Articles Posted in Structure

“All design can be understood as ideology embodied.” This aphoristic quote, from Tim Wu, The Master Switch: The Rise and Fall of Information Empires (Knopf 2010) at 201, refers to the architecture – the design – of the Internet. Decentralized, open, tolerant of all uses, multi-layered, opposed to bigness, a pure platform – these ideologies made their way into the creation and development of the Internet. Wu fears that it, like the preceding fundamental communication technologies of phones, radio, TV, movies, and cable, will succumb to domination by a cabal of huge corporations in cahoots with the government.

The design of a law department reflects underlying ideologies embodied in it during its history. The role and relative importance of specialist lawyers; integration with the business; variable costs of law firms; global footprint; respect and centrality of role, the view of clients; scope of services – all these fundamental beliefs of what makes internal legal services effective are baked into the design, the structure, of the law department.

According to author Tim Wu, four industries have been identified as “public callings”: telecommunications, banking, energy, and transportation. Utilities such as water and sewage companies could be added to the list. “Each plays an essential role in the workings of the nation and the economy, and thus these are the industries that have attracted regulation as common carriers, or infrastructure.” The quote comes from The Master Switch: The Rise and Fall of Information Empires (Knopf 2010) at 58. If the government does not in fact own and operate major segments of those industries, as in socialist regimes and corporatist governments, it intervenes, directs, and enforces in a commanding fashion for many of these industries.

In the United States, common carriers face thickets of regulations and oversight, laden with laws, regulations, and quasi-judicial proceedings. All things being equal, we might expect law departments in those industries to have not only more lawyers per billion dollars of revenue than non-common carriers but also different mixes of lawyers within the department. Their government affairs function, especially, may swell.

Prof. Wu, I should point out, might make an argument to the contrary. Regulations and the cozy succorance of the government might lessen some legal risks, such as antitrust, pricing conspiracies, quality standards, or even liabilities. Full-throated competitors may require more legal support than cosseted carriers.

Based on a survey of its members where 810 of them responded last year, the Society for Corporate Compliance and Ethics (SCCE) produced data on the reporting lines of the chief compliance officer (See my post of July 23, 2010: compliance and ethics with 24 references and 2 metaposts.).

In publicly traded US companies, half the time (51%) the general counsel’s office houses compliance so the topic compliance person reports to the top lawyer. In privately traded companies only a quarter of the time (27%) is that true. Because the SCCE asked specifically about healthcare companies, they also described that industry as less likely to have compliance reporting to law. To obtain a copy of the full report that contains this data, click here to email its president, Roy Snell.

A study conducted in 2009 by OPI, a French intellectual property consultancy, looked at the reporting position of intellectual property departments (patents, trademarks, designs and models). As summarized in 2010 Intelligence Report & Directory Series of Leaders League at 81, OPI found that 34.5 percent of the time in French companies that responded to its survey IP reports to the law department, 29 percent of the time to R&D, 11 percent to “Executive Management,” 7 percent to “Innovation,” 4 to “Valuation,” 1.5 to “Marketing,” and in 13 percent of the companies the IP group reported to two functions.

My consulting experience from this side of the Atlantic suggests that the chief IP lawyer much more often reports to the general counsel. Next in frequency would be R&D.

The most important characteristic of any position is the person it reports to. As befits that crucial status, this blog has accumulated at least 94 posts on reporting lines. In turn these created eight metaposts.

Some have to do with individual lawyers and their reporting lines (See my post of May 26, 2007: GCs report to former GC with 10 references; March 8, 2010: upward reporting of chief legal officers with 15 references; May 29, 2009: direct reports to the general counsel with 12 references; and March 27, 2009: tax lawyers and reporting with 7 references.).

Other collections of six or more posts on the topic – what I have called metaposts – have to do with what we might think of as aspects of structural reporting (See my post of Jan. 20, 2009: reporting of compliance functions with 11 references; Jan. 12, 2009: reporting other than decentralized by lawyers with 13 references; Aug. 5, 2008: decentralized reporting with 7 references; and July 4, 2009: solid line and matrix with 11 references and 3 metaposts.).

Two weeks ago Ben Heineman published a blog post about how compliance officers should co-report to the general counsel and to the chief financial officer. Roy Snell, the CEO of the Society of Corporate Compliance and Ethics, disagreed with the reporting to the general counsel. I have quoted Snell’s comment.

“Frankly, if I were the GC, I wouldn’t want this reporting relationship either. One of the main functions of the GC is to defend their company, and they are given great latitude to do so. The compliance officer is asked to defend the stakeholders of the company. They are given very little latitude. If a GC does the CO’s performance review or has hire/fire responsibility over the CO, it’s an entirely different game. If the GC has responsibility for compliance and they do not disclose information or deal with a problem properly, they are going to get hammered. Combining this function takes the GC from a position of effectiveness to having their hands tied.”

Snell wrote further from the CEO’s perspective. “If I were the CEO, I wouldn’t want this reporting relationship either. I want a vigorous compliance program; however, if I have trouble, I want someone to defend my organization vigorously. If the GC has hire/fire and annual review of the CO, this dual function just can’t operate effectively. With the two functions combined, I am either going to get a GC who is too cautious or a CO who is not cautions enough. Nobody should want this function combined. It is a recipe for disaster.”

The legal department of Harrah’s Entertainment, profiled in Corp. Counsel, Jan. 2011 at 82, has 62 people, of which 22 are lawyers. That means 40 of them are not lawyers, a quite high distribution. Very typically US law departments of much size have a one-to-one ratio of lawyers to non-lawyers. Harrah’s has a ratio close to one-to-two, which suggests a heavy complement of paralegals.

The Harrah’s general counsel also has reporting to him a regulatory and compliance department of 29. The ratio of law department members (62) to compliance members (29) presents one instance of a little-discussed benchmark. I would not even hazard an estimate of what might be a typical ratio based on Harrah’s because its law department structure differs so much from the norm.

Finally, the profile notes that the general counsel of Harrah’s, who works in Las Vegas, commutes each week there from Scottsdale, Arizona. Timothy Donovan is not the only general counsel who flies or has flown to work (See my post of June 9, 2007: cites three other general counsel who commuted by plane to their office.).

Monitoring competitive moves in the intellectual property space could fall to in-house patent lawyers or it could fall to the R&D department. A French intellectual property consultancy, OPI, has found that 70 percent of the time in French companies the research group takes on that responsibility. What the situation in the United States is I don’t know.

According to 2010 Intelligence Report & Directory Series of Leaders League at 80, French executives believe that researchers will better stay abreast of the field if they keep track of what competitors are filing and researching. So long as the researchers appreciate the legal significance of a burst of activity by a player in the same field as their company, they can bring in the lawyers when needed.

This lawyer manqué rarely gets to cite Supreme Court decisions so when I read in Corp. Counsel, Almanac 2010 at 13, about a February decision, I seized the opportunity. The Court clarified a conflict among the federal circuits as to how to define a company’s “principal place of business” for purposes of jurisdiction. Unsurprisingly, at least when you see all things through the lens of the internal legal staff, the high court held that judges need to look for the corporation’s “nerve center” – typically the location of its headquarters.

A few companies have so globalized their operations and the locations of their executives that the nerve center may be brain-like – distributed all over but coordinated. Overwhelmingly, though, companies do have a geographic nerve center, where most of the executive neurons fire, and it is there that a large portion of the senior lawyers should be based.

Thank you, all nine Justices, for ruling on this important issue of law department management.