Articles Posted in Structure

Trenton, New Jersey, accepted $22 million in state aid because of the deep budgetary hole it was in. That lifeline from the state came with a number of restrictions. Bloomberg Businessweek, Dec. 5, 2011 at 38, mentions that one of the constraints is that the state’s Community Affairs Department now has the right to approve the “hiring of outside contractors such as lawyers.”

There must be a law department for a city the size of Trenton, and this degree of oversight and approval drastically restricts the managerial authority of its top lawyer and the other lawyers in the department. The article suggests that other states are imposing similar limitations on cash-strapped cities that tap state funds. I would imagine that if the state agency takes the responsibility for approval seriously, the process of Trenton retaining outside counsel will significantly slow and complicate.

In an article about how to integrate two law departments when their companies merge, there is a list of “Twenty-Five Key Areas of Focus for Legal Department Integration.” The list appears in the ACC Docket, Nov. 2011 at 62. The first eight areas highlight management of the operations of the merged department, three more areas cover a significant component of operations and administration, but the remaining 14 all concern substantive legal services that need to be addressed.

What I consider squarely in the realm of managing the law department would be these eight, as listed: “legal personnel, knowledge management, budget and forecast, technology support, invoice management, records retention, outside counsel management, and litigation management.” Three areas listed after them involve a fair amount of law department management. “Patents, trademarks and other intellectual property, forms and templates, and contract management” all straddle operational issues as well as the provision of legal services. The remaining checklist items, the majority on the list, go to a general diagnosis of the needs of the merged company for various legal services, not to how the merged department functions and is managed.

Aside from that, not on the list are some operations topics that a general counsel of a merged law department ought to consider: facilities, locations of lawyers, reporting structure, and software.

Bob Santamaria is profiled in Asia-MENA Counsel, Vol. 9, Issue 7 at 40, Santamaria being the Group General Counsel of ANZ Bank, the third largest in Australia. He estimates that ANZ now has around forty-five lawyers across some thirty jurisdictions who work alongside the remainder of the team back home. Those outposts include Hong Kong Singapore, Vietnam, China, and Taiwan.

Let me soar far above this one instance of geographic distribution and offer a hypothesis. The smaller a country is by GDP, the higher the percentage of its major-company in-house lawyers are based outside the country. My reasoning is that companies that compete globally from a small starting country have to expand into bigger markets, and to help do so they post their lawyers in those remote locations. Thus, U.S. companies may be quite large but have only ten percent of their legal team overseas; a Belgian company that reaches billions of Euros in revenue probably has well more than half its lawyers elsewhere.

Back to Santamaria. He notes that organic growth of the bank’s legal infrastructure has been bolstered by opportunistic M&A. “For example, we picked up around fifteen lawyers with the acquisition of the Asian operations of the Royal Bank of Scotland.” Not a merger, true, but a significant corporate acquisition brought with it a large infusion of lawyers.

A profile in Asia-MENA Counsel, Vol. 9, Issue 7 at 40, describes the role of the Group General Counsel of ANZ Bank, the third largest in Australia. The role requires Bob Santamaria to report to and interact on a daily basis with three of the bank’s most senior stakeholders, the CFO, Chairman, and CEO. Yet although Santamaria has daily dealings with the CEO, the in-house function ultimately enjoys an autonomy that, in the words of the article, “some general counsel may only dream of.”

Santamaria explains that “I am appointed and can only be removed by the Board,” referring to the Board’s ability to ensure a sufficient level of independence from management. In other words, the CEO cannot unilaterally fire the general counsel. This reporting line and its protection for the general counsel is an unusual arrangement from my experience. In fact, if I were a general counsel at odds with my CEO, I would find little solace in the “protection” of the Board.

Each strata of a law department, from person to unit to the entire function, has its own regularities and concerns. A “lower level” won’t fully inform a “higher level.” Scientists have realized for years that an understanding of atomic interactions doesn’t encompass the larger sphere of molecules, nor does understanding molecular rules explain higher-level, complex organisms. Each rung of the hierarchy has its own properties, sometimes referred to as emergent characteristics, that depend on the former but are not defined by it nor fully elucidated by it. Components don’t explain the whole; the sum is greater than its parts.

So too, forces, incentives, and characteristics operate at the individual level in a law department, but when you “move up” to the practice group, new ones emerge. And then, multiple practice groups as part of a legal department introduce yet another set of considerations to be understood. Management concerns regarding a whole department are qualitatively different than those pertaining to a portion of it.

In the sciences this is called the problem of scale, as explained by Duncan J. Watts, Everything is Obvious: once you know the answer (Crown Business 2011) at 63. Moves up the scale present new problems and insights, emergent issues, with only partial overlap with other levels.

An article in Sloan Management Review, Fall 2011 at 21, reports 2004 data on the concentration levels of the four largest competitors in 50 industries. That is, in Aircraft the level almost reaches 100 percent, because four companies (Boeing, Airbus, Bombardier and Embrair?) dominate the market completely. Helicopters, smart cards, tobacco, music, and mobile phones all come in around 75 percent. Far less concentrated were steel, pharmaceuticals, insurance and IT services, each being in the 20 percent range.

What might this mean to the legal departments of the top four in any industry that has a concentration ratio above, say, 40 percent? That is the degree of concentration that the authors say results in interdependence in a domestic market and probably in the international market.

Anti-trust concerns lurk around every decision and every action. If your industry is very concentrated, competition law rears up everywhere.

Some lawyers describe their department as “hierarchical.” I have tried to unravel the concepts in that term because it has many. Five of them are summarized below.

1. Rank has more than its share of privileges. Distinctions in levels manifest themselves in many ways. Hierarchy has to do with special perquisites for those who are higher on the totem pole.

2. Information flows up and down chains of command, and mostly, to the extent it does flow, down. Hierarchy has to do with topside control of knowledge about what’s happening.

Andrea Bonime-Blanc oversees internal audit, enterprise risk management, ethics, corporate responsibility and compliance for Verint Systems, a global software company. She reports to the Chairman of the Audit Committee and indirectly to the Chief Legal Officer. In a recent BNA Insights article (Corporate Governance Reports) she gives four reasons why such a role should report to legal. This topic stretches far beyond the meager confines of a blog post, so I will simply annotate a comment or two.

1. “The complexity of modern compliance legislation and regulation requires legal expertise and therefore belongs in the legal department.” True as far as it goes, but what percentage of compliance depends on interpretation of laws and regulations?

2. “The GC is in a better position to coordinate disclosure and regulatory contact.” This ought to depend on whether the information provide and interaction requires legal background or administrative, process skills.

Less than four years ago, Pernod Ricard created six dedicated hubs of intellectual property lawyers and paralegals specialized by different categories of alcoholic beverages. About 30 of them work in these hubs, which are usually located near the production facilities. All this is spelled out in the Leaders League 2010 Intelligence Report at 72.

This arrangement is analogous to a business unit orientation for a law department but carried out for specialty area of law and expressed geographically. It will confront the inevitable issues of silos, consistency, and competition for resources, but no structure is perfect.

Winmark, through its CLO Programme members, obtained survey data in the Autumn of 2010 from 124 UK general counsel. The 27-page report can be requested from John Jeffcock.

Here is the report’s summary of what happened to those departments overall in the financial meltdown. “Like in 2009, 2010 saw a continued increase (1% in 2009 to 3% in 2010) in the size of in-house teams whilst budgets remained flat (3.2% fall in 2009 to 0.1% increase in 2010).” This data from the United Kingdom closely tracks what the General Counsel Metrics benchmark survey found for U.S. law departments (See my post of Sept. 28, 2011: sky did not fall on U.S. departments.). U.S. departments increased their staff a bit and saw their budgets hold up, albeit they remained flat.