Articles Posted in Structure

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A point-counterpoint in Lit. Mgt., Spring 2012 at 56, presents the case for and against staff counsel in insurance companies. Favoring staff counsel are “predictability of fees, decreased cycle time and increased trust between claims staff and attorneys handling their suits.” The proponent of staff counsel also argues for them due to their accessibility, depth of knowledge, and cost effectiveness.

Reasons to oppose staff counsel include objections to the unauthorized practice of law – but the proponent says that “most states have rejected these arguments” – and to the ethics of an employee representing an insured – but again, “virtually all tribunals finding that the use of staff counsel is ethically permissible.”

The opponent of staff counsel basically revives the “inherent conflict of interest” between serving the employer insurance company and serving the insured premium payer. Additional arguments in favor of independent trial counsel include breadth of experience, more resources available, and more favorable perceptions by courts and opponents.

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In MIT Sloan Mgt. Rev., Spring 2012, at 19, as a co-author the Director of the USPTO states that “intellectual capital and intangible assets – including technology, brands and strategic competencies – comprise more than 50 percent of the business outputs in the U.S. economy.” If so, wouldn’t you expect IP lawyers to become more crucial and therefore more common? I am not aware that the proportion of all law department lawyers accounted for by IP lawyers has risen. Instead, much of what the article refers to as intellectual capital is dealt with by generalist commercial lawyers.

Elsewhere the authors state that the World Intellectual Property Organization estimated in 2008 that there were 6.7 million patents in force around the world. Wow! The average annuity for a patent could be much more than $1,000, but if it were only that much holders of patents would spend nearly $7 billion a year simply keeping those patents current!

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The 2011 In-House Counsel Barometer, produced by the Canadian law firm Davies Ward Phillips & Vineberg In association with the Canadian Corporate Counsel Association (CCCA), covers the responses of 864 in-house lawyers in Canada.

The report states at 9 that “one-fifth (19%) of in-house counsel are sole practitioners in their organization and another 23% report that their law department is comprised of 2-3 lawyers.” Based on that distribution from a large number of respondents, the median size of Canadian law departments would be around 4 lawyers, since 42 percent have 3 or fewer, and one more lawyer will push the cumulative percentage beyond the 50% mark.

If lawyers did not come in units of one but were identified by full-time equivalents, the mathematical median might be around 3.2. “Mathematical median” is not a term of art, but tries to convey the “typical” number of lawyers in Canadian law departments if the numbers of lawyers could be stated more precisely than after jumps of one full lawyer at a time. The average won’t work because some very large departments might push the number higher than what I am trying to get at. Perhaps there is an average below the median?

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“Path dependence” describes situations in a law department where “a decision made early on for one reason … influences behavior long after that reason is irrelevant.” Art Markman, Smart Thinking: three essential keys to solve problems, innovate and get things done (Perigree 2012) at 28-29, gives the example of the QWERTY keyboard. Supposedly designed to prevent mechanical keys from jamming, we are still saddled with a very inefficient layout of keys long after computers have obviated the risk.

Path dependence shows up all the time in law departments. That compliance does or does not report to the general counsel may have been set years ago because of the personality of the first head of compliance, long since retired, but whose legacy today determines the a key structural component. Or path dependence explains why business unit lawyers in Asia report to the regional VP but the lawyers based in Europe report to the global general counsel. Path dependence presents obstacles to law departments that want to inoculate themselves with another department’s “best practice” (See my post of Nov. 25, 2009 #2: path dependency obstructs borrowed practices.). When we questions our assumptions, especially the sacred cows, we may be able to spot the path dependencies and test them for present-day applicability.

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Last year’s ALM survey asked about 14 functional areas and whether the chief legal officer supervised it or some other executive did. Unsurprisingly, for more than two out of three respondents, the top lawyer was by a large margin responsible for Compliance, Corporate Secretary, Patents, and Trademarks. On the other hand, it was very unusual for two functions to report to the general counsel: Human Resources and Tax (although a handful did have that arrangement). Roughly on the order of one-out-of-three general counsel had reporting oversight of Corporate Security, Environment Health & Safety, or Risk Management.

The “ties,” where it was as likely for the office of the general counsel to hold reporting responsibility as for another executive, were Government Relations and Insured Claims Settlement. To learn more about the Law Department Metrics Benchmark Survey of ALM Legal Intelligence, click here for ALM’s website.

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The most recent report by Profit & Law, Helene Trink’s consultancy in France, covers 119 heads of legal (directeurs juridiques) in France. Approximately 60% of them are in charge of the corporate secretarial function (Secrétariat du Conseil) and a similar percentage lead compliance and ethics (Conformité/Ethique). The least common area shown on one chart was public relations (affaires publiques). These results are roughly in line with what a comparable question would find in the United States.

As for reporting lines, most commonly the general counsel report to the Directeur Général (34%) followed by approximately equal numbers to the head of finance (Directeur Financier), the Secrétaire Général, the Directeur Général Délégué, or the top lawyer of the corporate group. Trink comments (at 5) that there appears to be a trend toward more general counsel reporting to the CEO or President. More commonly, general counsel in the U.S. report to the CEO or the President.

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The General Counsel of Allstate, Michele Coleman Mayes, gave an interview to Metropolitan Corporate Counsel, Feb. 2012 at 1. Introducing herself, Mayes said “Our legal department is the fifth largest in the country, with approximately 500 lawyers representing our insureds and 130 attorneys dedicated to other matters.” She counts so-called staff counsel in her total.

Her claim about ranking fifth set me wondering so I consulted ALM’s In-House Law Departments at the Top 500 Companies (2012). Allstate was number 89 on Fortune’s list for 2011. After GE and my own data from this blog, I have listed below some of the largest law departments that have their number of lawyers stated in the ALM book (shown in parenthesis).

General Electric (See my post of May 23, 2007: General Electric and its 1,225 lawyers.).

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An interview of Thomas Russo, general counsel of AIG since early 2010, appears in Corp. Counsel, Dec. 2011 at 18. It says that Russo has fifteen direct reports, which crowns him champion of that list in my book. That is a very large number of people to evaluate, respond to, meet with, mediate among, and rely on (See my post of May 29, 2009: direct reports to the general counsel with 12 references.).

In law departments of up to six or so attorneys, the general counsel may directly supervise all of the attorneys. They all are “direct reports.” As departments add lawyers, however, some of the more junior lawyers report to one of the direct reports. How many direct reports a general has varies widely as that number depends on a range of factors, primarily the total number of lawyers in the department.

Since the first compilation, cited above, I have written about direct reports eight more times (See my post of Oct. 27, 2009: determinants of the number; Jan. 7, 2010: management initiatives per direct report; Feb. 9, 2010: Clorox, with 30 lawyers, has four direct reports; March 9, 2010: assumption of four or five if department is sizeable enough; March 29, 2010: succession planning; May 26, 2010: heterogeneity may degrade direct reports’ performance; May 10, 2011: delegation of authority to direct reports; and July 6, 2011: when to create a third reporting level.).

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An article in Compliance, Winter 2012 at 14, explains some of the amendments to the 2010 Organizational Guidelines by the U.S. Sentencing Commission. According to the authors, “compliance programs should include a reporting line between the corporate compliance officer and the board of directors or subcommittee, as well as reports from the compliance officer to the board or a board committee at least annually.” Publicly traded companies must publish their codes of conduct and the authors found that about 10 percent of the Fortune 500 companies say something about the reporting line of compliance.

The article left me with the impression that the authors favor compliance reporting to the general counsel. “To avoid the dreaded silo mentality and build from the legal department’s expertise and resources, some companies have adopted a structure in which the compliance officer reports to the general counsel and is part of the legal department.” They close by saying that regardless of reporting lines, the chief compliance officer should communicate directly with the board at least annually.

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Writing in the ACC Docket, Nov. 2011 at 72, an author stresses the conflicts of interest a general counsel might have to face as she balances attorney-client privilege (in her lawyer role) against disclosure and full cooperation with government authorities (in her compliance role). She also argues that lawyers intimidate employees, usually unintentionally, and that discourages compliance reporting. Nor are attorneys throughout the company, visible and accessible, as seasoned compliance professionals circulate. Compliance is a “program” that needs management over a period of time, not what most lawyers want to be involved with or have the skills to carry out. For these reasons, the author argues for separate positions and against the chief compliance officer reporting to (or being) the chief legal officer.

Whether a general counsel can also function effectively as a company’s chief compliance officer has kept the heat on the contentious debate (See my post of Jan. 20, 2009: reporting lines of compliance function with 11 references; and July 23, 2010: compliance and ethics with 24 references and 2 metaposts.).

Since my last metapost, there have been more contributions to the debate (See my post of Jan. 12, 2011: Harrah’s GC combines the roles; Jan. 14, 2011: Ben Heineman view and rejoinder; Feb. 2, 2011: survey data on joint reporting lines; May 16, 2011: survey data on GCs as head of compliance; and Oct. 3, 2011: arguments for and against the dual report.).