In-House Honesty

In-House Honesty

By Sachin Adarkar. He is a general counsel and chief compliance officer for Prosper Marketplace Inc., a peer-to-peer lending company in San Francisco

As a general counsel, one of my primary duties is to assess the legal risks my company encounters and make recommendations about how best to address them. Sometimes, these risks don’t require much discussion: If we want to open a new office in Idaho, for example, there are certain licenses we’ll need to get, and there are certain filings we’ll need to make, and there really isn’t anything more to it. But more often, the legal risks underlying a course of action are harder to pin down and figuring out the right way to address them is more subjective: Should we pay another $15,000 to settle a threatened lawsuit? If a big, new customer won’t agree to the confidentiality provisions in our standard customer agreement, should we still move forward?

Making recommendations about how to answer these questions is central to my job. But how can I, or anyone evaluating my work, determine whether a recommendation is a good one? We usually can’t judge a recommendation from counsel based on the outcome, because we don’t know whether that outcome would have been different. This is particularly true when the rationale behind a recommendation is to avoid some kind of negative outcome. Would that vendor really have sued us if we hadn’t settled? We’ll never know. And yet, the business people at my company still need assurance that I’m giving them sound advice – particularly when the advice goes against their instincts. This is for my sake as well: When my colleagues have confidence in my recommendations, it makes my job easier and more enjoyable.

Even if the correctness of most legal decisions is ultimately subjective, the right process for making and communicating those decisions can build trust between a company’s legal department and its business clients. For me, the key is transparency. I always try to lay out the main elements that inform any of my decisions on a particular legal issue in a way that allows my audience to analyze my decision critically. This means answering the following questions:

– What are the plausible alternatives to my recommended approach, and, comparatively, what are the main costs and benefits of each of those approaches?
– To what extent is my cost-benefit analysis based on legal issues as opposed to nonlegal ones?
– To what degree is my analysis based on just black letter law, established practice, or my educated guess about what seems reasonable?
– What are my assumptions about the company’s risk tolerance in this area, and how have they affected my recommendation?

Being transparent about the elements underlying a legal recommendation will, of course, invite added scrutiny, which can be both daunting and frustrating. But, ultimately, I believe this approach yields a better decision-making process. If my conclusion on a legal issue relies on assumptions about my company’s priorities and risk tolerances, those assumptions should be tested. If I find that I am consistently off-base in my assumptions, that tells me I’m not understanding what’s going on in our business. And being forced to articulate my thought process out loud generally forces me to be more rigorous in my thinking.

Of course, lawyers know that many legal choices involve more art than science. But sometimes I find it tempting to gloss over that fact to convey the impression that I’m all-knowing and all-seeing. In the short run, obscuring this reality may actually increase my power at the company, but in the long run my colleagues will inevitably catch on – and when they do, their trust in me will be damaged, perhaps irreparably. Being straightforward about what I can and can’t know makes it easier for my colleagues to trust that my decision-making process is open, and helps them feel more invested.

To implement this approach, in-house counsel need to draw on skills beyond a simple willingness to be transparent. Most important is the ability to explain legal issues in a way that is comprehensible to nonlawyers. (To me, this is part of every in-house lawyer’s job.) When I discuss an important legal issue with a business colleague, I expect him or her to gain a clear understanding of the importance of the issue to the company’s business, the ways in which the company can address the issue, and the implications each possible approach has for the company. If that doesn’t happen, I didn’t communicate my points clearly enough.

Because the transparent approach is labor intensive, it should generally be reserved for more significant issues. So, in-house counsel needs to exercise judgment about which legal decisions merit this kind of an in-depth discussion, which require only an abbreviated discussion, and which require no discussion at all. At my company, a serious potential disagreement with a customer that could give rise to litigation would fall into the first category; a reasonable request from an important customer to change a substantive provision in one of our standard customer agreements would probably fall into category two; and a request from a customer’s counsel to change a that in one of our form agreements to a which would definitely go into category three (true story!).

Yes, there are costs that come with taking a more transparent approach. Most companies tend to have at least a few business people who are also amateur lawyers. These guys seem to love nothing more than showing how much more they know about the law than you do (and they are almost always guys, in my experience; why that’s so is a topic for someone else’s column – or dissertation). Admitting your fallibility will make you red meat for these folks, but hopefully, having the self-confidence to expose your decisions to critical inquiry and be frank about the limits of your knowledge will, over time, make it less enjoyable for them to go after you. Even if that doesn’t happen, however, learning to deal with people like that is part of the in-house experience. And who knows? Some of these amateur lawyers may find their discussions with you so enjoyable, they’ll decide to quit their jobs and go to law school instead!