Articles Posted in Structure

During a Counsel to Counsel forum held in Madrid, Spain on Feb. 26, 2008, one of the attendees spoke about two kinds of compliance functions. I quote a summary of the meeting from the Martindale-Hubble website.

“Here, one speaker recalled that, in their company, general compliance is handled by the internal audit department, while regulatory compliance was run by legal. The two departments are run separately, but form part of the same general process within the company.”

I have not encountered such a bifurcated compliance function.

The Economist, Nov. 15, 2008 at 78, speculates that with the current torrent of downsizing will come trimming of headquarters staff. It cites Nortel, which is “handing over activities such as marketing and R&D, which were previously run from the centre, to business units.” Although not mentioned, legal functions may follow suit. Sarbanes-Oxley supposedly pushed companies to report all lawyers to the general counsel; financial stress may push some of them to report legal groups back to business executives (See my post of March 11, 2005: SOX and reorganizations.).

No research that I have encountered suggests that companies with decentralized legal groups encounter more legal shortcomings than single-reporting-line departments, such as failures to spot issues, escalate them if appropriate, or prevent wrongdoing. Anecdote and subjective opinion do not prove that situation (See my post of Aug. 5, 2008: decentralized reporting with 7 references.).

Even to raise this reporting possibility ranks for me as apostasy, because I strongly advocate that all practicing lawyers in a company report (even if up a chain) to the top lawyer, who should report to the CEO. I believe that if the CEO holds the general counsel accountable for the legal affairs of a company, the general counsel should have managerial control over all inside and outside lawyers of a company. If there were a clean way, however, to divide the accountability, or to live comfortably with gaps in the accountability – the decisions of practicing lawyers who report to a business executive – then so be it. Many reputable companies have decentralized reporting of their lawyers.

Our industry needs a framework to describe the essentials of any law department. Specialists in many fields have created such taxonomies for their subjects, such astronomers and botanists (See my post of Nov. 24, 2008: botany and its lessons.). As my first crack at such a system of characteristics, here are five.

Activities. This includes my four-part breakdown of priorities, programs, processes, and practices as well as quasi legal work (See my post of April 9, 2008: quasi-legal tasks with 14 references.).

Structure. Key aspects of this classificatory attribute include centralized and decentralized reporting, levels of lawyers, and the split between legal practice areas and business unit specialists.

The London Rev. of Books, Vol. 30, Nov. 20, 2008 at 21, reviews a study of the pre-eminent botanist of the 19th century, Joseph Hooker. The travails of Hooker and other botanists as they struggled to find a system to taxonomize plants and methodologies to classify them caused me to think of law departments. It is difficult to do something similar for law departments.

Apparently, the famed system of Linnaeus drew on only the number and arrangements of the sexual parts of flowers. It worked, and brought much consistency in naming, but the system did not flow from plants’ overall morphology – the form and structure of a plant considered as a whole.

In a second post on this topic (See my post of Nov. 24, 2008: elements to describe law departments.) I consider a more comprehensive way to take into account the morphology of law departments and describe law departments systematically. The goal is to have a systematic way to specify and compare the definitive forms and functions of law departments.

“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.” This explanation came from Robert Mundheim, the former top lawyer of Salomon Smith Barney in Met. Corp. Counsel, Vol. 15, Aug. 2007 at 33. Think about the reach of the term “control functions.” What about environmental health & safety (EHS), risk management, procurement, and international trade? In a company, what function aside from production and selling is not a “control function” (See my post of Sept. 3, 2008: functions of the general counsel.).

Mundheim went further. “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.” Other functions are “faced with making legal calls,” including workers comp and tax, so where does the logic of independence lead?

No comprehensive definition exists for what should and should not be the charge of a general counsel. These two parameters fall short.

It is a significant decision for law department General Counsel to locate for the first time a lawyer in an overseas office (See my post of Nov. 16, 2008: five key questions to ask.). Before taking that decision, there are some other staffing possibilities to explore.

You might pick from among your stateside lawyers an on-call lawyer. That lawyer will be responsible for handling questions from overseas during a set period of time. Second, you might appoint a lawyer to be the single point of contact for your overseas clients (See my post of March 31, 2007: single points of contact – SPOC’s – and three references.).

Third, you might designate circuit riders. Every quarter dispatch a lawyer to the foreign location where they spend a week, to get to know the clients, and the clients develop some comfort and familiarity with the law department. A possible supplement to that idea would be for the client to send someone to spend time in your law department, not as a practicing lawyer but to learn about common processes like contracts and agreements. As a final idea, you might be able to get by with a part-time lawyer or perhaps with a secondment from a local law firm will patch the dike for a while (See my post of July 17, 2008: secondment with 12 references; and Jan. 23, 2008.)

A client asked me recently to help them think through the decision whether or not to base a lawyer outside of the United States. As we talked, we identified five questions that the general counsel should answer

What do clients want in terms of international legal support? Even if they would like a lawyer based in their country, you need to ask why do they want that lawyer there. It could be they feel that response time is too slow, or that the US lawyers do not understand local laws well enough, or that there are language barriers. It may be that they believe their matters get less attention than the matters of clients who can walk into the office of the lawyer.

How much work could the lawyer in the foreign office take on? Assuming the lawyer is full time, it is important that they have more than a full plate of legitimate legal work.

At a PLI conference, the General Counsel of Colgate-Palmolive dramatically pointed out that “Counterfeit is the crime of the 21st century – estimates run as high as around 10% of the world’s commerce.” If that estimate is anywhere near true, legal departments of companies who are victims must actively combat counterfeiters (See my post of May 5, 2008: Lenovo law department very involved.).

That said, what is the proper role of the internal legal team with respect to anti-counterfeiting initiatives? The actual boots-on-the-ground chores of finding copycat goods, buying them for proof, or seizing them has periodic, peripheral needs for legal counsel (See my post of June 11, 2008: vendors that locate and acquire fake products.). Legal advice plays a part, but management and enforcement of the anti-counterfeiting program should remain with the business units. The legal budget, for example, should not absorb “buys” of illicit goods (See my post of Sept. 9, 2008: outside law department’s budget.).

Those who are responsible for corporate governance concern themselves with, among other issues, whether Board committees are made up of independent directors or whether a director has some relative who works for the independent auditor. More comprehensively, Corp. Sec., Issue 54, June 2008 at 28, lists governance concerns under six broad topics. I have quoted them below.

1. Board (annual director elections, board size, compensation and director independence)

2. Capital/restructuring (dual class stock, merger/acquisition, recapitalization and stock split)