Measuring Up To The Challenges

Wednesday, August 1, 2007 - 00:00

The Editor interviews Charles R. Lotter, Former General Counsel, JC Penney Company, Inc.

Mr. Lotter and the other former general counsel interviewees were selected to be interviewed on the basis of their substantial experience as general counsel.

The interviewees noted with an * in the adjoining index to this Special Section were also selected to serve in 2007 as judges to determine the winners of the Texas General Counsel Forum's prestigious annual Magna Stella Awards.

Editor: Why is the general counsel uniquely suited for the role of persuasive counselor?

Lotter: Over the last decades, the implosion of some major corporations, the resulting litigation and the adoption of Sarbanes-Oxley in response have sensitized the various audiences of a corporation to compliance and corporate governance issues. In response, management and boards of directors as well as shareholders and the general public have given increased attention to compliance and corporate governance.

General counsel have long served as counselors to the corporation on these issues. Their mandate includes keeping an ear to the ground with respect to the various constituencies to which a corporation must be sensitive. Therefore, general counsel were the logical corporate officers for boards and CEOs to turn to as events moved compliance and governance issues front and center as CEO and board priorities. Obviously, the CEO must also pay attention to compliance and governance issues, but may lack the time to devote the kind of focused attention to them that is expected of the general counsel. A general counsel has to have a broad enough vision to keep track of these issues as they evolve and raise them in the course of business planning whenever relevant.

Editor: Do you believe that the board should be involved in the hiring, firing and compensating of the general counsel to ensure his or her independence?

Lotter: In most major companies, the board is involved in that process. Boards are usually concerned with succession planning for the CEO and all of the major executives including the general counsel. The board participates in the selection of the general counsel and usually approves his or her salary. That is a healthy situation and in recent years more and more boards have been actively involved in that process.

Editor: Does that affect the general counsel's relationship to the board?

Lotter: Board involvement with the general counsel and other senior officers is a plus. Boards often look to the general counsel for compliance assurance on the direction that the business is or may be taking. They want good independent and balanced advice that may or may not coincide with what management is proposing. Boards are pleased with a general counsel who can provide them with what they feel is an independent perspective. General counsel have responsibilities to both the CEO and the board. They have to be able to work with both in a non-confrontational manner while maintaining their independence.

Editor: Should the general counsel attend executive session meetings of the independent directors?

Lotter: As general counsel I attended all sessions of the board and the independent directors unless there was a personal involvement. In addition, when the board met in executive sessions, I attended all meetings except when my performance or compensation was being discussed and I was available to answer questions and to serve as secretary where minutes were needed. That is a healthy process and will build the board's confidence in the general counsel. I believe that this happens in many companies.

Editor: How does this access increase the general counsel's effectiveness?

Lotter: Such sessions provide insight into the board's thinking. That can be a real benefit to the CEO and senior management. If you are paying attention and sensitive to what is on the board's mind, that information can help senior management in its relations with the board. By knowing what may be bothering the board, the CEO and senior management will be in a better position to work effectively with the board. It is a healthy phenomenon as long as the general counsel plays an honest broker role in the process and preserves necessary confidences.

Editor: To be effective as general counsel, there must be a flow of information. Do you believe that a regular reporting requirement to the CEO and independent directors would achieve this?

Lotter: This is a regular process in most corporations. There is or should be at least an annual session where the independent members of the board meet with the general counsel without other members of management being present. Obviously, there are usually many opportunities for one-on-one sessions with the CEO. Regular interaction offers the opportunity to discuss matters more candidly.

Editor: Did you or a senior attorney attend board committee meetings on a regular basis?

Lotter: Yes. We assigned a senior attorney to each Board committee with substantive legal background in the area that the committee would consider. As general counsel, I attended all the board sessions and when feasible certain key committee meetings. Usually, when a significant issue was on the agenda, I would attend both the board meeting and the committee meetings where the issue was to be discussed. In those instances the senior counsel who normally attended the committee meeting would also be present. That was a way for general counsel to stay current on issues and board attitudes. In preparing for committee meetings and board sessions, the general counsel should make sure that the materials for the meeting are clear, complete and distributed with enough time for everyone to review them.

Editor: What about discussions among senior management?

Lotter: In my case, the general counsel was a member of the executive committee. We had executive committee meetings on a regular basis. Issues that needed to be addressed were discussed. It was an opportunity for the general counsel to weigh in on issues that might still be under discussion and to act as counselor where appropriate. Where the general counsel's point of view is respected, the general counsel can have considerable influence on the decision making process.

Editor: What was the role of the legal department in working with middle management?

Lotter: We assigned experienced attorneys to manage groups within the legal department such as corporate, benefits and human resources, etc. Each group of attorneys would report to a senior attorney, and they all worked on a daily basis with the business people. It was a common practice for the business people to discuss issues with that senior attorney and those who reported to him or her and to invite counsel to significant planning and other meetings. That approach allowed our lawyers to address legal issues before they became problems. By the time that things rose to the top of the organization, they had usually been well vetted legally and business-wise. At periodic meetings with the senior attorneys that were assigned to these groups, I had a chance to discuss what was being considered at lower levels so that we had ample opportunity to provide our support on a timely basis. Problems were easier to deal with because we were able to address them at an early stage.

Editor: Did the department use specialized lawyers?

Lotter: A responsible general counsel will retain specialists in areas where it makes sense for the company. If it is not feasible for the organization to retain a full time specialist, general counsel may seek outside counsel when needed. It would be logical for a publicly listed company with the typical range of disclosure and other responsibilities associated with such companies to add a full time attorney with a corporate SEC background to the in-house legal staff. Likewise, a significant number of employees and benefit programs might justify hiring a lawyer who is a specialist in those areas. On the other hand, someone with Foreign Corrupt Practices Act expertise may or may not be needed on a full time basis.

As general counsel, you want to make sure that a combination of staffing and overall access to resources provides you with the ability to deal with most issues internally without having to go outside to excess. Inside counsel should be experienced enough to spot an issue and to seek outside advice where that is required. To the extent that the general counsel is perceived to be responsible in managing his or her budget, the more his or her view will be accepted when there is a call to bring in a specialist.

Editor: How did you work with outside counsel?

Lotter: Having outside counsel that you are comfortable with was the way to deal with certain problems if they arose. I did not subscribe to the view of having one firm do it all. We used generalist firms and specialty firms as needed in areas such as litigation where their experience and skills were satisfactory and cost-effective.

Editor: What reporting relationship did outside counsel have?

Lotter: Normally, we wanted outside counsel to work through the inside counsel who retained them. Sometimes it would be the senior attorney assigned to an area. The judgment on whether outside legal help was needed and to what extent should be made by inside counsel rather than a business person who is usually not familiar with the legal issues or the skills required.

Editor: Should all lawyers within a company report on a solid line basis to the general counsel?

Lotter: It is best if all in-house lawyers report directly to the general counsel. In some cases a dotted line might be sufficient, but a solid line is best. When the legal department is centralized, a solid line relationship is easier to accomplish. For subsidiaries or divisions, in-house lawyers should report to general counsel on a solid line basis, but they may for limited purposes report to an operating officer on a dotted line basis with the general counsel having a significant role in hiring, promoting and compensating those attorneys. That enables the general counsel to be better informed and strengthens the overall compliance and up-the-ladder reporting functions because the lawyers know that they need to be responsive to the general counsel.

Editor: Do you believe that the CEO and board prefer this structure for the legal department?

Lotter: A solid line relationship enhances overall compliance security. That is an issue that should overcome budgetary and other organizational considerations for the CEO and board. A strong compliance structure is important so it should not be hard to make a case for solid line reporting for the lawyers who are dispersed throughout an organization and responsible for legal compliance.

Editor: How do you feel about the general counsel overseeing functions that have little relationship to legal?

Lotter: The role of the general counsel and the focus on legal matters and compliance is a full plate. To the extent that the general counsel is assigned responsibility for departments that are not related to discharging those functions, it may limit his or her effectiveness as general counsel. Applying this standard, good examples of departments that can be headed by the general counsel are government relations and internal audit. However, to the extent that general counsel are assigned other largely administrative or operating functions, this takes away from the time that the general counsel has to focus on his or her principal role and may dilute the perception of the general counsel.

Editor: What do you do if you do not have an adequate staff and the board and CEO do not respond to your requests for more resources?

Lotter: If the experience of senior management and the CEO is that the general counsel is effectively managing his or her budget, then there is usually no problem in getting resources. In theory, if you are not given enough resources to discharge the compliance function, you may be under an ethical obligation to resign. It seems to me that if your judgment is that the compliance mechanism is insufficient, you need to let the CEO and board know that is your view. The credibility of your case will usually determine if you get the resources.

Editor: Should the general counsel bring non-legal issues such as corporate social responsibility to the CEO's and the board's attention?

Lotter: In selecting a general counsel, the company should select someone who is aware of the various constituencies that affect the company's operations and will keep up to speed on what their concerns are. Increasingly, general counsel will be looked to for advice about how a particular business course of action will play with those constituencies, both in the short term and longer range. It is important that general counsel have the ability to spot issues that are bubbling up and likely to emerge and to evaluate what effect they will have on their companies and proposed courses of action. Corporate social responsibility may play a role in responding to such issues - in fact, how a corporation is perceived might even have an impact on legal outcomes and governmental policies.