Strong General Counsel = Strong Companies

Wednesday, March 28, 2012 - 09:51

In this editorial I bravely soldier into the minefield of advising on stock picking. My advice is that if stock pickers are looking for the best long-term investments, they should select those companies that have the strongest general counsel with the best legal departments that reach out for advice from the best law firms. 

We are proud to present reviews of two books by long-time friends who have devoted themselves to analyzing the characteristics that make general counsel effective. A coauthor of the book featured on our front cover is Norm Veasey, a great judge, lawyer and ethicist who has been a continuing student of what makes general counsel strong. The second, reviewed on page 47, is edited by Bob Haig, a prolific legal scholar and outstanding practitioner, who has written extensively on the roles of the judiciary and corporate counsel. His book focuses on the value of partnering relationships between inside and outside counsel.

My premise is that one should pick the stocks of those great companies that have strong general counsel ranked with or above the CFO in status and influence.  Such companies have the best records for avoiding major compliance and management failures. Why is that the case?

In his many interviews that we have published over the years and now in his book, Norm Veasey focused on the personal qualities and organizational environments that make general counsel strong. By virtue of having corporate counsel serving management in all areas of a company’s activities, a general counsel with such characteristics acquires more detailed knowledge of her company’s moving parts and the quality of its management personnel than any other executive. Bob looks at how general counsel also gain strength by partnering with great law firms.

America is emerging from a wrenching experience in which, with few exceptions, the financial services industry dragged the country into its deepest recession in modern history triggered by massive compliance failures. This can only be attributed to a total failure of general counsel to serve as Norm’s persuasive counselors wherein they effectively communicate the economic and legal risks that their companies face to their managements and boards. 

How could general counsel not have known that their companies were steering into a perfect storm of trouble? Chuck Prince’s analogy of musical chairs failed to capture the full seriousness of the situation at Citigroup because when the music stopped, the only chairs available were the wheelchairs provided by the American taxpayer. 

One of the important aspects of the causes of the great recession was that it involved not only legal but management failures. Norm points out that here, too, the general counsel plays an important role since she should question poor management decisions by senior management. Even though other members of senior management may lack the courage to speak up, rationalizing “Why pour cold water on another manager’s proposal because he may frustrate one of mine,” a strong general counsel will be expected to do so.          

Norm and Bob have examined the characteristics the stock picker should look for in companies having a strong general counsel as they seek out sound long-term value. The most important characteristic is that general counsel should be the recipient of information about what is happening throughout the corporation. This requires that she should be provided with this information by a network of in-house lawyers working with all levels of management.  If she is promptly alerted to situations that can explode into trouble, she will trigger action that will avoid a compliance or management failure that might cause a company’s stock to fall off the cliff.

The stock picker should avoid companies where the general counsel is kept in ignorance by silos of perceived and unwarranted self-congratulatory business success. She doesn’t want to put her money into an AIG which, while reporting great financial results, created a house of cards with credit default swaps in an impenetrable London silo. 

The most important characteristic the stock picker should be looking for in general counsel is that she is a persuasive counselor. Only by wielding the power of persuasion can she convince the CEO to avoid pitfalls that lie ahead. There was a time when most general counsel were drawn from among transactional lawyers. Today, we see an increasing number of litigators populating their ranks. 

Only by having strong general counsel can U.S. companies avoid a problem sometimes encountered by foreign companies. Many general counsel have participated in top-level business meetings in Japan with Japanese companies where their lawyer is either not present or, in a banquet-type setting is seated at the far end of the table. Toyota and Tokyo Electric Power paid a high price for not having someone blow the whistle before calamity struck. Stock pickers should take note. 

We plan throughout the coming months to feature strong corporate counsel and how they embody the characteristics we discussed.