The Role And Responsibility Of Today's General Counsel

Wednesday, August 1, 2007 - 00:00

Editor: What characteristics should a general counsel possess in order to be successful?

Mundheim: The role of general counsel varies depending on the company that they serve and thus qualifications will differ. One characteristic is key for all companies: unquestioned integrity. It also helps if the general counsel has significant business and life experience to bring to bear on the variety of problems she will confront.

Minimally, the general counsel is responsible for trying to assure that the company is acting within the law. However, companies are turning more and more to the general counsel to provide advice that goes beyond legal compliance. A proposed course of action may raise reputational issues for the company. The general counsel is expected to spot such issues and have a view about them. Additionally, the general counsel may be asked for her judgment on people. If the company is hiring a new senior manager, that person will frequently interview with the general counsel.

Editor: Why are lawyers best suited to serve as persuasive counselors?

Mundheim: The general counsel is supposed to provide advice on the legal environment and legal responsibilities. Her knowledge of how the legal environment is developing should give the general counsel a basis on which to give valuable advice in planning transactions or taking other business initiatives. For the general counsel to be an effective counselor, the CEO and other senior managers must be sure that the general counsel or her staff are included early in the planning and decision-making process, and are viewed as partners in the business process. General counsel should help mold these transactions or initiatives so that they meet legal requirements and do not transgress into areas that would damage the corporation's reputation.

General counsel's role as a partner to senior management does create tensions. General counsel must retain the ability to make clear-eyed professional judgments and to have the backbone to raise issues with the appropriate decision-maker if, for example, the proposed course of action raises issues of compliance with the law.

An additional tension can arises from the general counsel's responsibilities to the board of directors, which is the highest authority within the corporation, the general counsel's only client. For example, when discussing a transaction with the CEO, the general counsel may raise certain reputational or potential legal issues. Nevertheless, the CEO may determine that these issues are outweighed by the business advantage the transaction provides. During the board discussion on this transaction, if the CEO does not raise any of the issues raised by the general counsel, the general counsel may have an obligation to bring those issues to the board's attention. A wise general counsel knows how to work with the CEO, will alert him before the board meeting of the importance of the CEO's raising these issues with the board, thereby avoiding having it appear that the general counsel is trying to upstage the CEO.

Editor: How does a general counsel develop a relationship with the board of directors?

Mundheim: In order to have a trusting relationship with the general counsel so that board members receive full advice and early warning of problems, the board or the chair of a committee, like Audit, should reach out to the general counsel to develop a personal relationship. This will lead to regular and routine meetings between general counsel and board members where they can discuss issues that should come to their attention.

When I was general counsel of Salomon, Inc., the chair of the Audit Committee always met privately with me before the regular Audit Committee meeting. He would ask about any violations of law which had occurred since our last meeting, whether we had conducted an autopsy to find out how and why the violation occurred, what we were doing to prevent a similar violation from occurring. He would always close by asking whether any other issues were giving me concern. Since I knew the pattern of questions, I could tell the CEO on the day before the meeting the issues I planned to address with the chair of the Audit Committee. That gave the CEO the opportunity that evening at the board dinner to talk to the Audit Committee chair about those issues. Without embarrassing the CEO, the Audit Committee chair would learn all the information he should know.

Editor: Should the general counsel meet with the independent auditors in executive session?

Mundheim: We always did that at Salomon. When those meetings occur routinely, such meetings do not ring any alarm bells.

Editor: Should the board of directors be involved in the retention and compensation of general counsel?

Mundheim: Normally a board elects company officers. Since the general counsel is an officer of the corporation, the board elects the general counsel. The point of your question relates to the responsibility of the general counsel to the board and the desirability of a direct reporting line to the board. The board's role in retention, promotion and compensation allows the board to encourage the general counsel to discharge her responsibilities to the board and protects her in doing so. Thus, I think this board role can be quite important.

Editor: What processes should be in place to make sure the general counsel is fully informed?

Mundheim: The general counsel should attend board meetings to stay informed about what is happening in the company. During these meetings the general counsel will have an opportunity to assess the way significant decision makers approach problems. Other people in the business will gain confidence in the general counsel because she will understand and can explain board decisions. This interaction with the board enhances the stature and effectiveness of the general counsel.

Editor: What about meetings of committees of the board? Should the general counsel attend these as well?

Mundheim: In addition to board meetings, it is useful for the general counsel to attend significant committee meetings. Doing so deepens the relationship between the general counsel and the board. However, the general counsel has a variety of responsibilities, and she obviously must make choices among the many demands on her time.

Editor: Should legal departments have a critical mass of attorneys to provide advice to management?

Mundheim: Generally, that would be desirable. The legal staff will want to be viewed as part of the team with the business people so that the business people are comfortable with the lawyers and bring them in at an early stage. There should also be a reporting line up the chain to the general counsel to maintain the independence of the legal staff.

Editor: Should the general counsel serve as the chief compliance officer?

Mundheim: When I was general counsel of Salomon, Inc., compliance, internal audit and credit reported to me. The idea was to put the general counsel in charge of the control functions, except for risk management. Other organizations structure it differently. They may have internal audit report directly to the Audit Committee of the board, with administrative responsibility given to an officer other than the general counsel. I prefer that lawyers report directly to the general counsel with a dotted line to the business people with whom they work. Thus, the general counsel has ultimate say on hiring, firing, promotion, and compensation. That arrangement provides maximum protection for the lawyers and best assures their independence.

However, building the structure is not enough. The general counsel has to spend time making sure that the communication of information, up and down the line, works well and that the legal staff trust each other and communicate easily. The senior lawyer in a business division has the same tensions in reporting up as the general counsel has in reporting up to the board. That senior lawyer works on a daily basis with the division head and wants the division head to think of him as a member of the team. The general counsel has to be aware of the tension and make it as easy and safe as possible for the senior counsel to discharge his responsibilities to the general counsel.

Some corporations believe that compliance should report to the business head so that she will feel directly responsible for the effective work of that important function. That approach makes sense, but may not provide compliance with the support for its independence which reporting to the general counsel provides. In addition, since compliance is often faced with making legal calls, there is logic in having it report to the general counsel.

Editor: What should general counsel do if requests for needed resources are ignored by senior managers or the board?

Mundheim: If general counsel feels her function is being starved for resources, she has to talk to management. If she feels that her resources are still inadequate, she has to make the board or board committee responsible for legal and compliance aware of her view. If the board or board committee is persuaded, they can put pressure on the CEO to spend more money in that area. If the board is not persuaded, it may be time to look for a new job.

Editor: Do general counsel have a visionary role that extends beyond the legal function?

Mundheim: Yes. Companies are willing to pay for good judgment. That includes an ability to forecast where things are going so that the company can set itself up today to deal with issues that may arise in the future. The general counsel who, in the 1990s, warned that it would be advisable for a U.S. financial institution to discontinue doing off-market trades in Japan even though it appeared legal (and was done widely) has rendered a valuable service when Japanese securities regulators reverse a traditional position and suddenly take the position that participating in such trades violates Japanese law.

Editor: If the board of directors decides to retain its own independent outside counsel, what should the role of the general counsel be during the selection process? What should general counsel's relationship be with that independent counsel?

Mundheim: It depends. For example, if the Audit Committee decides it must undertake an investigation and that some members of senior management may be implicated, it is important that the Audit Committee interview and ultimately select its counsel. If the Audit Committee asks the general counsel to suggest some names to be considered, I think the general counsel can appropriately do that. However, the Audit Committee will have to satisfy itself that the firm hired has the necessary competence and independence.

The role of the general counsel in the work of the independent counsel also will vary. The general counsel knows the company and the people. She can be helpful in making the investigation more efficient. Independent counsel should advise the board or committee about the degree to which it thinks it would be useful to have the general counsel play a role and the risks of her doing so. The board or committee should then make the determination and, with independent counsel's advice, set the guidelines.

Editor: Having served as a dean and law school professor, do you believe that law schools are adequately preparing students to perform the functions of a persuasive counselor?

Mundheim: Although every law student must take a course in legal ethics and the legal profession, the courses vary enormously among law schools. When I taught Corporations, I tried in that course to raise legal ethics issues and to explore the appropriate role of corporate counsel. Many other professors do that. I notice that Professor Ted Schneyer at the University of Arizona Law School teaches a course in ethics focusing on the role of the corporate lawyer. And there is a casebook, by Professors Regan and Bauman, entitled Legal Ethics and Corporate Practice. This teaching helps make law students sensitive to the demands and tensions in the role. On the other hand, the lawyer who is a persuasive counselor is a lawyer who has demonstrated good judgment on difficult issues. That kind of judgment also requires schooling in experience and by an attitude toward the role which can be identified in law school, but needs encouragement by the legal and business communities.