Part I of this four-part series concluded: “So there is a gaping legal and regulatory hole in what should be a comprehensive shield of company-wide, managed compliance.”
Without experienced business leadership taking charge and managing compliance across the enterprise, and overseeing the systems and processes this requires, Legal is not accountable for any failure here. C-Suites and boards exempt their corporate law functions from any duty to anticipate, to make timely contingency efforts against, or to decisively neutralize, early-stage legal and regulatory risks. This allows such risks to mutate into full-blown lawsuits, agency enforcement actions, or other legal catastrophes before Legal turns its attention to them. Blindsiding senior executives.
Former GE General Counsel Ben Heineman, Jr. calls this the “ignorance defense”.
Consider three illustrative cases:
The Boeing 737 Max crashes (in 2019 and in 2020), the General Motors ignition switch tragedy (the device was the subject of a recall GM announced in 2014 after a decade of mechanical malfunctions and consequent deaths), and the (lesser known) Blue Bell Creameries listeria outbreaks (in 2015). Each involved:
- Loss of life at the hands of a business entrusted with its customers’ safety (Boeing / 346, GM / 124, Blue Bell Creameries / 3);
- Financial losses in the billions at Boeing and GM, and in the tens of millions at Blue Bell Creameries;
- Federal criminal prosecutions, each ending in the corporation’s guilty plea and a deferred prosecution agreement, with monetary penalties of $2.5 billion, $900 million, and $19 million, respectively;
- Massive civil lawsuits and resulting imposition of money damages;
- Formal findings of regulatory violations and related monetary penalties (Boeing / Federal Aviation Administration, GM / National Highway Traffic Safety Administration, Blue Bell Creameries / Food & Drug Administration);
- Reputational harm of historic consequence to century-old companies, known for the quality of their aircraft, automobiles, and ice cream, respectively.
In each case, before safety problems became public knowledge, executives and technical professionals within the enterprise possessed direct, tangible knowledge of red-flag compliance failures that posed substantial safety questions, along with related reports from regulators and other third parties (at Boeing, at GM, and at Blue Bell Creameries). Yet, in each case, Legal’s failure to make itself aware of this critical information already in the company’s possession — let alone anticipate and plan for likely contingencies — left the C-suite and board to be blindsided when customers started losing their lives:
1. In the case of the Boeing 737 Max catastrophe, the company’s general counsel kept his job (2 months after the second of two 737 Max crashes he became “Counsellor and Senior Advisor” focused on 737 Max legal issues), and retired from the company 10 months after the second of the two 737 Max crashes — with public thanks and accolades from the Boeing Company.
2. In the case of the GM ignition switch tragedy, GM’s general counsel kept his job and retired one year after the February 6, 2014 recall that telegraphed that situation to the world — with public thanks and accolades from GM (6 lower-level attorneys were fired four months after the recall, based on findings of a law firm’s investigation).
3. Blue Bell Creameries had a lower profile than Boeing and GM, and, as a privately held firm, there were no SEC filings by which to identify comings and goings of its general counsel. Nor could I find any press coverage about its general counsel. However, in the most prominent civil lawsuit against the company, the only two individuals singled out for causing deaths and related illnesses were the CEO and the Vice President of Operations — not the general counsel.
I don’t suggest that the general counsels working for Boeing, General Motors, or Blue Bell Creamery in the examples cited above were either morally or professionally blameworthy. Because I don’t know what relevant facts they knew, or when they came to know them.
But the C-Suites and boards at Boeing, General Motors, and Blue Bell Creameries telegraphed to in-house and law firm counsel that their assigned task was confined largely to reacting to events of which they had actual knowledge. But not much, if anything, more than that.
The C-suite and board should change their expectations of the corporate law function to a more proactive role: to identify, and then to prevent, early-stage legal and regulatory hazards which — among all the corporate functions — Legal is best positioned to understand. This should take place in a context of the CEO, COO, or CFO taking charge of, and managing, compliance company-wide, overseeing systems and processes to that end, and making Legal accountable for its role.
Coming in Part III of IV: Opposing views of the “ignorance defense”
Coming in Part IV of IV: Give Legal the responsibility to identify and prevent incipient dangers