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In the corporate governance literature, there is relatively little discussion about the corporate secretary, a key information intermediary for the board. The corporate secretary (CS) attends all board meetings and plays a crucial role in documenting and facilitating the decision-making process to ensure it can withstand legal scrutiny. Their duties are inextricably linked to the risk of litigation, as they provide essential legal and procedural guidance to the board and maintain communication with various stakeholders.
Given the nature of these responsibilities, many corporate secretaries also serve as the chief legal officer (CLO) of the organisation. This dual role ensures that the CS possesses a deep understanding of the firm’s legal environment and can guide the board on compliance and regulatory matters. However, this governance structure raises critical questions about potential conflicts of interest. Could these dual responsibilities create incentives that increase legal risks? Or does having a legal expert in this dual role reduce exposure to legal challenges?
This article investigates these questions by analyzing whether organisations in which the corporate secretary also serves as the chief legal officer—a structure referred to as “CLO duality”—are more likely to face legal problems.
Drawbacks of CLO Duality
One of the primary concerns with CLO duality stems from the inherent conflicts of interest that may arise when one individual is responsible for both legal compliance and governance facilitation. CLOs are typically hired by and report to the CEO, which may influence how they communicate with the board in their role as CS. Their dual loyalty could lead them to prioritize the CEO’s interests over transparency with the board, potentially distorting or withholding critical information.
A notable example is the case of Nancy Heinen, the former CS and CLO of Apple, who falsified documents and misled the board to cover up the backdating of stock options granted to herself and other executives. This case illustrates how conflicts of interest can lead to unethical behavior and legal consequences, ultimately harming the company and its stakeholders.
When the same individual serves as both Corporate Secretary and Chief Legal Officer, there is a risk that legal strategies developed by the CLO will be presented to the board without adequate scrutiny. The board relies on the CS for an accurate assessment of legal risks and strategies, but if that individual is also responsible for developing those strategies, there may be little independent evaluation of their effectiveness or potential risks. This lack of oversight can increase exposure to legal disputes and regulatory penalties. We refer to this concern as the “conflicted” explanation.
Benefits of CLO Duality
On the other hand, proponents of CLO duality argue that it enhances corporate governance by ensuring that an experienced legal professional is at the forefront of risk management. The CLO is responsible for identifying and mitigating legal challenges, and their dual role as CS enables them to provide timely and informed advice to the board.
Due to the fact that they are deeply familiar with both regulatory requirements and the company’s internal processes, CLOs serving as CSs can proactively implement measures to reduce legal risks. Their expertise in legal documentation and compliance enables them to develop robust governance frameworks, ensuring that board decisions are well-documented and legally defensible. This firm-specific legal knowledge could ultimately reduce the likelihood of litigation and regulatory penalties. We refer to this perspective as the “expert” hypothesis.
Empirical Analyses and Findings
To test these competing hypotheses, a study conducted by Jagadison K. Aier, Justin Hopkins and Syrena Shirley identified the determinants of CLO duality, focusing on characteristics associated with litigation risk. They found that companies with CLO duality are more likely to operate in high-litigation-risk industries, have a higher standard deviation of returns, be smaller in size, and have greater board independence compared to firms without CLO duality. Notably, the first two characteristics suggest that firms with CLO duality might be at higher risk of shareholder litigation, while the latter two indicate that these firms may be better governed and potentially face lower legal risk.
To further examine whether the “conflicted” or “expert” hypothesis dominates, they analyzed the relationship between CLO duality and various legal outcomes, including shareholder litigation, regulatory violations, and financial penalties imposed for such violations. Since legal risks can lead to significant financial and reputational costs, corporate boards are keenly interested in mitigating them.
Their study, based on a dataset of approximately 12,000 firm-year observations, reveals that firms with CLO duality are actually less likely to be targeted in shareholder litigation and commit regulatory violations. Furthermore, these firms pay 50% fewer penalties for regulatory infractions. These findings persist even when controlling for factors such as CLO compensation, firm size, industry risk, sales growth, stock return characteristics, and firm age. Overall, the results strongly support the “expert” hypothesis, indicating that CLO duality is associated with a lower likelihood of facing legal issues rather than increasing legal risks.
Further Exploration: Impact of Role Separation
To deepen understanding, they explore whether our results are influenced by firms transitioning from CLO duality to a separated structure (where the CS and CLO roles are held by different individuals). Among the firms sampled, 105 maintain CLO duality, while only 57 transition to a separated structure.
The regression analyses indicate that organisations adopting a combined CS/CLO structure experience fewer regulatory violations and lower financial penalties. This suggests that corporations that choose to consolidate these roles recognize the value of having a legal expert directly involved in governance matters. Moreover, the findings imply that separating these roles may not necessarily enhance legal oversight and could potentially diminish the effectiveness of compliance efforts.
The Role of Board Independence
The moderating effect of board independence on CLO duality’s impact was also investigated. Independent boards are generally more effective at monitoring executives and mitigating conflicts of interest. Our findings reveal that the benefits of CLO duality are most pronounced in firms with a high proportion of independent directors. This suggests a complementary relationship between CLO duality and board independence, reinforcing the idea that a well-functioning board can counterbalance potential conflicts of interest and enhance the benefits of legal expertise in governance.
Comparison with CFO Duality
To provide additional context, the second most common pairing of the corporate secretary role—with the Chief Financial Officer (CFO), was also examined. This structure, known as “CFO duality,” raises similar questions about whether expertise outweighs conflicts of interest.
The relationship between CFO duality and financial restatements, an important indicator of financial reporting integrity was analysed. The results show that firms with CFO duality issue 1.5% fewer financial restatements. More specifically, these firms experience fewer revision restatements (“little r” restatements), which indicate minor errors rather than significant misstatements. This finding suggests that having a financial expert as CS can enhance financial reporting accuracy, further supporting the argument that dual roles can improve governance outcomes rather than increasing risk.
Conclusion
Across multiple tests and settings, the study consistently finds that CLO duality is associated with a lower incidence of shareholder litigation and reduced regulatory penalties. Moreover, the presence of a high proportion of independent directors appears to enhance these benefits, suggesting that strong board oversight can mitigate any potential conflicts of interest arising from CLO duality.
Additionally, the examination of CFO duality further supports the notion that combining governance roles with relevant expertise can yield positive outcomes. Taken together, the results reinforce the critical role of the corporate secretary in modern corporate governance and challenge the assumption that dual roles inherently increase legal risks.
Ultimately, our findings suggest that rather than being a liability, CLO duality—when combined with effective board oversight—can be a valuable governance strategy for mitigating legal and regulatory risks in corporate organizations.
Sourced from CLS Blue Sky Blog
