Tough Challenges Of The General Counsel As Persuasive Counselor In Today's Tumultuous Economy

Tuesday, March 31, 2009 - 01:00

Editor: Describe the role of general counsel as persuasive counselor. Why is general counsel ideally suited to play this role?

Veasey: Those of us who are not general counsel should focus on the precise role of the general counsel, who represents only the corporation. Often the general counsel is hired by the CEO, but she is not the lawyer for the CEO since she serves both the CEO and the board of directors in terms of what is in the best interest of the corporation. There may be a tension there and also in the role of the general counsel - whether the general counsel is an enabler or a gatekeeper. I think of the general counsel as the persuasive counselor, which is something different from enabler or gatekeeper. The persuasive counselor is something different. The persuasive counselor is the lawyer who affirmatively tries to be proactive and courageous in persuading the board of directors and the CEO to follow the law, go beyond mere compliance with the law and to do the right thing from a moral, ethical and proper corporate governance perspective. Courage is the key word - sometimes it is very difficult for the general counsel to carry out this role when there are so many disparate tensions, particularly in today's tough environment.

Editor: What conditions must exist to make the general counsel effective in that role?

Veasey: The most important condition is trust . The board of directors and the CEO both must trust the general counsel both in terms of her skill, her ethics, her understanding of the company's business environment, her courage to do the right thing and to persuade all corporate constituencies to do the right thing. I think that there is a lot of discussion about the general counsel not being able to serve both masters. The conditions that must exist for the general counsel to be effective revolve around the ability to gain the trust of both the directors and the CEO. She must have the courage to make sure that the directors receive all the information they need in a way transparent to both the board of directors and management.

The general counsel has to have free flow of information to comprehend fully the corporation's business in order to be of maximum help to the board so that they use such information to ask the right questions. Her key role is as the bridge between the board of directors and management.

Editor: There are some areas that are very complicated, which the general counsel and the board must grapple with, such as understanding complex financial transactions.

Veasey: The general counsel needs an effective and knowledgeable staff to assist her in getting the right information, making sure it is understood in the way it applies to the corporation. It is a tough job, but the general counsel is ideally suited to be the person to make sure that everybody understands the material and its implications for the company.

Editor: Some companies have silos separating the lawyers from the free flow of information so that information does not reach the general counsel.

Veasey: Silos are the enemy of the free flow of information and transparency. It is up to the general counsel to break down those silos and make sure that they are not a barrier to getting the right kind of information at the right time.

Editor: Conversely, other companies have lawyers scattered among the various activities of the business people who are aware of business activity and planning.

Veasey: That is key. With different divisions performing different operations, having lawyers assigned to those operations and keeping the general counsel informed is vital. Those lawyers have to understand those operations while the general counsel has to be able to supervise the whole team of lawyers and make sure that she knows the information the lawyer in division A has while he is also aware of the information being handled by a lawyer in division B.

Editor: Facing the stark reality of the present day crisis, there are large cutbacks taking place in legal departments. Does there come a point where reducing the staff of the legal department jeopardizes the ability of the general counsel to perform effectively as a persuasive counselor?

Veasey: You have touched on a very important point - one that a lot of general counsel are facing. It should be up to the general counsel to make a decision on what is necessary for the functioning of the legal department. Often when a general counsel manages with fewer personnel, he needs to make sure that he doesn't jeopardize the most important things that the corporation does, which are compliance with law, risk assessment and risk management - and strategy going forward. It's up to the general counsel to make the case that cutbacks of the general counsel's staff could have the effect of damaging the corporation in vital areas.

Editor: Back in March 2008, you wrote an article entitled, "When The Going Gets Tough, Persuasive Counselors Need To Step Up." Now what did you know at the time that the rest of us did not know?

Veasey: I didn't know anything more than anyone else. Or I would have gone to cash.The lawyer for the corporation has to prepare for the worst case scenario and certainly that has come to pass in many corporations. The persuasive counselor should advise the board and top management about what can go wrong. Management and the board should ask themselves: what is our strategy? what can go wrong to derail our strategy? what can we do to prevent that from happening or to mitigate the consequences of its happening? The persuasive counselor must do those kinds of things as a general matter, but today it is even more important. It all revolves around risk assessment and risk management in all of its forms. There are two sides to the risk coin. One side is not being unduly risk averse so that you don't cut yourself off from prudent risks which would be of advantage to the corporation; the other side of the coin is making sure that you are aware of potential risks to the enterprise and its reputation. The general counsel must be able to evaluate the down side of those risks - the worst case scenarios - and the likelihood that those scenarios will come to pass. Everybody in the corporation has to do risk assessment - the board of directors, the audit committee, senior management - but it is up to the general counsel to make sure that everybody is focused on that kind of an analysis.

Editor: In an earlier interview you pointed to findings by investigators of the Enron situation and other companies caught up in scandals that there were significant breakdowns in information flows that prevented general counsel from effectively playing their proper role. Do you think that a similar pattern may emerge when special investigative reports become available relating to investment banks hit by the crisis?

Veasey: There were important lessons learned as a result of Enron - making sure that the lawyers were there helping people to ask the right questions to lift the veil of secrecy and communicating among all the constituencies so that the problems of Enron could be avoided. Now there are different kinds of problems. I am certainly not going to point any fingers at anybody in the current situation to assess blame.

Editor: Has acceptance of the persuasive counselor concept increased? Have additional companies bought into it?

Veasey: The more that I talk to general counsel, the more that I come to realize that they recognize the increased need for strong counseling in their role as the lawyer for the corporation. There certainly has been over the years a greater and greater understanding not only among general counsel but also among boards of directors and management to look more and more to the general counsel to be the persuasive counselor. Today corporations need the persuasive counselor more than ever before.

Ben Heineman's book High Performance with High Integrity should be the text for establishing the high tone at the top that is needed today more than ever. As you know, Ben Heineman, now retired, was GE's general counsel for many years. GE has one of the finest legal departments in the country. It is a good paradigm for anyone to follow in terms of how a general counsel's office and the legal department of a major corporation should function.

Editor: The federal administration has banned the general counsel from serving as chief compliance officer for companies in the healthcare industry. How do you view this?

Veasey: I question sometimes why the federal government comes in with a one-size-fits-all answer. Rather, these kinds of decisions should depend on what model is appropriate for a particular corporation.

Editor: Have you seen any trends to divide the ultimate responsibility for compliance among various corporate functions such that the effectiveness of the general counsel as persuasive counselor is reduced?

Veasey: It is often very good to have a separate compliance officer or a separate risk management officer. In many large corporations, the general counsel has so much to do that she can't be the line officer responsible for every corporate function in terms of compliance and risk. But if she either has these people report to her or keep her in the loop, then that is the most important thing. Again, there is no one-size-fits-all for any of these models.

Editor: What additional governance issues are relevant?

Veasey: One issue is the question of whether the board of directors should have its own lawyer present at meetings to represent the independent directors rather than relying entirely on the general counsel. Of course, there are situations where there is a potential conflict with management or the need for a second opinion. Or sometimes it is necessary to have an outside counsel for a particular issue like a management buy-out or other conflict issue. But as a general matter, you have to trust the general counsel. You have to make sure that you have the best person possible. The board of directors and the CEO have to be on the same page to make sure that they have the right general counsel whom they can trust. The general counsel has to have the courage and self-confidence to say when there is a need for an outside, independent counsel.

Editor: Do you feel that directors wish to have a voice in the selection of a general counsel and that this might give them a greater level of confidence in her counsel?

Veasey: I see an increasing desire on the part of boards to participate in the hiring of a general counsel. I think that the board needs to be more and more involved. This is in keeping with the recommendation of the ABA's Cheek Committee which recommended more board involvement in the hiring, compensation and retention of the general counsel.

Please email the interviewee at e.normanveasey@weil.com with questions about this interview.