Articles Posted in Structure

The Third Annual Law Department Operations Survey asked its respondents to check off to whom do they report. The report that resulted, at 14, states that 44.1 percent report directly to the general counsel as compared to 37 percent in 2009. The writer touts the improvement in the “chain of command.” But two years before the percentage had been much higher (See my post of Dec. 21, 2008: three out of four of the 50 respondents report to the general counsel.).

Another 27.1 percent in the latest survey report to a deputy/associate or assistant general counsel.

What surprised me is that “10 percent report directly to the CEO.” How can that be? I asked Brad Blickstein, one of the coordinators of the survey, who would be pleased to send you the report if you email him. He explained: “Regarding the six CEO responses, we ask people to fill out this survey if they are the person in their law department most responsible for operations. In a few cases, that’s the GC himself or herself.”

On the website of eHow.com you can read a thumbnail description of several corporate staff functions, including legal. Very peculiar in several respects, it is pasted below. The bracketed numbers I inserted follow the odd words or phrases I comment on after the quote.

‘The legal department receives legal reports [1] from lawyers who work with other departments in the company or processes [2] legal documents such as contracts and licenses [3]. The chief legal officer or general counsel position usually leads executive level [4] legal departments. These departments may provide litigation, legal compliance and risk management, business ethics and government relations functions.’ [5]

[1] Reports? This statement mystifies me because report reception amounts to nothing in law departments, and even more because the presumed report writers are “lawyers who work with other departments.’

The top lawyer of Anheuser-Busch InBev, Sabine Chalmers, describes her 150-lawyer department in Practical Law, March 2011 at 80. In accordance with her dual title of Chief Legal & Corporate Affairs Officer of the $36.8 billion company, she and her team also have responsibility for “corporate affairs.”

The profile briefly describes corporate affairs as “communications, public affairs and corporate social responsibility.” That scope extends to the horizon and doesn’t fit at all with what corporate lawyers traditionally do.

On the other hand, that lawyers aren’t skilled at a task doesn’t’ at all mean that the general counsel can’t oversee the function effectively. Chalmers undoubtedly has skilled people in charge of corporate affairs and quite possibly none of them have law degrees. After all, in some companies general counsel manage corporate jets, security guards, human resources and internal audit to name but a few unrelated functions.

“The board of directors decides the outlines of the staff, and structural organization of the legal and compliance function. Among other things, it decides whether the functions are joined or separate, whether they are handled centrally or not, to whom these functions report (board of directors, audit committee, CEO, etc.) and what resources and tools will be allocated to these functions so they can do their work effectively and reliably.” This quote comes from an article in the ACC’s Docket, Jan./Feb. 2011 at 42, written by a Swiss lawyer. He goes on to say that the board can delegate these legal and compliance tasks to corporate management who in turn can delegate responsibility further down.

As written, up to the delegation statement, the quote suggests far more intervention than I expect holds for boards of directors. Certainly the board bears ultimate responsibility for the actions of the company, both legal and compliance, but the quote pictures a degree of hands-on decision-making that doesn’t apply. The CEO or the general counsel, in the main, decide the functional characteristic outlined.

The lead article in Corp. Counsel, March 2011 at 67, profiles seven experienced administrators (aka business managers, managing directors, directors of administration, etc.). The piece on Danette Gallatin of The Williams Companies had a couple of sentences not so much about that role but about dispersion of law departments when its company undergoes corporate meiosis.

”Though its law department is on the smallish side, with 39 attorneys, there were 100 when Gallatin was hired in 2000. Williams shed lawyers when it spun off subsidiaries …” Set aside the mistaken implication that 39 lawyers amounts to a “smallish” department.

Imagine the disruption and disentanglement when two out of three colleagues go their separate ways in a spinoff (See my post of April 9, 2006: Tyco, Cendant and Wendy’s spin offs listed; Sept. 25, 2006: LANXESS spun off from Bayer Chemicals; Nov. 20, 2006: spun off companies and the size of their law departments (FMC Technologies); March 2, 2008: Spectra Energy spun off from Duke Power; Feb. 15, 2009: tough early years for a law department of a spin-off and mentions Kraft from Philip Morris, Catalent from Cardinal Health; and Jan. 21, 2011: Fortune Brands, Motorola, Sara Lee, ITT and Cargill.).

A friend sent me word of a compliance function survey being conducted jointly by PricewaterhouseCoopers and Compliance Week. One question asks “To what extent is your compliance function directly responsible for or involved in the following areas?” It then asks for each area about whether the compliance team is “directly responsible,” “somewhat involved,” “not involved,” and “not applicable.”

What dumfounded me was that the survey proceeds to list no less than 33 (thirty-three) areas! Many of them have law written all over them: Fair Competition, Anti-Corruption, Fair Employment, Privacy and Confidentiality, M&A Due Diligence, Intellectual Property, Insider Trading, and more. My forte, admittedly, being law departments not compliance functions, this overlap surprised me. The survey, by those steeped in compliance, certainly underlines the untidy understanding of the respective groups’ roles.

Comments I made earlier about Indra’s structure said nothing about an additional layer in law departments and a frequent cause of hard-to-resolve management issues: a geographic reporting matrix (See my post of Jan. 11, 2011: Indra’s law department structure.). Indra itself has not expanded yet to the point where, for example, regional groups of is lawyers report to a regional head as well as to a business unit head lawyer.

Several examples of matrix reporting because of global operations have appeared here (See my post of Feb. 15, 2006: Unilever has international overlays of reporting; June 24, 2007: Cadbury Schweppes; May 2, 2008: Siemens and global structure; July 24, 2009: IBM’s regional matrix; and July 1, 2010: P&G has geographic matrix reporting.). Other instances undoubtedly come up in widely-dispersed law departments like those of McDonalds, Coca-Cola and other international giants (See my post of July 4, 2009: solid line and matrix with 11 references and 3 metaposts; and Dec. 15, 2009: regional inside counsel with 8 references.)..

A comparison of legal services provided in-house by lawyers of German companies and U.S. companies picks out several differences. According to page 88 of the General Counsel Benchmarking Report for 2009 by Otto Henning & Co., contract issues (Aligemeines Vertragsrecht) dominate German departments, with 95 percent of them handling it in-house, compared to 79 percent in the US. From the German text I was unable to determine the source of the US data.

Corporate Governance and what I think is corporate law (Gesellschaftrecht) came in at 87 percent and 79 percent in Germany compared to 78 and 77 percent in the U.S. The biggest difference showed up in employment law (Arbeitsrecht) where in Germany 72 percent is done inside and the corresponding figure is 58 percent in the U.S. This may be due to the significant presence of work councils in Germany or perhaps employment litigation in the U.S. The final comparison I will note is tax (Steuerrecht) where the percentage reached 72 in Germany but only 40 in the U.S., perhaps because US tax lawyers so often report into the Finance function.

One of the many interesting parts of the impressive General Counsel Benchmarking Report for 2009 of the German consultants, Otto Henning & Co., discusses the total cost per in-house counsel (Anwalt) of centralized and decentralized law departments. I haven’t had translated all the German text (at 56) but I assume centralized and decentralized reporting structure means the same as we use those terms in English.

A chart shows that for the 56 participating law departments the internal cost per lawyer in 2009 was Euros 231,172 for the centralized departments (approximately $350,000 at the exchange rate during 2008) and Euros 297,967 (approximately $460,000) for decentralized. The difference amounts to a sharp 29 percent. As to such a differential, I have not seen other data on the cost gap between centralized and decentralized law departments. If a cost differential anything like that favors centralized reporting among US law departments, one has to wonder why decentralized reporting – other than overseas – holds anywhere.

The General Counsel Benchmarking Report for 2009 of the German strategy consultants Otto Henning & Co. comes in a very impressive book, though entirely in German. The participants in the study were 56 departments, all from the Fortune 150 of Germany. Among their responses, they provided data on their reporting lines (at 50-51).

The law department (Rechtsabteilung) reported half the time to the CEO, 19 pecent of the time to the Chief Financial Officer, 4 percent to the COO, 6 percent to HR’s head (Personalchef), 4 percent to the Chief Risk Officer, and 17 percent elsewhere. Since 2005, the year the biennial survey began, CEO reporting has increased significantly, with CFO and HR lines decreasing correspondingly.

Still, as compared to US general counsel, far fewer German general counsel report to the top executive of the company. Over here, CEO reporting reaches 80 percent or higher. It is also notable that nearly one out of five heads of legal in Germany, in very large companies to boot, report to someone other than the C-suiters mentioned above. Marketing, R&D, and even heads of business segments might account for that “other” category (Sonstige).