Compliance Readiness And Beyond - A Message From The Editor

Sunday, April 1, 2007 - 01:00

Al Driver, Editor

The Metropolitan Corporate Counsel

An article written by The Hon. E. Norman Veasey (former Chief Justice of the Delaware Supreme Court), which appeared in the November 2006 issue of The Business Lawyer, captures the central role of the general counsel in the governance of corporations - a role reinforced by the Model Rules and Sarbanes-Oxley.

The article begins with a hypothetical situation that highlights the challenges faced by general counsel. Norm posits an HP-like situation in which the general counsel of the company receives a late night phone call from the company's CEO demanding that she ferret out the identity of a board member who has been leaking information about a proposed merger that has not been made public.

The CEO insists that the general counsel not inform the board and that she do everything necessary to find the "rat." To complicate matters more, the CEO is also concerned about media inquiries into possible backdating of stock options. The CEO insists that the board approved this compensation strategy and that the general counsel not approach them with this issue.

The first issue raised by this hypothetical is the question: who is the client? Clearly the corporation is the client but this may be blurred by several factors that are inherent in the general counsel's position. The problem here is that the general counsel may feel that she will lose the CEO's trust if she approaches the board with this issue.

The General Counsel As "Persuasive Counselor"

Norm points out that by being accepted by both the CEO and the board as a "persuasive counselor," the general counsel makes good governance a reality, including making her company's compliance program effective. To play this role effectively the general counsel must be viewed by both the CEO and the board as a person of stature in the corporation.

The general counsel should be - and increasingly is - viewed by directors as the one person within a corporation who not only is professionally charged with protecting them against the distraction of ongoing litigation and the possibility of personal liability and loss of reputation but is also identified as the person within the corporation who is most in touch with the legal, political, economic and social forces affecting the corporation's future. As a result, boards are insisting that they be involved in the process of approving the general counsel's selection and that general counsel meet separately in executive session with the independent directors.

The traction gained by this process is clearly evident from the increased status accorded to the general counsel within corporations - compensation has increased and candidates are being drawn from among the most outstanding lawyers in the profession. In addition to law and compliance the scope of the chief legal officer's responsibilities has expanded to include such related areas as government relations, public relations, tax, security and internal audit. Because the modern global corporation is so dependant on its ability to deal with the external forces affecting the corporation, we are seeing a trend to selecting chief legal officers as CEOs - most recently the selection of Jeff Kindler to become Pfizer's CEO.

The kind of reaction on the part of the CEO to the general counsel's recommendations in Norm's hypothetical is becoming less frequent as more CEOs enthusiastically welcome the general counsel's role as "persuasive counselor." Rational CEOs recognize that they are answerable to the board. If through their failure to heed the general counsel's advice, the board feels threatened, then their own tenure is in jeopardy.

Both the board and the CEO need to view compliance as a business imperative that is at the heart of good corporate governance. As a "persuasive counselor," the burden falls on the general counsel to convince both the board and the CEO that compliance and good governance are in their self interest. WorldCom and Enron were wakeup calls, but new scandals are announced in the press on an almost daily basis, thus putting the CEO's tenure in jeopardy and exposing board members to humiliation, if not personal liability.

Even if the chief compliance officer does not report directly to the general counsel, the board will, without regard to reporting relationships, inevitably turn to the general counsel as chief legal officer for assurance that the compliance system is in sound operating condition so that it is unlikely that they will be exposed to liability or reproach. This requires the general counsel to make a legal judgment about the adequacy of the system. To make that judgment, she must have detailed information about the day to day operation of the system, its track record as to spotting breaches and how it compares with systems in place in similar companies.

The Role Of The Press

A general counsel can play the role of "persuasive counselor" only if she is up to the difficult job of persuading both the board and the CEO that taking her advice is not only in the best interest of shareholders but also in their personal self-interest. To do this, she must have the background, experience and, most importantly, corporate status that will command their respect. She also needs to have the tools in place that will enable her to discharge her responsibilities

This is where the press can help. The press can provide corporate counsel throughout the country with the intellectual ammunition they need to succeed in their expanded role and to convince their CEOs and boards of the importance of that role and the need for them to have the tools necessary to perform that role.

The Metropolitan Corporate Counsel was launched by the publisher and editor (who volunteer their services) as a public service to corporate counsel in 1993. The Metropolitan Corporate Counsel now reaches over 29,000 corporate counsel at over 14,000 law department locations nationwide, including all the Fortune 1000 companies (whose corporate counsel we have identified.)

It serves as a vehicle for law firms and legal service providers to extend their partnering relationships from helping just a few individual clients to relating to the entire corporate counsel community through their financial and editorial support of the newspaper. We are dedicated to providing information that will enable general counsel to be effective as "persuasive counselors" - and to play an essential role in corporate governance. This newspaper's central mission is to remind corporate counsel that, unless they effectively play the role of "persuasive counselor" on matters of governance and compliance, they and the companies they serve will have lost the opportunity to demonstrate that self-regulation works.

To date, we have encouraged our supporting law firms and legal service providers to support five compliance readiness programs, including that sponsored by Akin Gump, Ernst &Young, Fios and this newspaper in Dallas on May 1. (See articles in this issue.) The seminar is designed to provide general counsel with intellectual ammunition they may need to effectively play the role Norm described. In the two issues preceding each seminar, we publish Special Reports on Compliance Readiness, each packed with such ammunition. All our compliance readiness articles are archived on our website.

Equipping General Counsel To Serve As "Persuasive Counselors"

Let me give you a sample of the ammunition the newspaper provides. We interviewed Tom Baxter, general counsel and executive vice president, Federal Reserve Bank of New York for our October 2004 issue. Tom emphasized that the general counsel should do more than merely advise on the legal standards with which a company must comply. The general counsel should work as a visionary within the organization - someone who understands the legal risks and can work with management to connect compliance with good business.

Tom cited a report indicating that the failures at WorldCom were in large part due to the fact that the CEO had dispersed and fragmented the legal department, thus undermining its authority. Not only was the general counsel excluded from important decision making, but this treatment sent a clear message that the legal function in the company was not well respected and that compliance was not something that the company took seriously.

Picking up Tom's theme, our articles have stressed the importance of members of the legal department reporting on a solid line basis to the general counsel so that she is informed on what is happening throughout the organization. We have presented articles arguing that the legal department should be of a size sufficient to create a critical mass - such that corporate counsel come to know and work on a regular basis with those members of the company's management who are most likely to generate legal issues. This will increase the likelihood that these lawyers will become aware of legally sensitive matters at a sufficiently early stage to head off potential compliance failures.

We have provided guidance for a general counsel who is faced with a CEO who is unwilling to increase the legal department's staff to the level required to provide the legal coverage I just described or to provide the other tools required by an effective compliance program. In an interview in our November 2003 issue, I asked Norm Veasey (then Chief Justice of the Delaware Supreme Court) to answer my question: What should a general counsel do "if she has been denied the staff and other resources to carry out her responsibilities to her corporate client and its directors?" Norm noted that the general counsel must have the courage to "just say no" and be willing to take the consequences.

As expressed by Anastasia Kelly, now general counsel of AIG, in an interview in the October 2006 issue, general counsel should have the strength of character, intelligence and professional judgment to deal with a strong CEO. This is certainly true when it comes to getting a buy-in from the CEO and the board for decisions the general counsel knows are necessary when a compliance issue arises.

Situations like that in Norm's hypothetical where the general counsel's recommendations are rejected out of hand by the CEO may indicate that the general counsel has failed in her efforts to become the "persuasive counselor" envisioned by Norm Veasey and Stasia Kelly.

Beyond Compliance - The Vision Thing

The scope of general counsel's services as "persuasive counselor" is not limited to compliance. Of all officers, the general counsel is perceived by boards and CEOs as the person best positioned to learn about and initiate discussion of how to deal with legal, political, economic or social developments which may present threats or opportunities for the corporation. In this capacity as well, her ability, in Tom Baxter's words as "the visionary" within the corporation to act as a persuasive counselor, is critical to the corporation's future.

Conclusion

Good corporate governance and an effective compliance program require that the board and CEO have recourse to a chief legal officer who can act as a wise and "persuasive counselor" and who, in the words of Tom Baxter, is armed with the necessary "access, authority and resources." To preserve the credibility and competitiveness of our free enterprise system, general counsel must exemplify the benefits of "persuasive counseling." And, corporate counsel across America must spread the message about its benefits in every way possible. We will do our part by supplying the ammunition.

Note: This message is based on remarks prepared for presentation to an audience of general counsel.