Dive Brief:

• Companies have fewer legal problems if their chief legal officer serves as corporate secretary and a high proportion of the board is composed of independent directors, a study finds.
• The positive effect of the combined CLO-CS role remains even as companies age and they separate the two roles, as mature companies tend to do.
• “Our results should give pause to regulators and commentators who recommend separating the CLO and CS roles,” say the researchers.

Dive Insight:

The corporate secretary is an executive-level position whose role is to manage the board of directors and act as a liaison between the board and the management team. In this role the person shares with directors what the management team is doing and what risks the company faces, and sets up board meetings and fleshes out details of the agenda. 

Only a small fraction of companies have a standalone corporate secretary. The more typical approach is to hand the duty to one of the executives, in most cases the chief legal officer but sometimes the CFO. It’s rare for an executive other than those two to manage the role. That’s because the board’s fiduciary responsibilities typically align with those two roles: keeping the company out of legal trouble and making sure the company’s financials add up.

Asking an executive to manage the two roles tends to build in conflict: as a part of the management team, the executive has an incentive to paint a rosy picture to the board about how the company is doing while wanting to give the board accurate information so it can exercise its fiduciary responsibilities.    

This creates “impaired independence,” as the researchers call it, and would appear to lead to “more future legal issues.” But in their analysis of 110 companies, the researchers didn’t find that. 

“Results suggest that having an informed CS can reduce firm risk,” the report says. “Firms in which a single individual is tasked with both CLO and CS roles typically experience fewer legal issues than those without CLO duality.”

Having fewer legal issues, according to the report, means having “fewer incidents of shareholder litigation, regulatory violations, and regulatory penalties.” 

The study didn’t look at reasons why, but as a general matter, the researchers said, “firms with combined roles have the advantage of a well-informed legal mind advising and informing the board [and] can draw on the CLO’s legal skills when legal opinions or advice are required.” 

Equally important is the proportion of the board directors that are independent, probably because board independence acts as a check on the corporate secretary’s incentive to gloss over trouble.

“Independence of the board could remediate the impairment of the CS,” the report says. 

It’s not clear why the positive effect of the joint CLO-CS role tends to continue over time, even after the company separates the role, but the researchers think it has something to do with how companies change as they mature.

“It could be the case that young, risky firms bear more legal risk and … as they age, grow more sophisticated, and risk declines,” the report says. 

The study is called “Independent or Informed? How Combining the Roles of Corporate Secretary and Chief Legal Officer Impacts Legal Risk." It was the winner of the inaugural Carl Liggio Memorial Paper Competition hosted by the Association of Corporate Council. 

The researchers are Jagadison Aier of George Mason University, Justin Hopkins of the University of Virginia and Syrena Shirley of Columbia University.