Articles Posted in Structure

Sabine Chalmers, the chief legal officer of InBev, the world’s largest beer company by volume, has written a series of thoughtful columns for the ACC Docket. Her latest, Nov. 2007 at 10, treats the topic of law departments that have a corporate group as well as decentralized business groups of lawyers.

One of her four suggestions to bridge the divide is to survey members of the legal team to learn their views on areas of focus and effective ways of working together. Chalmers suggests that “Questions could cover:

• The respective roles of the corporate and business unit lawyers;

At a recent conference, Ben Heineman, the former general counsel of General Electric, gave his views on the optimal compliance function. At GE, the compliance staff were embedded in the functional unit that they worked for. For example, there were environmental compliance staff in the plastics division; there were environmental health and safety compliance staff in all the manufacturing units. General Electric had no single head of compliance; instead, it had a council of compliance professionals from the various business units and who coordinated activities.

Heineman believes this decentralized model serves a company better than if there is a global head of compliance overseeing widely different functions and practices. The recommended structure also reduces the number of direct reports to the CEO, or to another officer, such as the general counsel (See my post of July 25, 2007 about where compliance should report, and multiple references.).

InsideCounsel, Aug. 2007, at 50, brings out a structural attribute in the law department of $4 billion SunGard. In the past few decades, the article states, the company has acquired more than 100 companies. That is legal work enough, but even so it is widely acknowledged that for every acquisition consummated, there are others that go part of the way and yet require legal work.

The law department of SunGard may have one or more M&A specialist lawyers, given that volume of deals, but the article only says that “the legal department assigns each business unit a specific lawyer who becomes familiar with that segment of the business.” According to a senior lawyer for the company who is referred to in the article, those generalist commercial lawyers, who understand well the issues of the various business units, work on the acquisition deals that involve their units.

I still believe that business unit lawyers should be generalists, they should not handle major lawsuits (See my posts of Nov. 30, 2005 and five references cited; and June 20, 2007 on the mistaken view that inside counsel are “generalists.”) or acquisitions.

A quote by Norman Augustine, the retired chairman and CEO of Lockheed Martin, appears in an interview in Met. Corp. Counsel, Vol. 15, July 2007 at 46. Augustine makes a good point about the scope of a general counsel’s responsibilities.

“If the general counsel is to be looked upon as a persuasive counselor, it may not be advisable for the general counsel to manage departments unrelated to the general counsel’s duties as lawyer for the company. When that occurs, I become concerned that if the decision made by someone in one of those departments goes awry, the general counsel’s advice may be tainted, consciously or otherwise, because the general counsel is, in this case, responsible for the performance of the department.”

Two recent examples would run afoul of Augustine’s argument for separate roles. Teresa Bryce, the general counsel of Radian Group, is also the company’s chief risk officer (GC Mid-Atlantic, July 2007 at 27) while Mary Jo Dively, the general counsel of Carnegie Mellon, is also the university’s head of human resources and risk management (GC Mid-Atlantic, July 2007 at 9). If something were to go wrong legally in one of those departments, Augustine asks whether the general counsel – who manages the department – can remain objective.

Tom Sabatino, Jr,, the general counsel of Schering-Plough, argues in Met. Corp. Counsel, Vol. 15, July 2007 at 51, that lawyers “have to have accountability up to the general counsel. It reinforces the lawyers duty to the corporation.” In support of his view, he adduces three points.

He links the increasing focus on compliance within corporations to what he characterizes as “the trend toward direct accountability to the general counsel.” Sabatino must assume that the compliance function reports to the general counsel, which is not always the case (See my posts of Oct. 21, 2005; May 20, 2005; July 31, 2005; and Dec. 22, 2005 on reporting lines to the legal department of the compliance function.).

Sabatino next argues that direct reporting of lawyers “foster’s knowledge sharing and teamwork within the law department.” If lawyers work within business units silos, they have less reason or opportunity to share their experience and work product with outsiders (See my posts of March 22, 2006 on solutions to silos; Jan. 30, 2006 on cross-functional teams at Independence Blue Cross; and March 28, 2006 about PPG’s efforts to break down silos.).

Profiled in the N.L.J, Vol. 29, June 4, 2007 at 8, Mark Holden, the general counsel of Koch Industries, gives a glimpse of an important topic. Holden’s law department has 26 lawyers, and that legal team “provides litigation services for the stand-alone subsidiaries through separate service-level agreements with Koch companies, except for Georgia Pacific, which maintains its own legal staff” (See my post of May 14, 2005 on service level agreements (SLAs): and June 28, 2005 on profiles of key clients.).

A very decentralized company, one with business units that stand mostly on their own, might have such a decentralized legal structure. Some group of lawyers could help out the other lawyers based on a chargeback arrangement or an SLA. The shared-service model as described here is unusual, but the circumstances were right.

In 2004, NCR, a technology company with five business units and a presence in more than 100 countries, had a law department of about 112 people, including 42 lawyers. As recounted in Rees Morrison, Law Department Administrators: Lessons from Leaders (Hildebrandt Inst. 2004) at 8, the department’s organizational structure consisted of resources dedicated and assigned to business units complemented by “shared services” groups.

In certain functions NCR took advantage of economies of scale to create a shared service. One example was the contract management function where the department had one contract manager in a certain location supporting all the business units because it was not cost effective to create positions dedicated to each of the five business units.

All law department employees, even those assigned to support business units, ultimately reported on a solid line to the General Counsel. Many of them also had a heavy reporting relationship to a client, but “when it comes to where the budget is — who gives them their performance appraisal; who promotes them; who gives them merit increases; salary adjustments; all of that–it’s the General Counsel on a worldwide basis.”

Early this year, AmCOMP, Inc., an insurance holding company, announced that it had appointed George E. Harris as Senior Vice President and General Counsel, a new position for the Company. Commenting on the appointment, AmCOMP’s Chairman, President and Chief Executive Officer, said: “Having expanded our business … as well as completing our initial public offering of stock in 2006, it seemed the right time to create an internal legal department headed by the General Counsel position. We have known and worked with George for more than 20 years as he has represented the Company in numerous matters. Once we decided to form our internal legal department, the hiring selection was easy. George knows insurance law, AmCOMP’s business and our people. He will be able to seamlessly integrate into our corporate culture and provide the necessary legal guidance we require.”

In one paragraph you have all the elements that lead companies to hire their first lawyer, whether or not that pioneer gets the general counsel title. Those drivers include business growth, increased legal complexity, rising external legal costs, familiarity with a lawyer at a firm, and recognition that an employee lawyer combines substantive knowledge and institutional familiarity.

The global legal function of Cadbury Schweppes hired 15 new lawyers during the early months of 2007, according to Legal Week, Vol. 9, March 15, 2007, at 4. During that period, the chief legal officer, Hank Udow, created five new practice groups: procurement, competition, emerging markets, food safety, and tax. “Members of the company’s now 80-strong legal team will be asked to specialize in one of the areas, with each team meeting up at least three times a year.” Udow explains later that “Under the new system, all lawyers will spend up to 30% of their time on their chosen specialism.”

The article says that the legal team is already divided into five groups: two regional groups, US beverages, US confectionery, and global intellectual property. The hope is that the new focuses will better leverage the size and scale of the company’s legal group. To help with this the department has implemented a group-wide intranet “to give all members of the legal department access to documents and online practice-centred forums.” I could not figure out from the news item how the legal function will matrix responsibilities between the five specialties and the five groups.

CA (nee Computer Associates) announced in the fall of 2006 that it appointed Amy Fliegelman Olli and Kenneth Handel as co-GCs. The announcement is in Corp. Counsel, Nov. 2006 at 70. The joint position as chief legal officers has precedent at Citigroup and at Goldman Sachs. Both of those legal functions at one time recently had two general counsel. Perhaps one reason for the double heads is a fear of losing the one not selected? Perhaps this is the highest form of job sharing (See my post of Dec. 4, 2005 about job sharing.)?

I expect it is difficult for twin general counsel to sort out responsibilities and decision-making. Complex judgment calls are hard enough to make, and to expect two people who are equals to agree massively compounds the problem. To figure out who should make what decisions is impossible in advance, given the complexity of judgment calls that land on the general counsel’s desk.

Moreover, it is likely that some remnants of competition for the sole top lawyer position remain and the two lawyers may be aligned with different camps of executives. Beset with so difficulties it is for good reason that the practice is very uncommon.