-versed in all aspects of business strategy: General counsel need to understand all components of business strategy (including being financially adept). Their ability to see across the business and operational strategy better positions them to understand and engage in a broader range of sustainability issues.

Embedded in the business, but with independence of thought: General counsel are best able to perform their roles when they are embedded within the business team. This does not mean that they need to be assigned as a dedicated resource – they have mixed views about this. They need to be seen as partners in the business and not just the providers of a legal service. However, they must maintain independence of thought and objectivity. The ability to balance those two issues is fundamentally important to their effectiveness.

Willing to go beyond compliance: Some general counsel feel that compliance is the “lowest bar” to be crossed and that they must often ensure their organizations are delivering more than mere compliance. They say they focus on creating an environment where obligations are not only assessed by strict compliance with the “letter of the law”, but also against the principles underpinning the law and, importantly, corporate values.

A leader and advocate for change: As senior executives, team leaders and role models, general counsel see their role as an advocate and strategic adviser as key to their ability to succeed and contribute across a broad corporate sustainability agenda.

In the current climate, general counsel have new and diverse roles to play and these touch on all facets of a business. Counsel should devote time to coaching and training so that their colleagues understand and implement the requirements of corporate sustainability to positively protect, propel and enhance their businesses and stakeholder satisfaction.

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Akhil Prasad is the country counsel for Boeing in India. He has been an in-house lawyer for over 22 years, and was previously with Xerox, Electrolux, GM, Disney and Fidelity. Manoj Kumar Agarwal is an associate professor in the faculty of commerce and business administration at Meerut College in Meerut.