Reinforcing General Counsel's Enhanced Role

Wednesday, August 1, 2007 - 01:00

Editor: Pete, tell us about your practice.

Lodwick: My practice includes counseling in mergers and acquisitions and securities laws matters. I regularly advise boards of directors, audit committees with respect to Sarbanes-Oxley-related and governance matters, including SEC and Department of Justice investigations, and represent special investigation, transaction and litigation committees.

Editor: Are you seeing situations among your clients where general counsel act as persuasive counselors?

Lodwick: For a variety of reasons, general counsel are with increasing frequency in a position to act as persuasive counselors. There is greater accountability for public companies, their boards, executive teams and general counsel in the post-Sarbanes-Oxley era. Public company boards are more attuned to corporate governance, ethical and risk management issues. Each of these initiatives places greater demands on the general counsel and elevates the general counsel's profile and voice in the board room and executive suite. The recent accounting and options backdating scandals provide stark reminders of the damage that can result from a general counsel's failure to speak out against ethical lapses. As a result, the SEC and DOJ are increasingly focused on the actions of the general counsel's office. All of these developments have fostered an environment where general counsel must be more proactive in their counseling.

Having conducted a number of independent investigations over the past several years, I have observed that the effectiveness of general counsel in meeting their responsibilities is in many cases proportional to the willingness of the CEO to embrace the role of general counsel as a persuasive counselor. Boards and CEO's are increasingly reliant on general counsels as persuasive counselors, and we see general counsels meeting that challenge on a regular basis. We spend a great deal of time assisting general counsel in performing that function.

Editor: Does your firm include experts on questions relating to the conduct of board and board committee meetings, preparation of minutes and otherwise documenting the due diligence of the directors?

Lodwick: Yes. We have a core group of attorneys who are experienced in dealing with issues relating to corporate governance and board and committee processes. It is an evolutionary area requiring experience, judgment and often a great deal of diplomacy. Each situation is different and there are often multiple constituencies with differing interests that have opinions regarding process. During an audit committee investigation, for example, management, the audit committee, the external auditors, the board, defense counsel for individual officers and in some instances the government all have an interest in the process. Using experienced outside counsel is critical to navigating these sometimes treacherous waters.

Editor: Do you believe that the changes that have taken place in the laws and regulations have created a need for general counsel to have more detailed minutes than existed previously?

Lodwick: Boards and committees are increasingly focused on process, as well as the documentation of process. The record keeping requirements of Section 404 of Sarbanes-Oxley have placed greater demands on general counsels. Earlier this year, the Delaware Court of Chancery was critical of the lack of detail in minutes for key board and special committee minutes in connection with the sale of a public corporation. Opinions vary on the level of detail in minutes in a given situation, but generally companies are paying more attention to the issue of minutes.

Editor: Does your firm assist the general counsel in the indoctrination of directors and in answering questions of directors with respect to avoidance of personal liability and the adequacy of D&O insurance and indemnification?

Lodwick: We regularly consult with general counsel in a variety of matters related to the board, including vetting director candidates for independence issues and developing and in some cases presenting orientation and continuing education programs for directors. If requested, we annually review with general counsel the adequacy of their companies' compliance programs and governance structure, and evaluate their D&O insurance and indemnification coverage. In addition, we regularly consult with individuals considering a board position regarding D&O insurance and indemnification issues. Our counseling with directors relates less towards the avoidance of personal liability and more towards helping them manage risk for a particular company or industry and fulfill their responsibilities to their shareholders.

Directors who are considering joining or remaining on a board typically evaluate a number of factors, including "tone at the top" and management's commitment to good governance and ethical conduct. An effective and informed general counsel can be an integral part of that commitment.

Editor: The general counsel is called upon to advise with respect to technical areas of the law. Do you have lawyers in critical technical areas, such as law and accounting, executive compensation, FCPA and IP, who provide the input required by the general counsel to give such advice?

Lodwick: Today's general counsel and their staffs are increasingly expected to be conversant with a number of areas of the law. For example, the Foreign Corrupt Practices Act is an area requiring greater attention from general counsels of multi-national companies, who are expected to understand the implications of conducting business in different countries and to protect against the significant consequences that can arise from an ineffective compliance program. We have expertise in each of the areas you mentioned and are regularly called upon by general counsel to augment their efforts. General counsel cannot be experts in every area, but they should have enough resources in place so that they can spot the issues and where necessary seek the advice of outside counsel. We often assist the general counsel's efforts to identify and frame the issues and make recommendations to management or the board.

Editor: Is your firm available to act for boards of directors, audit committees and special investigation committees of the board where there is a need for independent counsel?

Lodwick: We regularly counsel boards of directors, audit committees, and special investigation or litigation committees. In addition to conducting independent investigations, we serve as regular outside counsel for a number of audit committees. In many cases, an audit committee or group of independent directors also deems it prudent to seek advice from outside counsel on discrete matters.

With regard to our relationship with the general counsel, each situation is a bit different depending on the relationship among the general counsel, the CEO and the board and the issues involved. Most general counsel understand the need for independent directors to seek outside advice from time to time. It may on occasion be the general counsel who advises the board or board committee that such an engagement might be prudent. During an investigation, it is often important for outside counsel to keep the general counsel apprised of the process without compromising the integrity of the investigation, particularly if that general counsel serves the role of persuasive counsel within the organization. In the case of internal investigations, where there can be enormous pressure on management to resolve outstanding investigative items in an expedited manner, the general counsel is often integral to obtaining effective cooperation from management.

Editor: Do lawyers from your firm, when requested, accompany general counsel to board meetings, including audit committee meetings? What about meetings with the CEO or a management committee?

Lodwick: We accompany general counsel to board and committee meetings as requested to address specific issues. Our role is often to assist in the preparation of the general counsel for these meetings and to be available as a resource. General counsel will invite us to attend management or CEO meetings when there is a sensitive topic to be discussed or where general counsel wishes to call on our expertise to reinforce his or her views.

Editor: A frequent concern of general counsel is that they lack the resources to effectively play the role of persuasive counselors. Has the firm been called upon to use its knowledge of best practices among its clients to assist general counsel in obtaining needed resources?

Lodwick: Public boards and board committees are increasingly aware of the value of having a general counsel not only with the ability and courage to act as a persuasive counselor, but also with the resources required to perform that role. These issues may arise, for example, in the context of compensation committee deliberations addressing hiring, retaining and/or compensating the general counsel and with the audit committee in making its annual risk management evaluations.

Most sophisticated boards annually review the corporate governance structure in place and the adequacy of resources in various sensitive areas such as the general counsel's office or internal audit. We are occasionally asked to comment on whether these areas have adequate resources and on how best practices can be tailored to fit the specific company and organization. It is sometimes difficult for management to appreciate fully the consequences and risks of a lapse in these areas until the problem has arisen or an investigation has concluded, and experienced counsel can often identify better practices that help address potentially problematic areas before issues arise.

Editor: Another concern is that the legal function may not be structured so as to assure the flow of accurate information from all in-house and outside lawyers to the general counsel. Does the firm advise with respect to best practices in this area?

Lodwick: The implementation of Section 404 as well as the officer certification process for quarterly and annual SEC filings prompted many companies to reassess the effectiveness of the flow of information that supports those certifications. The general counsel is much more involved now than in the past in reviewing the information that supports Section 404 certifications. We are involved in advising our public clients and private companies that may wish to go public about the kinds of information needed to support such certifications and best practices in structuring a system that encourages and facilitates prompt and effective reporting.

Editor: How would you sum up?

Lodwick: For many companies, the role of the general counsel continues to evolve. Today's general counsels have significant challenges in assuring that their organizations act ethically and in compliance with the laws. They are increasingly responsible for establishing good governance practices in the boardroom and in the executive suite. They are more involved in management functions than before. It is a challenging and important role.

Please email the interviewee at peter.lodwick@tklaw.com with questions about this interview.