Professionalism and ethics in consulting

who among its staff members qualify for certification. They are then certified without involving external persons in the process.

The advancement of certification has, however, been slow and some controversial questions have yet to be answered. Few clients are aware of the existence and value of certification, which is therefore seldom used as a qualification requirement in selecting consultants. The number of certified consultants has also remained very small. Nevertheless, despite its limited quantitative impact, the CMC initiative has made a significant contribution to the promotion of competence and ethical standards in consulting in many parts of the world and to collaboration of consultants from various countries on these issues of common interest.

Licensing

Certification and similar procedures are voluntary, and fully in the hands of a private membership organization. Licensing or official registration can be made compulsory. This means that, to be authorized to practise, a professional (firm or individual person) must request and obtain an official licence, for which the professional must meet certain criteria. Certification does not have to be a criterion. The licence can be withdrawn in instances of malpractice. Licensing can be done directly by a government authority, or delegated to a semi-official agency or a membership association, which carries it out under government guidance and surveillance.

By and large, management consultants have little experience of licensing; their views on this practice reflect mainly their general attitudes to free competition and to government intervention. Some consultants are strongly opposed to the idea of licensing, which they regard as an unnecessary bureaucracy and infringement of their freedom. They claim that in consulting it is impossible to define any meaningful criteria for licensing except those that concern any business. Others recognize that progression towards professionalism may require some form of flexible and non-bureaucratic licensing, with a key role being played by professional membership organizations enjoying a high reputation and the full confidence, not only of the consultants, but also of clients, government authorities and the general public.

6.5Legal liability and professional responsibility

Management consultants, as any other professional advisers, are not immune from being held legally responsible in certain cases where their advice or recommendations are deemed to cause pecuniary damage or loss to their clients or, perhaps, others in a relationship with their clients. While such legal liability might be more problematic in the case of engineering or computer consultants, it is not insignificant in the “pure” management consulting area. This section looks briefly into the standards used in various legal systems in determining

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liability and in assessing the amount of damages awarded, as well as the question of insurance available to consultants to cover such liability, and other means by which consultants may protect themselves.

First, it should be pointed out that, in countries where the courts have easily found liability stemming from professional advice given by consultants, and where clients/plaintiffs have been awarded large amounts of damages, one undesirable effect has sometimes been to induce a certain reticence on the part of consultants to recommend bold, novel and imaginative solutions to their clients’ problems. In other words, fear of possible legal action can lead to overcautiousness and risk avoidance. Even where insurance is available (usually at considerable expense) to mitigate the consultant’s actual loss, the mere fact of being deemed responsible for negligence or for contractual breaches, and the repercussions on the consultant’s reputation, may be sufficient to dampen his or her enthusiasm and innovativeness in advising clients.

Liability: why and when?

This being said, legal liability will normally, and in principle, flow only from a clear demonstration of malpractice in the form of non-professionalism bordering on or carrying over into the realm of gross negligence or fraud. Although not always respected in practice, the rule should be that an honest error of professional judgement in and of itself should not entail the legal liability of the consultant. As a minimum there should be a demonstration of noncompliance with an accepted standard for the profession and/or deviation from the requirements of the consulting contract.

While this is not often easy to establish, lawsuits are more frequently brought and won (and judgements or settlements are larger) in certain legal systems (many cite the very litigious American system) than in others. Where this is the case, a contributing factor may be the nature of the defendant/ consultant, i.e. where a big firm is involved which, in the eyes of a court or jury, can easily pay large amounts in reparation. The same effect may be seen where it is known that the defendant is covered by insurance, and the insurance company itself is seen as having “deep pockets”. In both cases the finder of facts, jury or judge, may pay less heed to a thorough search for real fault by the defendant. In fact, in some societies there may be a view that where there has been loss, there must be a legal remedy. In any case there is a general trend towards finding liability more easily, and compensating (sometimes problematical) harm more handsomely, and this warrants consideration and possible defensive action by professional management consultants.2

It should be noted that it is normally no defence for the consultant to assert that he or she was merely giving advice or recommendations. The client has the “right” to rely on the expertise proffered by the consultant. The fact that the client was under absolutely no obligation to follow such advice or accept such recommendations counts for little, juridically speaking, if it can be demonstrated that the consultant’s action was patently unprofessional and did

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not meet the standards of the profession. Of course, in order for a plaintiff to prevail, damages or loss directly consequential to following the advice and recommendations of the consultant must be shown as well. In other words, the loss or “injury” must be directly traceable to the negligence (or contractual nonperformance) of the consultant.

Another significant aspect of this whole question is the financial situation of the management consultant and, in particular, the single practitioner or the very small firm. If the consultancy is organized as a limited liability company, or even if it has no corporate structure, its assets may not be sufficient to allow the client to recover the loss or damages suffered, or even to make a lawsuit economically worth while. Nevertheless, as noted earlier, it is far from pleasant to be accused of unprofessional conduct in the exercise of a consultancy.

Minimizing liability

One way of minimizing possible legal liability is for consultants to ensure that the terms of reference and specifications of the consultancy are clearly and unambiguously spelled out in the consultancy contract. Ambiguities in this regard often lead to expectations on the part of the client which are not intended by the consultant. Such misunderstandings can in turn lead to allegations of failure by the consultant to adhere to the contract, and to claims and lawsuits. Such a situation should be avoidable if due care is taken in drafting the contract.

Another means of attenuating, if not eliminating, possible liability for the consultant is to negotiate a clause in the consultancy agreement in which such liability is limited to a specified amount. It is quite common to find clauses that specify that the consultant’s maximum liability for professional acts of misfeasance or nonfeasance (or breach of the consultancy contract) is to be limited to a specified amount or to the total amount of the fee. Obviously such a clause must be negotiated and mutually agreed, and agreement will depend on the relative bargaining strength of the consultant and the client. The consultant should also keep in mind that there may be national legal restrictions on the possibility and extent of a limitation of liability.

In view of the tendency towards litigation in certain countries, an arbitration clause is sometimes included in the consultancy contract. Such clauses normally stipulate that in case of disagreement over the fulfilment of the obligations of the contract, or in case of other dispute arising under the contract, recourse is to be had to agreed arbitration (a single arbitrator or board of arbitrators) rather than to the courts. The idea is that arbitration of claims by an arbitrator or arbitration board which is knowledgeable and impartial will guarantee that the consultant does not become an innocent victim of the tendency of certain parties to sue at the drop of a hat and for judgements to be out of line with reality. Of course any such clause must be agreed to by the client, who may also take the initiative to include such a clause to better protect his or her interests.

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Professional liability insurance

Insurance against professional fault and liability becomes a serious consideration for management consultants who wish to protect themselves from possible economic disaster resulting from the practice of their profession. In some situations the client may insist that the consultant carry appropriate insurance in order to protect the client in case of damage or loss owing to the activities of the consultant. Consultants may insure themselves either generally over a period of time or in respect of a single project. Indeed, the contracting of insurance is current practice for many of the large consultancy firms, and particularly those whose practice can give rise to the possibility of costly claims by clients. However, insurance coverage can be expensive, with rather high “deductibles” (the insured’s contribution in meeting losses) and is not available everywhere. Where it is, premiums can amount to a significant percentage of gross billings (as much as 5 per cent or more for consultants who are considered to present higher risks).

Such insurance coverage is not standardized, even in the United States and United Kingdom, where it is probably most common. Thus the policies, in terms of the risks covered, deductible amount, premiums and other aspects, frequently have to be negotiated between the consultant and the insurer. Obviously, the particular nature of typical or specific consultancies performed will figure prominently in the assessment of the risk component. Typically, insurance will cover the consultant if he or she is found to have performed negligently, but not in case of, for example, failure to deliver or fraud. In certain countries, there is a move towards professional associations either arranging for or sponsoring individual or group liability insurance for their members.

Finally, consultants should consider whether their insurance coverage should include personal injury claims of third parties (e.g. employees or clients of the client) who may have claims allegedly resulting from the activities and recommendations of the consultant.

Liability awareness and diverse jurisdictions

Consultants should be aware, at least in a general way, of the possible liability they may be exposed to in undertaking consultancies. This is obviously of greater importance (and more difficult) for consultants who operate internationally and hence are subject to different legislation and jurisprudence depending where the consultancy takes place. In this regard, the consulting contract may specify the governing (applicable) law, in the event of legal claims arising out of the agreement, by reference to a particular country that is related in one way or another to the contractual relationship (e.g. place of conclusion of the contract, domicile of one or the other of the parties, or place where the work is to be performed).

For this and other reasons, consultants may wish to seek competent legal advice, particularly where an assignment may involve more than minimal risks of possible liability. In a number of countries, there is a growing group of lawyers who specialize in legal liability of professionals.

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Professional responsibility

The relationship between legal liability and professional responsibility in consulting, generally speaking, is a relationship between law and ethics. Legal liability of professionals is a legal construct, imposed by law. It is applicable only if there are appropriate rules or laws, and an institutional framework able to enforce them. In contrast, professional responsibility can be defined as a set of voluntarily adopted and self-imposed values, norms and constraints, reflecting the professionals’ conception of their role in the economy and in society, and their responsibility towards the clients. It is an ethical and cultural concept. Differences in the application of legal liability in various countries are due to different legal systems. Differences in professional responsibility reflect different social and professional cultures.

As discussed earlier, professional responsibility covers a wide range of issues in which a consultant must choose among alternative modes of behaviour. The quality of the consulting service is the best example. In most assignments, the quality of the services provided will depend entirely or predominantly on the consultant’s own judgement, which in turn will be guided by his or her sense of responsibility towards the client. Legal liability will be applicable only to a very small number of extreme cases, where service quality has dropped to the level of malpractice and has caused damage to the client.

A strong sense of professional responsibility, and not a cautiously formulated consulting contract, is therefore the best safeguard in avoiding legal liability. Most instances where a professional adviser’s legal liability is in question are not due to bad intentions but can be traced to breaches of professional responsibility such as inadequate research and fact-finding, appointment of incompetent staff, hasty and superficial judgement, or failure to inform the client of the risks involved and issues that could not be taken into consideration.

It is the policy of professional consulting associations to define ethical and behavioural norms which express their members’ professional responsibility above and beyond the requirements of law. In this way the professional associations guide and educate their members and protect the profession. This protection also includes disciplinary procedures and measures in cases of violation of the codes of conduct. However, in management consulting these disciplinary measures tend to be exceptional and their impact has remained limited. Professional associations can deal with cases of conduct that are contrary to the adopted codes if such cases are brought to their attention. They have no mandate and no resources for acting, on a continuing basis, as inspectors of their members’ professional behaviour.

Therefore, in the end it is the consulting firm that must define for itself its perception of professional responsibility and integrity, and instil in every consultant employed by the firm a strong sense of professional responsibility.

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1G. Lippitt and R. Lippitt: The consulting process in action (La Jolla, CA, University Associates, 1978), p. 74.

2In some countries a counter-trend has been apparent in recent years. This legislative and practical development is probably a reaction by law-makers and the judiciary to past excesses.

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