Law Department Management

A picture worth a thousand words about the proper role of general counsel

The NY Times, July 8, 2008, at C3, published a photo of InBev’s chief executive striding through the US Senate surrounded by a bevy of reporters. Prominently in the shot, looking determined with her briefcase is Sabine Chalmers, the general counsel of InBev, who is striding four steps ahead of the CEO.

I like the image and its inspirational message for general counsel: the top legal officer not just at the table (or in the hallway) but leading the way, energetic, focused, in charge.

The fraction of your company’s value you would attribute to your legal function

A special supplement to the Fin. Times, June 9, 2006 at 5, delves into the views of CFOs on risk management. The two professors who wrote the piece had asked 334 CFOs “What fraction of your company’s value would you attribute to the finance function?” The average estimate was 10 percent of the value of the company and there was relatively little variation by region, industry or between public and private companies.

I am not sure what to make of the responses to that question if it were asked of a large group of chief legal officers. I can’t conceive how they would even begin to think about quantifying such a figure. If the figure has validity, it would bestow the ultimate measure of a law department’s value.

I would be fascinated to see how a group of CEOs rank the various support functions in terms of their contribution to the value of the company. Where would legal stand?

In-house patent lawyers pay off

An article in the Harv. Bus. Rev., Vol. 85, June 2008 at 132-3, recommends five principles for companies that wish to fend off patent trolls (See my posts of Jan. 20, 2006: trolls and litigation costs; Oct. 29, 2006: Qualcomm’s business model; May 13, 2007: Microsoft’s patent litigation against trolls; and April 8, 2006: secret governmental patents.).

The fourth principle is for firms to “foster interdepartmental and intercompany cooperation.” One example cited cites law departments: “R&D departments that assign patent lawyers to projects from the beginning tend to produce higher-quality technologies, which they are then better able to protect.”

I wonder what proof the authors have for that statement. If the statement means that patent lawyers take more care to protect the ideas of inventors, that ought to be true. But do patent lawyers improve the actual invention?

The authors continue, “Most firms don’t follow this practice, however, because it’s more expensive in the short run.” Again, where are the metrics that backup this sweeping statement? In my experience as a consultant to law departments, companies that have even a modest flow of patentable inventions set up patent review committees and bring lawyers in for initial decisions about inventions (See my post of March 23, 2008: patent review committees.).

The legalization of various tasks and resulting burdens on law departments

It is all too easy for the law department to don the mantle of responsibilities that have legal elements, but should be handled by others. This creeping legalization applies to such functions as electronic discovery, compliance, risk management, records management, contract administration, equity awards oversight, workers comp, and ethics.

Each of those areas undeniably has laws or regulations that need to be understood and enforced, but the onus of responsibility ought to lie elsewhere than the legal team. To assign responsibilities to the law department that are removed from its core competency – to legalize a function – warps the role and effectiveness of internal lawyers and erodes the obligations of other groups within the company.

An example of crossing the line from lawyer to business executive

At one company on a panel at the Fifth General Counsel Roundtable, Dec. 6, 2007, summarized in a publication by the Economist Intelligence Unit, risk management is embedded within each business line. Risk management is overseen by a central risk committee on which the general counsel sits.

Here is the zinger: "The legal department vets all major decisions the company makes." The example given was that the general counsel signs off on all interest rate models.

The pervasive responsibility boasted by that legal department cuts far too wide a swathe. Any law department that presumes to intrude on “all major decisions” treads far onto the turf of business executives.

Four reasons why the general counsel “is a good choice to help manage risk”

According to a panelist at the Fifth General Counsel Roundtable, Dec. 6, 2007 cited in a summary produced by the Economist Intelligence Unit at 8, the four reasons, draw on several advantages of a general counsel and his or her law department.

(1) The general counsel “touches more areas of the company than even the president or line leaders." Everything significant ought to come to the attention of the top lawyer.

(2) "The GC is independent, which is a valuable trait in risk management." Lawyers ought not to be too closely aligned with any particular business unit or staff group (See my post of June 10, 2008: comments by Michael Helfer.)

(3) Attorneys often work in an area where there are many very small risks,” such as drafting contracts. As with compliance professionals, lawyers must be wary of and careful about everything.

(4) "Attorneys are skeptical." They tend to challenge and ask questions of people (See my post of Nov. 27, 2005: Caliper findings and the skepticism of lawyers.).

A fundamental challenge for general counsel: balancing company vs business unit views

Michael Helfer, the general counsel of Citigroup, addressed the Fifth General Counsel Roundtable, Dec. 6, 2007. As summarized by the Economist Intelligence Unit at 6, Helfer reflected on a fundamental management challenge: “managing a legal function so that it supports the company’s business strategy without being co-opted by any particular business within the company.”

“In-house lawyers represent the company as a whole” runs the truism, but in the hurly-burly of work life, it is seductive for those lawyers to identify with human beings, the clients they talk to on the phone and share meals with in the cafeteria. The tugs of individual representation, however, are little co-options, and erode the corporate-wide view that Helfer espouses. The price of liberty is eternal vigilance, as is the price of independence from particular business and staff groups.

Sometimes bumpy relations with outside auditors

The Fulton County Daily Report, May 2, 2008, has an article by Katheryn Hayes Tucker that comments on the Association of Corporate Counsel Eighth Annual Chief Legal Officer Survey, released last month. The ACC invited 5,355 U.S. members holding the CLO or GC title to participate in the survey and 1,166 responded.

The data from late 2007 shows that 85 percent of the respondents expressed deep satisfaction with their career, according to an executive summary released by ACC. One downside, however, are independent auditors.

The top lawyers don't appear to be so fond of the outside auditors with whom they work. “While 59 percent of GCs said their relationships with outside auditors had not changed in the past year, about a quarter of the respondents said those associations had been difficult.” The reason cited by some GCs is that the dynamic had become more adversarial. I can imagine heads butt when the accountants take one position and the lawyers take another.

Six major universities, full of brains, but without a general counsel

In Corp. Counsel, Vol. 15, May 2008 at 98-99, you can peruse a list of 90 “top-ranked universities and the lawyers that head their legal departments.” In that illustrious grove of academe, however, lurk no less than six that lack a chief legal officer. The bereft six are the Univ. of Delaware, Purdue, Clark, Stevens Institute of Technology, Clarkson, and Penn State. Perhaps they have in-house lawyers but no one designated as even primus inter pares. In fact, I strongly suspect that a few of those half-dozen (5.2% of the group) have a practicing lawyer or two on the payroll.

As a consultant to legal departments as well as an alumnus, I am pleased that my undergraduate college, Harvard, as well as my law school, Columbia, and my LLM school, NYU, each have a general counsel.

One postscript (pun recognized): Georgia Inst. of Technology is headed by a Chief Legal Adviser, which puts that office holder in his place. Just advise me, don’t make any decisions.

Should the law department run a company’s anti-counterfeiting activities?

A piece in Counsel to Counsel, May 28 at 10, showcases the efforts of the computer manufacturer Lenovo to combat worldwide counterfeiting of its products. "As the company's legal representative, inside counsel must ensure that processes are in place to watch for and identify counterfeit items early on, aggressively pursue and prosecute counterfeiters, and reassure partners, the public and government regulators that the company's products are trustworthy.” Certainly, the general counsel of Lenovo, Michael O’Neill, moneil@lenovo.com believes that oversight of anti-counterfeit efforts falls within the ambit of the legal department.

Undoubtedly, companies need to know the laws that pertain to fake products and how to cut them off legally, which means that lawyers need to provide counsel, but much of the associated leg work does not require legal training. To monitor Internet and bricks-and-mortar sellers and manufacturers, to investigate customer complaints, to purchase samples of suspicious products and identify them as knock-offs, to train port-of-entry law enforcement and customs agencies, to educate and calm consumers, to take part in raids, and to lobby with peer companies for protective laws and regulations does not require the oversight of a lawyer.

It seems to me that crack-downs on counterfeits sits right at the edge of the law department’s scope of responsibility.