Doing The Essentials On A Tight Budget

Wednesday, August 1, 2007 - 01:00

The Editor interviews Bryan "Buck" F. Smith, Jr., former executive vice president, secretary and general counsel, 7-Eleven, Inc.

Editor: Please tell our readers about your background.

Smith: I served as the general counsel for The Southland Corporation from 1992 to 2006. The company changed its name to 7-Eleven, Inc. in 2000. I left 7-Eleven, Inc. in 2006 after the company was taken private by our majority shareholder, a Japanese corporation.

Editor: Why is the general counsel selected to fill the role of persuasive counselor?

Smith: The general counsel has long been viewed as the conscience of the corporation. Chief Justice Veasey uses that term in his article. As I was growing up, my father Bryan Smith, who was general counsel of Texas Instruments, used that term to refer to his role there. Although in that role you have to be the keeper of standards of righteousness, you must play that role without being self-righteous - otherwise your good advice is likely to be ignored.

Today's rules, regulations and standards are written by lawyers and accountants and enforced by lawyers and accountants. Cases interpreting them are adjudicated by judges who sometimes sit in a vacuum with little understanding of the tensions arising out of our role. Unfortunately, they are likely to review matters with perfect hindsight. I think that the general counsel is uniquely qualified to interpret the rules and apply them to the culture of the company that the general counsel serves.

When Sarbanes-Oxley was enacted, we tried to summarize it for our directors and officers and then apply it to the business. We put in place the types of structures and systems that were necessary to keep us compliant with the rules while making sure we were doing what was best for the company and its shareholders.

Editor: Should the board oversee the hiring, firing and compensation of the general counsel?

Smith: I was fortunate in that I was among the top five executives in the compensation table. I had the compensation committee of our board looking after me. I never had to fight that fight. However, I agree with the concept that the board has to be involved in hiring, evaluating and compensating because without that, if you have an overly dominant CEO, the general counsel's role can be severely compromised.

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

Smith: Yes. To the extent that records are made of meetings of the independent directors in executive session, there is a need for the corporate secretary to be present to take the minutes. One way to assure that this happens is for the general counsel to serve as the secretary of the corporation. The general counsel needs to be involved in those meetings to understand the concerns of the directors.

Our board had some top notch directors, including Lewis Platt who was the former CEO of Hewlett-Packard and Boeing. He was a great guy who understood the importance of good governance - and a strong force in keeping me intimately involved in those executive session meetings, committee meetings and the informal conversations that occurred along the way. The fact that the general counsel is so well informed about the views of the independent directors means that he commands the respect not only of the CEO, but the other senior officers - and Lew understood that. The general counsel should have the reputation of having the trust and ear of the board. I could not imagine it any other way.

Editor: Should there be a mechanism to force the company to ensure that the general counsel is fully informed of what is happening at the company?

Smith: Yes. Putting in structures for regular reports in instruments like the audit committee charter can go a long way to take away the tension that might exist if you did not have the structure that required the general counsel to be kept informed. I knew that I had to provide the audit committee with a compliance report on a semi-annual basis. Gathering the necessary information was a burden, but the process helped to keep me well informed about what was happening at the company.

I found that to encourage people to speak frankly to you about compliance issues, you need to maintain good social relationships with as many members of management as possible. They must view you as a friend in whom it is safe to confide. I disagree with the concept that such relationships create the risk of compromising the general counsel's independence. However, you need the judgment to know how to communicate information without unnecessarily jeopardizing the source

Editor: Did you attend board and board committee meetings?

Smith: Yes, the general counsel should serve as the corporate secretary so that it is necessary for him or her to attend board meetings. I always tried to attend board committee meetings. If there were concurrent meetings, I would have one of the most trusted members of our legal department attend one and act as secretary.

Editor: What about involvement with management meetings?

Smith: I was a member of our executive committee and attended its weekly meetings.

Editor: How should a company staff its legal department?

Smith: It is important that the general counsel have sufficient staff to serve the needs of the business people. Cutting staff to the extent that the company is not legally protected and is exposed to compliance failures is false economy. I found it helpful to check the appropriateness of our staffing by benchmarking with other comparable companies. This provided me with ammunition to convince management that my requests for additional staff were reasonable. But, I would tell my staff that I did not want them to become "meeting wizards" where lawyers would sit all day in meetings and not do anything else. I was afraid of overstaffing and becoming bloated with more attorneys than needed. At the same time I was afraid of not having enough people to serve the client. It is a balancing act that goes on continually. If there is pressure on earnings, management will start cutting staff and other expenses unless the general counsel can make a convincing argument that the cuts would be imprudent.

Editor: What would you do if you were denied the resources that you felt were necessary to protect your company from compliance failures?

Smith: If a company does not provide a proper level of resources, I would try to do what I could with the resources available, but I would keep an eye on it. If it became dangerous or overly burdensome, I would voice my concern. I never had to take it beyond that point because the CEO or CFO would listen to me. They knew I always kept an eye on the bottom line. Obviously, I would have to resign if I did not feel that I had the tools necessary to do my job.

Editor: What about the use of outside counsel?

Smith: It was a significant expense for the company. We liked to do the work inside if we could in a cost effective manner. However, when we got into an area that was beyond our resources or expertise, we would go outside. I cultivated relationships with lawyers who I knew understood what I wanted and how I wanted it done. Budgeting for outside counsel fees can be tricky. A lawsuit can unexpectedly pop-up where you need an army of litigators.

Editor: Did you have specialized lawyers in-house?

Smith: I could cost justify bringing an expert in-house if we had sufficient demand. I would typically look for a fourth or fifth year associate at a law firm. We got into a highly sophisticated electronic financial service business where we had kiosks that you could use to cash a check and withdraw money. It is a highly regulated industry. I finally decided to bring a specialist into the legal department because of the large amount we were spending on outside counsel. We also had lawyers in our legal department who were familiar with issues involving financial disclosures and accounting.

Editor: Did all in-house lawyers report to you?

Smith: All the lawyers reported to me. I was completely centralized with all our lawyers housed in offices in the legal department.

Editor: How do you feel about general counsel taking responsibility for departments other than the legal department?

Smith: That inevitably happens. If a corporation has a general counsel who is a good manager, the corporation will layer more responsibilities on him or her. I had constant pressure from the CEO prior to our going private transaction to assume the mantel of chief administrative officer and general counsel. This can really compromise the privilege issue if you are not careful. I did take on government affairs as general counsel. I also had corporate records which is a compliance and regulation driven process in terms of retention of documents. After the going private transaction, I gave up the general counsel responsibility and became the chief administrative officer. The company appointed a new general counsel at that time.

Editor: Do you feel that general counsel should play a role in corporate social responsibility and should push issues like diversity and pro bono?

Smith: In a perfect world, you should stay abreast of activities that will affect future legal outcomes in foreign countries and in the U.S. I lived in a world where I was fighting a firestorm everyday. I was so focused on staying in front of purely legal and regulatory issues that I did not focus too much on things like pro bono or diversity. I did not force the lawyers to engage in pro bono work. I was so thinly staffed that I did not feel that it was appropriate to put that burden on them. Your involvement in such issues depends a lot on the business you are in and the amount of staffing that is available to you.