Law Department Management

Remove compliance and ethics from the law department

"It's best not to position compliance and ethics people in the law department, says Joseph E. Murphy, counsel at Compliance Systems Legal Group and author of Building a Career in Compliance and Ethics (Society of Corporate Compliance and Ethics, 2007).” I have felt that one reason for this separation is that compliance professionals feel like they are second-class citizens around lawyers (See my post of March 26, 2005: second-class citizens; May 20, 2005:merging compliance and law under the GC; July 31, 2005: law and compliance housed together; Sept. 27, 2005 #4: Merrill merges the functions; April 15, 2007: compliance and its reporting lines; and Dec. 2, 2007: why it is best to separate the two functions.).

Following this quote in GC Mid-Atlantic, March 2008 at 13, Murphy recommends that law departments “hire non-lawyers to implement and run the compliance department; have a manager who is not acting in an attorney role (although the employee may or may not have a law degree) to oversee ethics and compliance, and also have one in-house counsel to oversee the legal angle.” Much of compliance is execution, not interpretation of laws and regulations, so compliance is ripe for non-legal management.

Self insurance by large US companies has moved claims to law and increased its size?

"Over the past few decades, Fortune 500 corporations have increasingly opted to self-insure, with retentions of at least $3 to $5 million per occurrence and often $25 million or more. They look to insurance companies only for coverage of catastrophic events. The insurance industry is not seen as offering cost-effective first dollar or low-retention coverage. Since they are insuring themselves, Fortune 500 corporations have had to become their own claims managers, expanding their law departments to manage the risk." (emphasis added) Met. Corp. Counsel, Vol. 16, May 2008 at 47, blares out this staggering claim by the President of eLawForum.

It is not common for the claims function to reside in the legal department (See my posts of April 23, 2006: claims-to-litigation metrics; and March 13, 2008: Council on Ethical Billing.). Nor has there been any recent noticeable growth recently in law department staffing. Is the emphasized statement true? Perhaps “claims” should be read as lawsuits. Even with that reading, it is not true that law departments previously abdicated litigation management to insurance companies.

Workers’ comp should not be part of the law department

There, I’ve said it. Plain as day.

Perhaps that is why the blog has been almost barren of references to the function (See my posts of Oct. 27, 2005: whether workers comp claims were in certain benchmark reports; April 23, 2006: metrics on claims that result in litigation; Jan. 25, 2006: whether law departments count workers comp in their reported litigation.)

Although the function can be important and costly, it is rarely part of the law department’s scope of responsibilities (See my posts of May 19, 2006: #4: huge spending by Los Angeles; and April 6, 2007: McDonald’s transformation of its workers’ compensation program.). Some companies even turn to external advisors for this specialized field, one which is mostly administrative and procedural with little need for legal interpretation or dispute resolution (See my post of April 4, 2006 about the specialist company, AHC, Inc. that has resident experts.).

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.

Geographically dispersed lawyers, but a tool to help them reach each other

An article in ACC Docket, Vol. 30, June 2008 at 85, discusses General Electric’s Asia-Pacific legal group. It has about 140 lawyers located in 11 countries as well as Hong Kong and Taiwan. In only three locations do more than 10 lawyers sit in the same building complex “and even in these locations they are often divided into smaller groups in order to be closer to their clients." Proximity to clients is very important.

The far-flung group uses software called Sametime (See my post of June 4, 2008: three technologies of IBM.). It displays the names of all of the company's Asia-Pacific lawyers on the right-hand side of each person’s computer screen, showing the lawyers in green if they are at their desk and available to talk. How does it know that the lawyers are present and not on the phone?

The tool also allows instant messaging, which is frequently used by the far-flung lawyer group.

The indicators of availability and the informality of chatting both help to link together the lawyers.

Barristeristas? Starbucks varies from the typical ratio of one lawyer for every non-lawyer

ACC Docket, Vol. 30, June 2008 at 44, explains how the law department of Starbucks Coffee Company uses paralegals “to perform a significant volume of real estate and intellectual property work.” The company’s global legal department is comprised of approximately 150 “partners,” which is the term the company uses for its legal employees.

Interestingly, about one third of the partners are attorneys, while paralegals and other staff members account for about two thirds. The customary ratio is one for one (See my posts of March 26, 2006: EMC and its ratio of one-to-one; May 10, 2006: the US Department of State and its 160 lawyers and 140 support staff; Jan. 25, 2007: GM with its 107 attorneys and 109 support staff; and Dec. 23, 2005 prosecuting attorney’s offices.).

To be sure, some law departments tilt on the side that Starbucks does (See my post of Nov. 28, 2007: Cummins and CISCO.). Where there is a flow of similar legal work, such as the real property needs of Starbucks and its trademark portfolio, it makes complete sense to move toward more support staff than lawyers.

One out of five top compliance officers report to the general counsel

Compliance Week conducted a survey that InsideCounsel, June 2008 at 14, draws on for some metrics. Of the companies that responded, a third (31.7%) had a position called “Chief Compliance Officer.”

As to where the “top compliance executive” reports, about a third (34.9%) report to the CEO and one out of five (20.8%) report to the general counsel. A tiny minority (2.5%) reports to the Board of Directors (See my posts of May 3, 2006: law department as the “independent beacon of ethics and compliance”; and Sept. 27, 2005 #4: Merrill Lynch had 280 lawyers and 235 "compliance executives" worldwide.).

Many posts on this blog describe reporting lines of compliance functions (See my posts of Nov. 1, 2005: one-third to general counsel; May 20, 2005 and July 31, 2005: compliance and law within same group; Oct. 21, 2005: where should compliance report if not to law; Jan. 16, 2006: in health care companies; Dec. 22, 2005: law department relationship to ethics and compliance heads; Feb. 7, 2006: in financial institutions; Sept. 17, 2005 #2: at Citigroup, compliance reports to chief risk officer; Nov. 16, 2005 #1: at Raytheon, Chief Ethics Officer and the Chief Compliance Officer report to GC; Jan. 17, 2006 #1: to GC at McDonalds.). When compliance professionals and lawyers report and work in the same group, there are potential negative interactions between the two groups (See my posts of Feb. 12, 2006 and March 26, 2005: avoiding a two-tier system of employees.).

The day-to-day activities of compliance lawyers and professionals have seldom appeared here (See my posts of Sept. 5, 2005: tracking new laws and their effects at Countrywide; Dec. 31, 2006: ethics hotlines and compliance officers at Raytheon; and June 19, 2006: systems that allow employees to report legal and ethical infractions.).

One common activity, where there is a compliance program, is employee training (See my posts of Dec. 19, 2005: British Petroleum’s law department and its online compliance and ethics training; July 5, 2006: online legal and compliance training vendors; June 13, 2006: online compliance training; Oct. 25, 2006: at Genentech; and March 25, 2005: case studies that spread awareness of legal and compliance risks.).

It is expensive to fund compliance functions (See my posts of May 30, 2005 and June 15, 2005: law firm and inside legal costs of SOX compliance; July 25, 2005: financial services companies spent $11 billion in 2005 on money-laundering compliance; and Dec. 20, 2005 and Dec. 22, 2005: spending on compliance and ethics programs compared to legal programs.).

Surveys aplenty provide us with metrics regarding compliance functions (See my posts of July 25, 2005: best practices for legal risk and compliance; Oct. 25, 2006: Corpedia benchmarking survey; Sept. 4, 2005 #4: “corporate compliance/reputational risk” ranked second highest for importance in European study; and Aug. 26, 2006: survey of “business challenges” to law departments.). Another source of information is associations (See my posts of Jan. 17, 2006: Ethics Officer Association and eight global standards; and Oct. 25, 2006: rebranded Ethics and Compliance Officer Association.).

Rapid growth at an Abu Dhabi-based law department

Every now and then we learn of a law department that has expanded rapidly (See my posts of Feb. 19, 2006 #4: Home Depot; Nov. 19, 2005: Google: and Sept. 22, 2005: Wal-Mart.). In the U.S., the law department of Caterpillar has doubled in size, to 179 lawyers, since 2002, according to Corp. Counsel, Vol. 15, June 2008 at 103.

Outside the U.S., here is a more exotic example. According to Corp. Counsel, Vol. 15, June 2008 at 64, TAQA, a Dubai-based energy investment company, has been a gusher of in-house growth. As the company swelled in the past three years to $22 billion of assets, its internal legal group grew to nine attorneys. The company recruited its first general counsel from Allen & Overy, no less.

On a separate note, it pleases me to add another country to my collection of non-US law departments that have appeared in this blog (See my post of June 10, 2008: Brazilian department; Dec. 11, 2007: Russian department; and Sept. 30, 2006: 11 other countries.).

A menagerie of terms for legal specialists in-house

I am aware of at least six terms for legal specialties within law departments (See my post of May 5, 2008: 30 references to specialists.).

(1) Some general counsel refer to core competencies (See my posts of June 4, 2007: nine references to core competencies; and Aug. 5, 2007: clash between core competency and full service.). They mean, I think, the legal knowledge and skills most essential to the company’s profitability.
(2) Others use the phrase Centers of Excellence for clusters of very experienced lawyers (See my post of Feb. 4, 2008: Centers of Excellence.).
(3) Likewise “shared services” describes specialists who provide legal counsel to business unit lawyers (See my posts of Feb. 4, 2008: five references to shared services.
(4) Another expression is areas of expertise (See my post of Nov. 6, 2007: “areas of expertise” at Freddie Mac rather than functional lines or business units.).
(5) Others refer to practice groups (See my post of May 14, 2006: practice groups, as distinct from business unit groups and specialists.).
(6) “Subject matter experts” constitute another term for specialists (See my post of March 17, 2006: online list of SME’s.).

The shades of meanings between these variations elude me. The essence, however is that certain lawyers in corporations focus their work in narrower fields of law than do other lawyers.

Complexities of having both regional general counsel and business unit general counsel

The new company general counsel at Siemens, the engineering and technology giant, significantly restructured the sprawling legal function. As reported in Legal Week, April 3, 2008, Peter Solmssen appointed general counsel for each of the company’s corporate, energy, industry and healthcare groups as well as regional counsel for the Americas, Europe, CIS and cross-sector businesses. The company is recruiting a general counsel for Asia, Australia and the Middle East.

This marks the first time the direct reports to the global general counsel have these responsibilities. It is also a clear example of matrix reporting (See my posts of Aug. 27, 2005: “double solid line matrix”; Feb. 15, 2006: the bane of combining reports; June 24, 2007: Cadbury Schweppes; and May 21, 2006: business lawyers and legal specialists.).

On a different topic, Solmssen issued a statement about the appointments that said "The [new] general counsels will not just give legal advice; they will have a formative role and decision-making function in business operations. Their responsibilities in this key position will go considerably beyond merely identifying risks."

It is disappointing that in 2008 he even needs to say that a general counsel – a synecdoche for the legal department – should go beyond “merely identifying risks.”