Articles Posted in Structure

The Society of Corporate Compliance and Ethics surveyed its members in 2009. According to a summary of the findings by John Soriano in Compliance Week, the survey found a plurality (45%) of chief compliance officers reported directly to the CEO. Only 17 percent of the respondents reported to the chief legal officer (See my post of Jan. 20, 2009: reporting lines of compliance function with 11 references.).

Nearly three quarters of the respondents believe that they should report directly to the CEO. It doesn’t surprise me that such a high percentage of believe they should report to the top executive – don’t all functional heads believe that?

This blog has commented before on the reporting lines of chief compliance officers (CCO’s) (See my post of Jan. 20, 2009: reporting lines of compliance function with 11 references.).

It had not occurred to me that government agencies might take a position. According to an article in Compliance Week by John Soriano, “the Office of the Inspector General of the Department of Health and Human Services has taken a clear position: Compliance and legal functions should be separate, and the CCO should not report the General Counsel.” For pharma companies, this message might lead to structural change.

General counsel can find themselves with all kinds of functions reporting to them. An unusual example appears at Polaris Industries a $1.6 billion manufacturer of snowmobiles and other products. The law department of Polaris has four lawyers and paralegals in her department. Aside from that, according to a profile of its general counsel in the National Law Journal, June 21, 2010 at 6, a four-member export/import group that is responsible for customs compliance, also reports to the general counsel (See my post of June 11, 2008 #5: export compliance software at GM; Oct. 21, 2009: online decision tree software for import/export; and Aug. 5, 2005: a “pre-law” group.).

As with many other corporate functions, what particular mix is assigned to the top lawyer comes about as a result of many factors: ability, interest, corporate history, views of the CEOs, the talents and experience of others in the C-suite, and more.

Although it is easy to list differences between companies that have publicly-traded shares and privately held companies, how those differences play out in legal department responsibilities, structure and budget so far remains unknown. In the fullness of time and benchmark participation, all will be revealed (See my post of Dec. 9, 2005: ADR survey sorts participants into publicly- and privately-held; Dec. 14, 2005: dispute wise companies; Feb. 1, 2006: general counsel compensation at Texas publicly-traded companies; May 26, 2007: market cap and its importance to companies; Jan. 19, 2008: metrics are missing that differentiate privately-held companies; Sept. 28, 2008: D&O questionnaires for directors; and March 29, 2009: certificates from Directors regarding conflicts.).

Meanwhile, it certainly seems plausible that publicly traded companies incur higher legal costs. Privately held firms have fewer SEC investigations, simpler incentive stock plans, no shareholder derivative lawsuits, no equity issuer fees, no corporate governance mandates from stock exchanges, and perhaps simpler acquisitions because there is no stock to issue (See my post of Jan. 18, 2009: share prices, event studies and litigation with 6 references.). To quantify the cost gap remains work for future analysts.

A supplement in the ACC Docket, June 2010 after 32, uses terminology from Coca-Cola’s legal group in Europe. They describe their business unit lawyers as “operational lawyers” and their specialty lawyers as “functional lawyers.” Other legal departments apply different labels. What we call the two kinds of lawyers in legal departments doesn’t matter.

What matters are differences between the two distinct groups. One should be embedded as much as possible with the business unit, even being co-located with them. The other can cluster at headquarters. One should be an issue spotter; the other resolves issues. One rarely calls on outside counsel; the other accounts for most of the use of outside counsel, such as litigation, environmental, anti-trust and employment. One trades on its intimate knowledge of the business and its courses of conduct, the other could be almost as remote as a law firm. One rarely does legal research, the other has to keep up with changes in the law and dig into its intricacies. These functional gaps, not terminology, make all the difference.

Corp. Counsel, May 2010 at 25, mentions in passing that Mitchell Zamoff is the “co-general counsel of United-Health Group.” Before, I have wondered how twin GCs parcel out decision-making and avoid competition (See my post of June 16, 2007: co-general counsel at Citigroup and the former Computer Associates; and April 2, 2009 #1: Greg Palm at Goldman Sachs.). Other disadvantages of dual GCs would seem to be the double reporting burden on the CEO or some other executive, the challenge of maintaining compensation equity, and the complexities of allocating and delineating responsibilities.

The rare opposite, by the way, happens if two organizations share a general counsel (See my post of March 28, 2006: two universities, one general counsel.).

Jerry Okarma is the vice president, secretary and general counsel of Johnson Controls. He is a member of the company’s executive operating team, and oversees all legal and compliance activities of the company.

In addition, and to the point of this speculative post, Okarma is responsible for shareholder services, enterprise security, and the aviation function, according to an interview on Law360, May 4th.

Noting the unusual responsibilities this top lawyer has for shareholder services, security, and the Johnson Controls air force, it occurred to me that with retrenchment and cost control underway everywhere, with senior executives “choosing to pursue personal interests right and left,” general counsel might increasingly be asked to take on ancillary responsibilities (See my post of Oct. 2, 2006: sometimes shareholder relations are part of the legal department; Feb. 1, 2007: Cummins for security and aviation; and April 18, 2009: EMC’s GC manages its aviation group.). It is unlikely that a non-lawyer will step into the managerial shoes of a general counsel, but the opposite could well happen.

Corp. Counsel, March 2010 at 77-79, makes several points about the litigation group at Ford Motor.

(1) The group employs the most lawyers in the department. That should sadden everyone except those in the litigation group, because no company sees litigation as a core competency (except patent trolls) and litigation rarely adds value for society.

(2) For years Ford has had four teams in its litigation group – product litigation, general litigation, regulatory, and in-house discovery – and its lawyers specialized on one of the four teams. A company with the onslaught of litigation like Ford can and should focus lawyers on portions of that stream.

In Corp. Counsel, March 2010 at A4, a partner at Anderson Kill discusses claims investigations by in-house counsel and two privileges. “For the work-product doctrine to apply, the investigation must be outside of standard claims handling process. For attorney-client privilege to apply, the attorney must provide legal advice and not conduct a factual investigation.” Later the partner adds: “If the matter could by handled by a layman just as easily as a lawyer, the matter may not be privileged.”

If a legal department handles claims, that is fine for coverage issues and litigation, but not fundamental fact-finding. Risk of privilege loss is only one reason why claims operations should be separate from the legal department (See my post of April 23, 2006: workers’ compensation claims that end in litigation; June 15, 2006: percentage of claims that turn into lawsuits; Aug. 5, 2005: “pre-law” groups such as claims; June 6, 2008: law department should not handle routine claims work; June 26, 2008: self insurance by large US companies has moved claims to law; March 13, 2008: Council on Ethical Billing; and Aug. 21, 2005: tension between lawyers and risk managers on notification of claims.).

It is no easy matter to create in the minds of departmental lawyers a collective sense that they are pulling the oars together, especially when they are all over the world and come from many different legal backgrounds. Bits and pieces of techniques to do so had appeared here and there, but I wanted to assemble the whole lot. In an article published this week, I culled three previous posts, added some new twists, organized the techniques according to how easy they are to implement, and explained the entire collection. Click on the link to download the National Law Journal article as a PDF file.

If any readers can suggest other methods to help homogenize the culture and practices of scattered legal teams, please let me know.