Editor: Would you tell our readers about your professional background?
Bates: I am with King & Spalding. I joined the firm in Atlanta in 1979 and then moved to New York 15 years ago as part of the firm's expansion. I have been practicing in the M&A and corporate finance area for 28 years, and I have a particular focus on corporate governance.
Editor: King & Spalding has experienced an extraordinary transformation over the years. Would you share with us what it is that has enabled the firm to succeed?
Bates: The firm has enjoyed excellent management over the years, and that has included an insistence on being responsive to our clients' needs. We have grown from a single office to four U.S. and four overseas offices as a consequence of listening to our clients, looking at where they were going and getting there with them. In all cases, our expansion has been a direct result of meeting client needs.
Editor: In light of your practice background, I think you are in a position to comment on the transformation of the role of general counsel in recent years.
Bates: With the corporate scandals and Sarbanes-Oxley, the position of general counsel has been in the spotlight. The issues faced by general counsel, however, long preceded the scandals and Sarbanes-Oxley. If you look at some of the better general counsel, you will find a long history of people making a contribution to the company both in terms of the legal advice they render and in their understanding of the company's business. These are people with good business sense, and I believe that that has always been one of the ways that exceptional general counsel were measured.
By the same token, you used to hear - and very occasionally you hear today - the complaint of the business people that the company's lawyers - both outside counsel and in-house - do not understand the business. If there was some truth to that criticism in the past, I certainly think it has faded in recent years. I believe everyone engaged in this discussion - whether at an outside firm or with the company's legal department - understands that they are there to help make the business succeed.
Editor: One of the interesting comments that former Delaware Chief Justice Norman Veasey and Christine DiGuglielmo make in their article on the "persuasive counselor" concerns the role of the board of directors in the hiring and firing, and compensation, of general counsel. Should the board be involved?
Bates: This may be a good best practice, but I think it is difficult to implement. There is no question but that general counsel has a primary responsibility to the company and to the board of directors, but the head of the legal department is a member of the senior management team and works with the CEO on a daily basis. The running of the company on a day-to-day basis is the responsibility of the CEO - and it is not the responsibility of the board - and, to ensure a smooth operation, I think the hiring and firing of general counsel, and other members of the senior executive group, should vest in the CEO. General counsel has a special relationship with the board, and he or she should have access to the board at all times, but I think that access concerns exceptional matters and should not stray into day-to-day management.
I think the best governing boards today understand that there is a line to be drawn between company oversight and strategic responsibility - which is the board's prerogative - and day-to-day management - which is not. If the board is to become engaged in the latter, that usually means some crisis is underway, and that is precisely the time when it is essential that general counsel's direct line of communication with the board be functioning.
Let me add that I think that a good CEO should deliberate with the board on the hiring and firing of general counsel, as well as other members of the senior management group, even if the final decision remains with the CEO.
Editor: What about the notion of general counsel participation in executive sessions of the board?
Bates: I think general counsel can make a valuable contribution in participating in both general and executive sessions of the board.
General counsel does not have to be the corporate secretary, but he or she should attend all board meetings and certainly needs to participate in the finalization of board and board committee minutes. Given the scrutiny on corporate governance today, the deliberations of the board of directors must be painstaking, thorough and properly documented, and they must be perceived as all of these things. Ensuring that that is the case is one of the most important contributions that general counsel can make to the company.
Nevertheless, there are times - and I am thinking about specific personnel decisions - where general counsel participation may not be appropriate. Again, general counsel has a special responsibility to the company and its board, but general counsel is also a member of the senior management group. There is a tension here.
Editor: You mentioned how important it is today for general counsel to understand the company's business. This does not mean that general counsel should support every business initiative irrespective of the risk assessment, however.
Bates: Absolutely not. In the past general counsel and the members of corporate legal departments were accused - often unfairly - of too negative a response to new initiatives on the basis of risk assessment. I think one of the things that has taken place in recent years - and this development was underway long before the scandals and Sarbanes-Oxley - is that a better understanding of the company's business has led to a better understanding of the risks that the company faces. Good general counsel today understand that they are there to protect against risk and to participate in making good business decisions. The two are not antithetical but rather are synthesized into a process that leads to enlightened decisions. I see this most often where the company has a significant investment portfolio, and the lawyers' input is essential in assessing the risks and moving the investments forward, whether real estate, equity securities, mortgage instruments, and so on.
One of the signals that the company has recognized the value that general counsel brings to the table is the timing of legal involvement, the point at which counsel is brought into the discussion. By bringing counsel in earlier, rather than later, many matters are being resolved before they ripen into real issues. And I think that general counsel are brought in earlier as a consequence of a greater sense of confidence on the part of the board of directors and the other members of the senior management group in their understanding of the business and a greater appreciation of the value that they bring to the discussion.
Editor: Has the manner in which outside counsel works with a company changed as well?
Bates: What I have just said with respect to general counsel and the members of the corporate legal department applies to outside counsel as well. A company's outside law firm is expected to have a grasp of its business today, and many companies believe it is good to have outside counsel involved at the board level. This is not to say that outside counsel is supplanting the in-house lawyers. Rather, it reflects a desire to have outside counsel available on an as-needed basis, and that covers a wide range of issues involving both subject-matter expertise and, increasingly, company expertise. I believe that a company is best served when its outside counsel and in-house lawyers work closely together in addressing the extraordinary variety of issues, including business, risk assessment and legal issues, that arise today in the corporate context.
Editor: Do you find yourself being called on by boards of directors where they are deliberately avoiding their own general counsel?
Bates: With the exception of corporate investigations - and that is a special case - I do not find myself called into situations where the board of directors is avoiding general counsel. There are certainly times when the board desires a fresh look at something, and the assessment of an objective outside counsel is of great value. The normal procedure is for outside counsel to work with the in-house lawyers in preparing its assessment for the board. At present, that is a fairly standard process with respect to options backdating issues and foreign corrupt practices issues.
Editor: What about general counsel taking responsibility for an increasing volume of non-legal issues in the company, such as compliance?
Bates: Corporate compliance is a function that must work its way up to general counsel. There are models that have specific accounting matter issues going through the CFO's office as a consequence of some specialized expertise that resides there, but I would suggest that general counsel should participate even where the specific expertise is found elsewhere. Not only do compliance issues have legal consequences, but the overview of the company's business that general counsel possesses today may mean that he or she is the only person who is in a position to assess the gravity of a particular compliance situation on a company-wide basis.
Editor: So it is important for the persuasive counselor to be proactive rather than reactive?
Bates: Absolutely. To be merely reactive today is to ask for trouble. A primary responsibility is for general counsel to have the proper controls and reporting mechanisms in place, but once an issue has been identified and the process is underway general counsel must act. If you wait for the matter to develop it may be more difficult to defend the company, particularly if an illegal action is involved.
Editor: What about the situation where general counsel does not have adequate resources?
Bates: Part of being a persuasive counselor is having the ability to convince the CEO or the board of directors that you need these resources either in-house or available from an outside firm. A good general counsel will be prepared to present a cost/benefit analysis.
At the end of the day, as Chief Justice Veasey notes, general counsel must have the courage to stand up and speak out about what is necessary for the company's well being.
While the spotlight on corporate governance and compliance has resulted in an increase in the responsibilities of general counsel, in point of fact long before Enron and WorldCom there were excellent practitioners in this position who understood what they had to do to fulfill their obligations to the company. We may not have heard about them because they did their jobs right, but they have certainly succeeded in establishing a very familiar foundation from which today's practitioners are able to operate.