Helping Guide The Corporation To "Do The Right Thing"

Sunday, July 1, 2007 - 01:00

The Editor interviews Thomas J. Sabatino, Jr., Executive Vice President and General Counsel, Schering-Plough 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: How would you characterize the role of the general counsel?

Sabatino: The general counsel often sits at the fulcrum of decision making in a corporation, especially where he has a deep understanding of the business dynamics and challenges that drive the corporation. He is frequently in the best position to see both the opportunities and risks of a given business decision and he can give the CEO, other members of senior management, and the board a balanced view and advice. The general counsel is also frequently seen as a moral compass for the organization - helping to ensure that the organization "does the right thing," not just the legally acceptable thing. This behavior reinforces a corporation's commitment to good corporate governance and compliance and amplifies the right "tone at the top."

Editor: Do you think it is important for the board to be involved in decisions affecting the retention and compensation of general counsel?

Sabatino: Yes - the board needs to be actively involved in the hiring, retention and compensation of the general counsel and other key members of management. At Schering-Plough the Compensation Committee acts on the compensation and benefits for every senior executive, including the general counsel. The board also takes an active interest in the development of senior management, including me as general counsel.

I do not believe that reporting to the CEO compromises the role of the general counsel as persuasive counselor - in fact, I think that it strengthens that role. Without the active support of the CEO, the general counsel would not have the access, understanding and impact that is needed to be a "persuasive counselor." Being one of the CEO's direct reports puts you in the thick of things where you can be most effective.

Editor: How does access to the board or audit committee increase general counsel's effectiveness as a persuasive counselor?

Sabatino: At Schering-Plough I have ready access to the board, the Audit committee and our Business Practices Oversight committee, and present to them on important legal and compliance matters in executive session. More importantly, our CEO believes that there should be no artificial barriers between the general counsel and the directors. For example, if important compliance issues arise between board meetings, the chief compliance officer and I will talk directly to the chair of the Audit or Business Practices Oversight committees. That is the way it should work in a corporation.

Editor: Should the general counsel regularly report to the CEO and the independent directors on matters relating to compliance and governance?

Sabatino: Absolutely. I have both formal and informal ways of communicating with the CEO on governance and compliance related activity. At Schering-Plough, we also have a chief compliance officer who reports directly to the CEO. She and I work hand in glove on all important compliance-related activity and we both have easy and ongoing access to the CEO and other members of senior management. On governance matters the corporate secretary is also the Chief Governance Officer; she reports to me, and she has unfettered access to the CEO and me and the head of our Nominating and Corporate Governance committee. But it is also a matter of attitude on the part of the CEO. He or she must be interested and engaged in dealing with these matters, seeking out the information and not merely waiting for it to come to him. We are lucky at Schering-Plough as our CEO is quite engaged in these issues.

Editor: Should meetings of each committee of the board include the general counsel or the corporate secretary?

Sabatino: I believe that either the general counsel or the corporate secretary should be present at all of the board meetings. Schering-Plough's board follows this practice. This is really a matter of good governance. More importantly, the general counsel needs to be seen as an active contributor at those meetings and on all of the important issues that confront the board. The general counsel must actively engage the board on matters of significant legal importance to the corporation and act as a persuasive counselor in that setting as well.

Editor: Should general counsel or a member of the law department attend all meetings of senior management?

Sabatino: Not only should they attend, but the general counsel should be considered a member of senior management. At Schering-Plough, I am a member of the Executive Management team, which consists of the most senior members of management. We meet every two weeks on a formal basis and discuss the key strategic and operational challenges of the company. I also interact with my peers as a member of that team on a continuous basis - frequently interacting on issues multiple times a day. The general counsel must be in the middle of the information flow. He should seek out information about what is happening in the company on both an operational and strategic level. The general counsel should know how company products are performing in the market. They should have a feel for the consumers of these products. To be a persuasive counselor, you need to have a tactile feel for the business.

Editor: Should members of the legal department participate in all planning meetings and other committee meetings of management in which legal issues may come up?

Sabatino: Lawyers in any organization must be close to the business and the managers of that business. Lawyers should be part of key management structures and active participants. This not only helps head off compliance or other legal issues, but also frequently provides lawyers the ability to be engaged in finding an optimal business answer. You cannot predict when a legal issue may arise, and you will not have enough lawyers to go to every management meeting. And of course, the size of the organization will dictate how accessible lawyers are to members of management on a daily basis. So you have to assure that there are easy and frequent communications between the legal professionals and their business partners.

Editor: Should in-house lawyers be trained to recognize problems that may need to be referred to outside specialists?

Sabatino: Depending on the size and complexity of the organization, legal specialists need to be available. In highly regulated industries, this becomes essential. For example, we have people who are experts in areas like FDA, regulatory, pricing and reimbursement but they are not merely high level specialists who are called on when needed. They are highly valued members of the business teams with whom they work. In addition, it is very important to have good cross-functional training so that those who work directly with certain management groups can spot issues and triage them to appropriate experts either in the company or outside.

Editor: What should the reporting relationships of outside counsel be?

Sabatino: In matters other than those directly involving the board, the outside counsel should report regularly to the general counsel and other members of the law department on compliance-related issues. They should view themselves as just as responsible for ensuring compliance as the in-house lawyers. In matters that may impact the board, the board needs to have the ability to engage independent counsel. In fact, the NYSE rules mandate that outside experts be available for certain committees. A board that trusts its general counsel should look to him for advice on whom to select. And unless the general counsel is implicated or there is a potential for a conflict of interest, the outside counsel should have ongoing communications with the general counsel. In fact, the general counsel can help outside counsel navigate the complexities of an organization in order to complete a thorough and accurate investigation in a timely manner. Our Corporate Secretary and I also sometimes suggest to the board or a board committee they bring in an independent counsel for a separate perspective. For example, we did this with our Compensation Committee for the first proxy statement under the new rules.

Editor: Should all in-house lawyers directly report to the general counsel?

Sabatino: Lawyers and other legal professionals have to have accountability up to the general counsel. It reinforces the lawyers' duty to the corporation. In that regard, the increasing focus on compliance and the trend toward direct accountability to the general counsel coincide. But equally, this direct reporting relationship fosters knowledge sharing and teamwork within the law department. And it provides for a clear path for professional development and career enhancement. At Schering-Plough, we take our performance management process (PMP) very seriously. We have a robust process in setting objectives and in providing feedback and evaluation. We get input from the business and law department colleagues. For example, I get feedback on my direct reports from my CEO and other stakeholders. This is something that would be very difficult to do in a decentralized model.

Editor: Can a partially centralized and partially decentralized structure be effective in uncovering and addressing compliance issues?

Sabatino: The centralized/decentralized model under which some areas are centralized, with direct report to the general counsel, and other areas are decentralized with direct business reporting and a dotted line to the general counsel, has limitations. There is a different model which we use at Schering-Plough. Under this model all of the lawyers report up through the law department but many of the lawyers operate as members of management teams and frequently their offices are located with those of the business partners. We do this in a number of countries around the world. I think this continues the accountability and connectivity to the law department with the intimacy to the business that is essential to being a good business partner. This maximizes the chances of addressing compliance and other legal issues early because you can recognize them as they are developing and the lawyer can leverage the rest of the law department to help find solutions to these issues.

Editor: What can general counsel do to convince the CEO or board of the need to provide necessary resources?

Sabatino: General counsel need to educate senior management on the value that lawyers bring. In some areas it is easy. For example, protecting our intellectual property assets is an area where the investment is pretty obvious. Other areas are a little harder to explain, although my experience has been that sophisticated boards and CEOs understand the value that compliance and business integrity bring to a corporation. But it also doesn't mean that you have an unlimited budget. You have to find cost effective ways to manage and settle litigation and handle other matters with outside counsel. We have implemented a robust early case assessment and other early dispute resolution (EDR) mechanisms. We have also reduced the number of firms that we use in our convergence process to create cost savings and efficiencies. And we communicate regularly with the CEO, the board and senior management on on-going matters and their costs.

Editor: To what do you attribute a trend toward general counsel also supervising other departments?

Sabatino: I think the good general counsel (and any good lawyer) has the ability to see many sides of an issue. They take advantage of their deep understanding of the business, their ability to evaluate risk and their strong analytical skills to deal with problems and find solutions. Good business lawyers tend to have good peripheral vision. These are all good skills to have as an in house lawyer, but they are also good skills for the manager of any complex function or business. I think CEOs recognize that and provide general counsel with the opportunity to play a wider role.

Editor: Should general counsel bring corporate social responsibility issues to the attention of the CEO and the board?

Sabatino: Yes, if it is not already happening. At Schering-Plough the CEO and the board initiated a Social Action Plan to inform decision making. But the general counsel may also raise these issues when analyzing potential legal outcomes. And often this engagement is driven by the role that lawyers have traditionally played in our society. There is a heritage of public service, such as pro bono activities and fostering diversity. And the general counsel frequently is a moral compass for a corporation. These activities also help build trust with key stakeholders, like shareholders and regulators, which in turn can have a positive impact on business activities. Business integrity must be led by the CEO, but the general counsel can add real value by being an active and visible supporter on these matters. It gets back to the role of a persuasive counselor, who helps guide the corporation to "do the right thing."