Editor: Mike, how has the passage of Sarbanes-Oxley affected the role of corporate counsel for nonprofit organizations?
Godfrey: Sarbanes-Oxley has become the standard by which all governance is judged and is something that all in-house counsel will have to live with for the rest of their careers. I believe that non-profits must meet the spirit of Sarbanes-Oxley even if not all of its provisions apply.
Editor: What characteristics should general counsel possess to serve as effective persuasive counselors?
Godfrey: General counsel must have a broad understanding of the entities they serve so that they can analyze legal issues in the context of the big picture. Evaluating legal issues on an ad hoc case-by-case basis without that information may not help the company in the long run. General counsel should have the ability to foresee how the legal implications of particular actions may affect their companies in the broader context. To do this effectively, general counsel must not only understand their companies' business plans, but also must have the kind of rapport with their CEOs that allows them to talk to them objectively, candidly, and confidentially.
Editor: Some have suggested the general counsel's independence is limited, because the CEO has the ability to influence the compensation of the general counsel. Do you agree with this assessment?
Godfrey: In most organizations, a CEO's recommendations with regard to the compensation of an executive officer, including the general counsel, must be confirmed by the board of directors. The annual compensation package, particularly bonuses and stock options, are approved by the board of directors on the recommendation of the compensation committee. The CEO's recommendations are important but not the final word. If the CEO were trying to treat the general counsel too favorably or too unfavorably, it should be caught by the compensation committee or the board.
Editor: Should general counsel attend all meetings of independent directors in executive session?
Godfrey: The general counsel should have access to the executive sessions of the independent directors. However, having the general counsel attend every meeting risks transforming his or her role into that of an inspector general instead of general counsel. The presence of the general counsel in some circumstances could have a chilling effect on other people who are invited to discuss issues with the independent directors.
Editor: Should structures be developed whereby the general counsel regularly reports to the CEO and the independent directors on matters relating to compliance and governance?
Godfrey: Such recommendations are designed to cure problems that should not exist in healthy organizations. I never had trouble with access to the CEO, other executive officers or the board of directors. We did not need to create a new paradigm because we regularly worked together and discussed important matters candidly.
Editor: Should general counsel or another member of the legal department attend board committee meetings?
Godfrey: I served as secretary for those committees so I attended them regularly. There are certain committees where the general counsel's presence is extremely valuable, the audit committee being the best example. However, there are other committees, such as the compensation committee, where it may not be necessary to have an attorney present throughout their meeting. Nevertheless, these committees should have the opportunity to call in-house counsel in to discuss important matters with legal implications as the need arises.
Editor: Do you believe that a legal department should have a critical mass of attorneys to interact with middle management on a regular basis?
Godfrey: Adequate staffing is the only way to assure that the company is getting the legal advice it needs. Line managers should have access to and develop a rapport with the attorneys who support them. This results in very constructive dialogue to provide informed and appropriate legal advice, and it also affords the business people another perspective on the issues. I used to tell the lawyers not to be afraid to give managers their business advice. Lawyers have experience and perspective that may be helpful to the business side, but this advice should never be confused with legal advice. Corporate counsel should always make it clear to their business clients when they are giving purely business advice.
Editor: Should corporate counsel attend middle management meetings?
Godfrey: At FINA, they were often asked to attend. Knowing the details of a planned transaction facilitates their ability to provide legal advice. Some, but not all, of the line managers regularly invited attorneys with whom they worked closely to their regular staff meetings.
Editor: Does it make sense to charge the general counsel with the compliance function in an organization?
Godfrey: The lawyer is there to assure that the company can accomplish its goals in a way that meets the legal standards. To me that is a proactive role and different from the role of the compliance officer who is the company's equivalent of an inspector general, someone who receives complaints and tests the company's internal controls to make sure that they are working. The role of the lawyer is to help the company craft its business in a way that satisfies the obligations of the law. I hesitate to call this role a compliance function. The compliance officer's responsibility is to identify and blow the whistle when there has been a breakdown within the organization.
Editor: Should an in-house legal department include attorneys with specialized expertise?
Godfrey: A well organized legal department will have a broad range of specialized expertise. At FINA our legal department included legal experts in all the areas where we could justify a full time lawyer. ERISA compliance is an example of an area in which we relied on outside counsel. We didn't need a full-time benefits specialist. Our in-house staff included a sophisticated tax practitioner and CPA, an environmental regulatory specialist and a number of other specialists in areas of the law that were applicable to FINA's business.
Because of the importance of the company's SEC compliance, as general counsel I developed sufficient knowledge of accounting principles and FASB regulations to recognize potential compliance issues. This knowledge was also necessary for my meetings with the auditors to review the company's legal position and the accuracy of any disclosure filings we were about to make. Without a reasonable understanding of FASB regulations and accounting, I could not have done that.
Editor: To whom should outside counsel report?
Godfrey: Except in very special circumstances such as where independent counsel conducts an investigation on behalf of the board or a board committee, outside counsel should be retained by the general counsel and report to the general counsel. I do not believe that line managers should get independent legal advice from outside counsel. I would not be comfortable that they would ask the right questions, provide all of the necessary information or necessarily understand the answers they get.
Editor: Will an up the ladder reporting requirement create sufficient leverage for counsel to encourage others in the business to do the right thing?
Godfrey: Out of the 5,000 public corporations in the U.S., most are striving to do the right thing. In these instances, corporate counsel and outside counsel will not be faced with a situation of having to report a matter to the board or audit committee. For the rare situations where counsel (whether inside or outside) uncover an issue not being fully addressed, Sarbanes-Oxley and the rules of professional responsibility require them to report to the highest authority that can act on behalf of the corporation. Awareness on the part of management and the board that counsel has that responsibility will lend greater weight to counsel's advice - but in most cases counsel's advice would have been heeded in the first place. I've said that Sarbanes Oxley was a huge dose of medicine for a disease from which most corporations did not suffer.
Editor: Is there a trend to create a direct reporting relationship of all in-house counsel to the general counsel?
Godfrey: That is the way that it should be organized. I believe that all lawyers should report within the law department with the information flowing up to the general counsel. I do not mind lawyers having dotted line relationships to line managers in circumstances where they are dedicated to a segment of the company's business. However, I think that ultimate responsibility for the hiring, firing and compensating of lawyers should lie with the general counsel.
Editor: Can a partially centralized legal department operate effectively?
Godfrey: They must be effective because many companies have adopted the model of having a solid line to a divisional manager and a dotted line to the general counsel. However, my observation has been that this approach has been most successful where the divisional law departments are larger. I do not believe that a small legal group reporting on a solid line to a divisional manager is an effective arrangement. Lawyers benefit from the ability to have a dialogue with colleagues. The opportunity for a lawyer to drop into a colleague's office and hash over a legal situation leads to a better legal product. That is something that is not available when lawyers are scattered about the business in one or two person offices.
Editor: Did you have departmental meetings where lawyers would talk with colleagues about issues?
Godfrey: I had three assistant general counsel that reported to me and the other lawyers reported to one of them. The assistant general counsel and I would meet regularly to discuss the legal affairs of the company, and I would inform them of developments from the executive suite. I relied on them to disperse that information to their staffs. All the lawyers had access to me if they needed my attention, and I had access to them anytime I needed to see them. My legal staff ranged from 16 to 20, and I found that to be an effective relationship to pass information back and forth.
Editor: How do you feel about general counsel being charged with overseeing non-legal operations at a business?
Godfrey: At FINA I headed government relations, public affairs, security, human resources, and one or two others along the way. I have seen a move towards companies having a chief administrative officer. Many of those companies look to the general counsel as the person most qualified to have that expanded responsibility. I never had the title but on a de facto basis that was my function. When a general counsel heads up other functions, it is very important that he or she is aware of what hat is being worn at any particular time.
Editor: What should general counsel do when management refuses to provide adequate resources for the legal department?
Godfrey: They should resign. Lawyers have an ethical duty not to undertake legal representation that they are not qualified to handle. A lawyer who does not have the needed resources to serve as chief legal officer will not be able to discharge his or her professional obligations to the corporate entity. Most CEOs know that there is no long term benefit to running the business without an adequate understanding of the legal requirements that apply. I had to present and defend the law department budget annually. If I needed more resources, I had to make the case, but having made the case, I was never denied those resources.