General Counsel in the Hot Seat - Who's Next?

I can't tell you how many conversations I've had on the topic of governance and what motivates behavior, good or bad. Is it the proverbial carrot or stick? What is that one event (or series of events) that changes the collective mindset and spurs organizations to take action?

The answer I get most of the time is that people will act when they are forced to do so, either because of regulation, litigation, liability insurance hikes, regulatory investigation, losses that lead to headlines and so on.

Does that imply that bad news is a harbinger of corporate governance activity (and by extension, pension governance)?

If so, then a recent article about corporate counsel liability is a must read. According to "Gatekeeper GCs Increasingly Becoming Targets for Liability" by Sheri Qualters, gatekeepers like corporate attorneys are under "escalating government scrutiny" for failing to protect shareholders' interests. As a result, "in-house counsel and their law firm advisers say they're increasingly concerned about potential liability faced by in-house lawyers, who are stepping up their documentation of advice and even taking on additional professional liability insurance as precautionary measures."

Securities litigation lawyer William Schuman with McDermott Will & Emery's Chicago office offers that "The current mindset at enforcement agencies is that general counsel need to protect the shareholders' best interests, not just do the management team's bidding."

So how does this relate to life in pension land?

Let me count the ways.

1. There is increasing recognition that ERISA and Sarbanes-Oxley go hand in hand and that anyone involved in corporate governance is necessarily on the hook for pension governance. (In case you missed it, click here to read "Can Poor Pension Governance Land You in Jail?")

2. The first of several major accounting rule changes announced last week have the potential to wreak financial havoc for companies with underfunded plans. There is some talk that even companies with "healthy" plans may find the heightened scrutiny by investors a bit tough to take. Similar to stock drop cases, one wonders if adverse financial statement impact could lead to shareholder suits.

3. In the aftermath of several hedge fund blow-ups, do some ERISA plan fiduciaries leave themselves exposed if their selection process is anything but robust?

4. Will 401(k) plan providers be accused of selecting an inappropriate default investment option (pursuant to the Pension Protection Act of 2006) and have to quell participants' concerns in court?

5. How many more complaints will be filed on the basis of fiduciary breach with respect to the payment of investment fees? (See "Employers Face Suits Over 401(k) Fees" by Arden Dale and Jilian Mincer, Dow Jones Newswires, October 3, 2006.)

These are just a few of the many outcomes we think could lead shareholders to cry foul, sue and put the general counsel, board members and other parties in the liability hot seat.

Drop us a line if you want to talk further. posted by Susan Mangiero at 10/04/2006 12:36:00 AM