Today's Successful General Counsel: Always Looking Around The Corner

Saturday, March 1, 2008 - 01:00

These remarks were taken from a panel entitled "The Growing Role of Corporate Counsel," which was held as part of PLI's Corporate Counsel Institute in September 2007. The participants were Louise Parent, General Counsel of American Express Co. and Esta Eiger Stecher, General Counsel of Goldman Sachs. The panel was moderated by Richard Ziegler, formerly General Counsel of 3M Corp and currently a partner at Jenner & Block, who led the discussion through several phases of a hypothetical.

Ziegler: You are the general counsel of the well-known XY Corp, a blue-chip multinational whose portfolio of subsidiaries includes consumer products companies, and a member of its seven-person senior management team. XY's key competitors have decided to embark on marketing campaigns which promote their products as global-warming friendly. This is a concern for XY, because in fact XY's production methods create considerably more carbon dioxide than do those of its competitors.

You are sitting at a senior management meeting when the discussion turns to the possibility that XY change its production techniques to reduce its carbon emissions profile. The CFO notes that any meaningful emissions reduction would likely cost several hundred million dollars in the start-up phase, and also up to 5 percent of XY's current annual revenue for the foreseeable future. It is unlikely that the environmental improvement can be translated into increased sales because the competitors do not face the same expense in reducing their emissions.

Nonetheless, many in the group acknowledge that XY's current emissions can't be sustained for the indefinite future. The CFO states that if the company decides to embark on this path, the huge start-up costs would post an immediate hit to the company's financials. Meanwhile, you recall that on that very morning, you had read an article in The New York Times in which the author describes carbon emissions reduction programs being pursued at other blue-chip companies. The CEO turns to you and asks you whether or not XY is legally obligated to do anything about the situation at this time. You answer with accurate, strictly legal counsel: "At the moment, no." The CEO says nothing; neither do you, and the discussion moves on to other subjects.

Stecher: What is striking about this hypothetical already is that the general counsel is only asked whether there is a current legal obligation to reduce greenhouse gas emissions. Today's general counsel would believe it was her job to give advice on a much broader range of issues than just the current legal requirements.

At the meeting I would have said, "Did you see in the paper that Andrew Cuomo sent letters to five power companies asking them whether there are material omissions in their disclosure relating to climate change?" Or, "Did you see that the SEC has recently said it is committed to robust disclosure with regard to climate change?" A general counsel must be aware of what's around the corner, and her role includes making senior management aware of same. Parent: I agree completely. The general counsel's role is to be aware of emerging trends in the external environment. These may take the form of laws and regulations, but they also include government scrutiny, shareholder activism and the like. It was a missed opportunity to discuss long-term trends and issues with senior leaders who may be focused on quarterly results. Good general counsel can serve to initiate a much broader discussion beyond immediate compliance with current laws.

Ziegler: Let's say that you, as general counsel, knew that the next agenda item would be the proposed acquisition of a coal-fired plant, which you strongly opposed, and so you had chosen not to take on global warming in the abstract.

Stecher: The discussion of the coal-fired plant was a perfect opportunity to return to the previous issue about carbon emissions. In addition to making sure the company is in compliance with current laws and regulations, a general counsel's most important role is not only to look ahead, but to look around . The coal-fired plant discussion should have been placed in the larger context of carbon emissions reduction at XY overall.

Ziegler: Let's hypothesize: XY has proudly announced the creation on its Board of a Corporate Responsibility Committee, who will serve as the corporation's "antennae" and ensure that XY is a leader in corporate citizenship. Can you use this to your advantage?

Parent: Having such a committee can be a tremendous asset for a general counsel, because it suggests that the Board - the CEO's boss - cares about these public responsibility issues and the company's reputation.A corporate responsibility committee can serve as an excellent vehicle for bringing sustainability and other long-term issues - including carbon emission issues and other emerging trends - before the Board. Assuming her CEO is attentive to the board, a general counsel can help make sure that the committee's charter and mandate are fully realized. She might come back to the CEO and suggest that they work together to craft a forward-looking presentation dealing with these issues for the next board meeting.

Ziegler: The vision that you have for XY is that it should be reducing its carbon emissions - a long-term vision which is at odds with the short-term plans of the CFO. This classic tension seems to characterize many GC-CFO relationships today. Can a general counsel do her job if she is associated with taking the long-term view at the expense of the short term?

Stecher: Absolutely. In the case of this hypothetical, we're not talking about legal risk; we're talking about operational risk, and the CFO is talking about financial risk. These are all issues which can be discussed. I don't believe the general counsel should be the one to make the decision for the company in such an instance, but I do believe she must help the company through the decision-making process.

Ziegler: You return to the office, and you decide to write an email to the CEO, informing him that you feel the company will be "at risk" if it does nothing about carbon emissions and hit "send." Do you copy others on this email?

Parent: First of all, I heard once that 50 percent of communication is body language; 40 percent is tone of voice, and 10 percent is what you actually say. If the general counsel were to redirect a CEO onto something he may not want to address (or feels has already been settled), she should have that conversation directly, not via email. As for the question you asked: she should not cc everyone. If she did, she would be inviting comment from five more points of view. She might want to turn around the CEO first, then make the case to the other members of the operating committee. Broaching the issue one-to-one both allows the general counsel to express herself more candidly and encourages the CEO to listen more thoughtfully.

Ziegler: Your discussion with the CEO goes well, and you are able to turn him round to your point of view. However, the CFO gets wind of the conversation, and confronts you, suggesting that you've disingenuously gone behind her back. What do you say?

Stecher: I'm beginning to notice in this hypo that there seems to be considerable discord between the general counsel and the CFO! While of course one's relationship with the CEO is extremely important, it is incumbent upon a GC to maintain good relations with all of senior management. You needn't always agree, but you must be able maintain constructive dialogue with everybody.

If she did have good relationships, she should have reached out promptly to the others in senior management after her conversation with the CEO.

Ziegler: Back to the email. Say that XY is currently in some litigation context in which the SEC is examining your disclosure of these issues, and your email is within the scope of the document request. Imagine you had used the phrase "operational" or "reputational" risk, not just risk. Do you have any argument that this email is privileged?

Parent: One could argue that the email is within the context of an ongoing discussion of the company's legal and regulatory risks relating to environmental regulations, and therefore constitutes legal advice.

Ziegler: The company secretary copies you on an email to the COO, attaching a new stockholder proposal from Activist Shareholder Group A. This proposal states that XY must do something about its carbon emissions, as it is losing its competitive edge. The group proposes that XY cut its carbon emissions 10 percent each year for the next 7 years; that senior management bonuses be penalized to the degree these benchmarks are not met; and that progress on these points be disclosed in annual reports. The proposal crosses the transom on the last day allowed for submissions for the upcoming shareholder meeting.

Should this proposal be included in XY's proxy, and, if not, who should decide whether to seek to persuade the SEC to issue a No Action letter so that this can be safely excluded?

Stecher: First, I would call whoever works with me on the proxy and ask, "What are our arguments for exclusion here?" because I know that senior management will ask me if it can be excluded. Second, I would make sure the CEO, as well as the chair of the governance committee, is aware of this proposal. Then would come the legal points: did this arrive on the right day? Does Activist Shareholder Group A own the right amount of stock? Then we would construct our arguments as to whether this is excludable because it entails too much interference with the ordinary operation of business, or because it's too proscriptive under state law. Next, I would put together a group of people including the CEO and the CFO to see if we even want to try to exclude the proposal, then discuss this with the chair of the governance committee to see if he agrees.

Parent: That's exactly right. The general counsel's job here is to do a legal analysis of excludability, but the decision to exclude the proposal, to print and oppose it or to discuss with the proponent its withdrawal should be made by a senior management team and certainly in consultation with the oversight of the appropriate board committee, which will likely have its own view on the decision.

I would also ask my proxy solicitors how other companies may have dealt with similar proposals: e.g., did anyone print and oppose it, did any proponent withdraw it voluntarily and if not, what was the vote? This, along with getting a sense of the shareholder base from the company's proxy solicitor, is some of the necessary "pre-work" that a general counsel should do before making a recommendation to senior management and the board.

Stecher: Going back to the notion of general counsel "looking around the corner," a general counsel should be aware of the current shareholder environment. She should have already known whether shareholder proposals involving carbon emissions had arrived at other Fortune 500 companies in recent months and warned senior management and the board about the likelihood that XY would receive one as well.

Ziegler: With the board and senior management you decide to negotiate with Shareholder Group A. Who will do the negotiating?

Parent : Clearly this is in the realm of the general counsel or the corporate secretary. In a larger law department, there should be someone handling relationships with investors, especially institutional ones, who can be the face to a company's investors.

Stecher : In addition, there ought to be a government relations person or group whose job it is to be on top of issues such as carbon emissions. What's interesting about this hypothetical is that it reveals what the general counsel should have done before. The successful general counsel of today asks questions that are not limited to legal issues. In addition to the responsibility of helping a company look at the legality of its business practices, she also must address operational or reputational risk, even financial risk. It is her task to be the eyes and ears of a company and to pass on what she sees and hears - and drawing from these, what she anticipates for tomorrow - to her client, the company.

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