The CEO, Board And General Counsel

Sunday, July 1, 2007 - 00:00

The Editor interviews Norman R. Augustine, retired Chairman and CEO, Lockheed Martin Corporation.

The contributors to this Special Section were asked to comment on the role of the general counsel as persuasive counselor as discussed in an article by E. Norman Veasey and T. Di Guglielmo in the November 2006 Business Lawyer page 1 entitled The Tensions, Stresses and Professional Responsibilities of the Lawyer for the Corporation ("Article") and in the interview of former Chief Justice Veasey beginning on the cover of this issue.

Part II of this Special Section will be published in our August issue.

The comments of the authors and interviewees in this Special Section reflect their personal views and are not necessarily reflective of the policies or operations of any company, firm or other organization with which they are now or have been affiliated.

Editor: You are familiar with Norm Veasey's concept of the general counsel as persuasive counselor. Do you have any general observations about that concept based on your perspective as a former CEO and your history of service as a director of a number of companies?

Augustine: I generally agree with Norm's concept. In fact, it describes quite closely the relationship I had with our general counsel during my 10 years as CEO. However, any concept when it deals with human beings and interpersonal relationships must be viewed in the context of the wide spectrum of counsels, CEOs and Boards that one finds in real life.

The old fashioned general counsel often in effect headed a small legal firm housed within a corporation that management would contact for advice when something went wrong. By the time I became CEO, the general counsel was viewed by many CEOs, including me, as an integral part of the most senior management team. The general counsel was of course still expected to provide legal advice - but also advice well beyond that. The general counsel was to be kept informed about all important business developments and was encouraged to share his or her views about a broad variety of matters affecting the company. In our case, the general counsel attended all Board meetings and participated in all the meetings of our senior management team. The general counsel was welcome in my office for any meeting I held except those involving certain sensitive personnel matters and the like. I encouraged him to go to the Board with any issue that bothered him, but expected him to come to me first unless the issue was one that concerned me personally. That was the ground rule, and it worked.

I, of course, expected our general counsel to be an extraordinary lawyer and to apply the unique analytical and practical skills that are involved in the practice of that profession in the solution of not only legal issues facing the company but also in providing advice with respect to broad business decisions.

Particularly in a crisis, some general counsel tend to give advice that views an issue as a purely legal matter while ignoring other aspects, such as the effect on corporate reputation that may be of far greater importance than legal liability. When this happens, the general counsel is not filling the role that I believe he or she should embrace. I would of course expect the general counsel to offer purely legal advice, but then to follow that with advice that looks at the issue from other standpoints as well, such as those of a consumer and the public.

It should be emphasized that when general counsel give advice that is based on other than an application of the requirements of the law, they need to distinguish where one stopped and the other started. We would not in any event ever knowingly violate the law, but, when you get into gray areas like ethics reputations, reasonable business people can differ about the appropriate manner to address a problem.

If the general counsel is to be looked upon as a persuasive counselor, it may not be advisable for the general counsel to manage departments unrelated to the general counsel's duties as lawyer for the company. When that occurs, I become concerned that if a decision made by someone in one of those departments goes awry, the general counsel's advice may be tainted, consciously or otherwise, because the general counsel is, in this case, responsible for the performance of that department. Possible self-interest may dilute the quality of advice one might otherwise expect from the general counsel - and simultaneously undermine the general counsel's credibility and impact.

The company for which I worked always had the ethics officer report to the general counsel because the former was also generally a lawyer. If I had to do that again, I would have the ethics officer report directly to the CEO. Although the approach we used worked quite satisfactorily, it does strike me that the enormous stature of the chief ethics officer should be highlighted and reinforced so that his or her function is viewed by everyone in the company as being sufficiently important to report at the highest level in the corporation. However, because it is a more specialized function, I would not put it in the same category as that of the general counsel by making the ethics officer a member of an executive committee. Independence considerations also argue for this conclusion.

I did not want the general counsel to merely tell me as a lawyer what we could not do - although that is of course very important. As a member of the management team I expected the general counsel to help figure out what we could do to achieve our objective. It of course had to be legal and ethical, but we needed all the brain power we could muster in dealing with complex issues. For this, the general counsel needs not only knowledge of the law, and high personal integrity, but also sound business judgment and courage.

Up-the-ladder reporting - including to the Board - by the general counsel seems to me to be appropriate independently of Sarbanes-Oxley. In fact, it is a moot point in a company that seeks to operate legally and ethically. If the company is operating illegally and unethically, and the general counsel cannot promptly bring about a change in such practices, then the general counsel should go to the Board and resign. In a case where the CEO and general counsel are both qualified lawyers and simply do not agree on a matter of the law, it is also appropriate for the general counsel to go to the Board - but only after informing the CEO of what he or she intends to say.

The ability to see around corners - to borrow Jack Welch's words - is particularly important in the case of the general counsel. It is a quality that not a lot of people have. And when it comes to social responsibility, ethics is not what you have a right to do, but what is the right thing to do. Potter Stewart said that "The law is the bare minimum threshold you know you have to meet. You like to know what that is clearly. Beyond that there are other constraints such as your company's reputation and what is the right thing to do."

It is up to general counsel to stand their ground if they feel that they do not have the resources to carry out their expanded responsibilities under Sarbanes Oxley. However, I have never attended a budget meeting where the lawyers did not say they needed more lawyers the engineers didn't need more engineers the accountants didn't need more accountants and the marketers didn't need lower prices! As is so often the case, a business common sense balance needs to be applied. Legal and auditing are particularly critical in this regard and if they believe that their ability to fulfill their primary obligations is impaired they have not only a right but also a responsibility to appeal to the Board. If I were general counsel and felt that I had a critical responsibility that I could not carry out with the resources I had, I would first appeal to the CEO, then to the Board and, failing that, seek less risky employment.

Editor: Has the CEO's role changed?

Augustine: I believe that CEOs are, as in the past, primarily leaders. But today they are leaders by consensus rather than by authority. A CEO now has to consider many more constituencies, including not only the owners of the company and its employees, customers and suppliers, but also the public, Congress, regulators and the media. In the past, a CEO could focus on the bottom line and give directions. Today's employees do not expect to be managed that way. A CEO who attempts to do that will usually lose the benefit of the employees' brainpower. After all, they know their jobs better than anyone else. Today, the CEO has to be a good listener and not have such an intimidating presence that employees are afraid to communicate candidly with him or her. At the same time, perhaps more than ever, the CEO is expected to produce results and this entails a degree of forcefulness.

A CEO has to look at broad ramifications of all actions, especially in response to a crisis. There is a hazard to taking too narrow a view. For example, the CEO may make a major error by considering only legal ramifications. There have been cases where companies, including the one I served, incurred significant costs because they thought it was the right thing to do even though it might diminish their chances of prevailing in a court of law. The Tylenol recall at Johnson & Johnson is a classic example. The decision to launch the recall was made by Jim Burke, a courageous CEO, but I am sure that he did this only after consulting with key members of management, including the general counsel.

A CEO needs a lawyer who understands the law and is good at it, just as the CEO needs a CFO who understands accounting. But today's CEO expects a lot more from a lawyer who is serving in the capacity of general counsel. There are the matters of chemistry and courage on the part of the general counsel. One needs a general counsel who can establish the kind of relationship with the CEO that gives confidence in the counsel's candor and judgment and who, if he thinks the CEO is wrong, is willing to put his or her career on the line by coming to the CEO's office and saying so. This of course takes a combination not only of selflessness and courage on the part of the general counsel, but also a willingness on the part of the CEO to listen . Every CEO needs at least one trusted advisor who is willing to close the door and say why what you are doing is wrong. That is a measure not only of a good subordinate, but also of a good friend. Fortunately, I had such a relationship with both my general counsel and CFO among others.

The general counsel must therefore be someone the CEO trusts and is comfortable sharing virtually everything with. The corporate counsel must be a selfless individual, one who is discrete in protecting sensitive matters. The CEO must always be confident that the general counsel is advising what is best for the company and not what is best for the general counsel.

Editor: What should the general counsel's relationship with the Board be?

Augustine: The general counsel should attend all Board meetings except for those dealing with salaries, succession and such matters. Generally, he should have the opportunity to attend the meetings of Board committees, but should not be required to attend all such meetings since many are not relevant to the counsel's function.

The CEO's relationship with the Board should be respected. In addition to sharing his or her own views with the Board, the CEO should also share any contrary views. It should not be necessary for someone else to fill that role. The end objective of everyone is to make the right decision and that is always enhanced by getting all the facts on the table. If the general counsel has some important facts or views that were not conveyed to the Board by the CEO, the general counsel should see that they are shared with the Board. However, I would once again expect the general counsel to share any such information with the CEO and advising of his or her intent before doing so.

Hopefully, the CEO and Board have a relationship where there is full candor back and forth. Having another set of ears at board meetings listening for nuances is valuable. To have the general counsel fulfill that role is logical but above all, a general counsel interacting between the CEO and the Board must be very careful not to undermine the relationship between the Board and the CEO - which is, when all is said and done, the relationship of primary importance.

For the general counsel to attend most audit committee meetings and some executive sessions of the independent directors, by invitation, without other members of management present is a reasonable occurrence. Direct contacts between individual directors and senior executives are also appropriate, but must be conducted in a prudent manner to avoid undermining the CEO or giving the director misleading impressions since even a senior executive may not have the CEO's broader perspective. As a director, I have made it a practice to conduct business only through the CEO, except for instances where I serve as chair of a committee and routine committee matters are being addressed. Also, as a director, I believe one should never give direction to anyone in management except the CEO, and then only when acting on behalf of the entire Board. A director may seek information, but should never give direction without going through the CEO.