Chief Executive Officers' Perspective of the Law Department

("Think like a CEO, act like a Lawyer")
by Andrew L Horsley

Presented at the Australian Corporate Lawyers Association
8th National Conference "Maximum Momentum", Sydney 22 March 2002

Introduction

Corporate lawyers are always eager to get the latest news about how they are perceived by their client, namely, the corporation. In setting the scene for the topic of today's Conference, "Maximum Momentum", the title of my talk is " Chief Executive Officers' Perspective of the Law Department" and my key message is "Think like a CEO, act like a Lawyer". In my presentation I will focus on three themes:

1. How CEO's Judge their Lawyers
2. Global and Local perspectives
3. The Effective Law Department.

Variations on these themes have been constant at ACLA conferences since they began as state conferences for Corporate lawyers in March 1983 in Melbourne and Sydney in 1985.

My talk today combines these three themes. The corporate lawyer needs to get inside the mind of the Chief Executive in order to understand the deep drivers of the business, the skills required for adaptation in a global environment and the importance of perfect implementation.

In essence: Think like a CEO, act like a lawyer.

My practice as a corporate lawyer was with Esso Australia where I was Legal Counsel in the Exploration Department advising on off-shore and on-shore petroleum exploration. For the past 16 years, since leaving Esso, I have been an executive search consultant. During this time I have had numerous opportunities to observe the relationship that exists between Chief Executives and their lawyers. Like any relationship that exists between a Chief Executive and advisers the range of emotions evoked extends from mutual admiration to mutual rancour. Emotions aside, the tenor of my remarks is constructive

The term "Law Department" in the title may sound grandiose particularly where a Corporate lawyer may be the sole lawyer in the company but I see it as synonymous with the in-house legal function which may range from an individual to a full service integrated Law Department operating in different jurisdictions throughout the world.

In my experience with Esso Australia, of which Exxon Corporation was the parent company, the Law Department was organised over 120 years ago in 1881, one year prior to the completion of the incorporation of Exxon which was a pre cursor to the Standard Oil Company of New Jersey. Its breakup and the formation of the Seven Sisters is part of world petroleum history. Exxon-Mobil as it is known today along with the activities of numerous other American and international corporations have regularly infused the debate concerning the practice of corporate law.

Many large corporations now have Law Departments which would rival some of the larger law firms of the world. The same scrutiny applied to the operations and performance of corporations is also used to assess the performance of these Law Departments.

How CEOs Judge Their Lawyers

Lawyers are typically judged by clients. In a corporation the clients are not only the Chief Executive but divisional and functional management. The word quickly gets around the corporation as to those lawyers who are most responsive to their clients' needs. The skills required of the Chief Executive is a good place to start when assessing the Law Department.

To add some balance as to how CEO's judge their lawyers, as an executive search consultant, I would like to place on the record what I look for in a Chief Executive:-

1. Be an asset builder;
2. Understand your business;
3. Be visible;
4. Manage change;
5. Keep learning;
6. Understand the issues;
7. Be a Globalist;
8. Plan succession.

All these skills are relevant to the corporate lawyer particularly in the face of globalisation. This is due to the importance of these skills in the make up of the corporate lawyer as they must adapt to a rapidly changing corporate environment. The weightings of these skills between the Chief Executive and the corporate lawyer is one of degree. Peter Drucker refers to a theory of business as having three parts (Harvard Business Review, September - October 1994, p 99).

They are:

(i) assumptions about the environment of the organisation, society and its structure, the market, the customer, and technology
(ii) assumptions about the specific mission of the organisation
(iii) assumptions about the core competencies needed to accomplish the organisation's mission.

The practice of corporate law has changed dramatically over the past 20 years in the face of these assumptions. Corporate law follows, mirrors and must constantly address the unique facts and circumstances in which each corporation finds itself. How well the corporate lawyer is able to move with the times will be a determinant of how the Chief Executive perceives them. If the corporate lawyer fails to adapt, they disappear. Sometimes the Chief Executive must make a fine judgment between keeping the work in house or sending it outside.

While I would not put the corporate lawyer on the endangered species list just yet, they must continually keep bringing themselves up to the mark and face the incremental changes which are implicit in Drucker's assumptions.

It is precisely this need for adaptation which makes the life of the Corporate lawyer both exciting and interesting. However, Chief Executives do have a number of fundamental concerns and priorities when they deal with their corporate lawyers.

It is useful to provide some observations as to what a number of Chief Executives who I spoke to on this topic look for in their corporate lawyers:-

"My corporate lawyer keeps me out of goal"

"A corporate lawyer needs to fit our culture. They are all smart. But I look for the same aggression in our corporate lawyer that exists throughout the organisation."

"They need to know and understand our business".

"When we go to court they need to make sure that we win."

"You need to add value to the line people".

"A lot of the time they are dealing with the ACCC and educating our people on compliance".

"For me, the corporate lawyer is involved with risk management and identifying opportunities for the clients and shareholders. They advise on general business strategy and they must understand the business. They are not always the most commercial."

"They provide fundamental training for our business heads".

A former Chief Executive of a very large Australian company: "We never had corporate lawyers. When they were on the other side of the table in a deal, I found them to be pretty much postboxes for their own management. They are not the most skilled".

All the Chief Executives I spoke to come with a different perspective. "Where you sit" certainly determines your view of the world. Similarly, every General Counsel and corporate lawyer has their own views as to what is required. Even with well established Law Departments each Chief Executive will perceive it differently thereby using and valuing its services accordingly. Some executives may use corporate lawyers as crutches for their own decision making or to satisfy an exaggerated need for self protection. Universally, Chief Executives value advice that is legally solid, reflecting commercial acumen and timely. The business of the corporation determines the makeup of the corporate lawyer's practice.

Global and Local Perspectives

Just as law firms have had to deal with globalisation so too has the corporate Law Department. McKinsey & Company, (Quarterly 2001, No 2 p 44,) commented that "Over the past 30 years globalisation, deregulation and technological change have reconfigured many service industries such as banking and accounting. In contrast, the legal industry has remained relatively fragmented. In part, as a result of the historic importance of local relationships and local laws."

Corporate Law Departments have been ahead of the game in this respect because they are fundamental to the broader corporate function and change is forced upon them at an earlier stage particularly in connection with Drucker's assumptions concerning the environment, mission and core competencies.

International law firms follow their international clients. Similarly local law firms always will develop an expertise to address corporate client's needs in the local jurisdiction. However, the Chief Executive and usually the General Counsel need to make a decision as to what work remains in house and what goes outside. McKinsey & Company article again p47 "Deregulation, globalization and greater transparency - promoted in part by information technology - have expanded the choices available to corporate General Counsels (sic) and made it easier than ever for them to compare the services and prices of law firms".

The threshold question often is the cost of internal versus external legal advice. It may cost upwards of $250,000 to establish a rudimentary in house legal function. That amount will go a long way to meeting a modest sized company's annual legal bill. The reality however is as companies become larger and operate in diverse jurisdictions the need for consistency of approach, speed, accuracy and the all important knowledge management issues including corporate memory makes the pressure for a capable and experienced Law Department more compelling.

The Chief Executive, as one General Counsel remarked, is often "arrogant, opinionated and cares only about costs." All the more reason for the corporate lawyer to ensure that they become the trusted adviser to management and can deliver correct advice in a timely fashion. After all, it is much easier to deal with someone who is trusted and knowledgeable rather than going for the unknown and untested outside brand.

Chief Executives and General Counsel typically have a policy of using external lawyers in a number of key areas. This can be in litigation, complex merger and acquisition work, capital markets or in areas where the Law Department does not have the obvious expertise. Law firms recognise this and are organising themselves accordingly both globally and locally - as are large Australian corporations.

BHP Billiton is a prime Australian example of a global business, which is structured as a dual listed business comprising a "PLC" corporation and a "Limited" corporation. Its legal function is now organised as one global legal division rather than organised along business divisional lines and while the dual listed structure may not necessarily increase business complexity it certainly does give rise to increasing legal complexity where the lawyers need to be tuned into global legal implications of business decisions. Their Law Department comprises over 70 lawyers enjoying the benefits of working in a truly global environment.

The Law Department is the optimum filter for the best that can be learnt from the outside. The captive corporate client makes little sense for anyone - corporate management, corporate lawyers or the law firm. What is important is to recognise that people learn differently at different speeds under varying circumstances. Exposure to good role models, peer group support, a variety of transactions and clients is what makes the practice of corporate law so appealing.

The Effective Law Department

The Law Department remains the first port of call for the Chief Executive when there is a legal issue. It is also the first port of call for business managers when they have an issue which has an actual or potential legal implication. Chief Executives and General Counsel alike recognise the problems which quickly arise if there is an inconsistency in the advice that a business unit or group headquarters is receiving.

It is typically the General Counsel who makes the decision where to turn if the capability to solve the problem does not exist in house.

Typically, litigation is outsourced or the 'hired guns' are brought in. The major functions of a Law Department, depending on the business are Mergers, Acquisitions or Dispositions, Governance, Compliance, Regulatory, Contracting, Licensing, Intellectual Property and Industrial Relations. The Chief Executive needs to know that the Law Department will be up to the task when advice is sought.

Charles Morgan, the General Counsel of BellSouth in Atlanta and known to some of you here today comments that "the General Counsel is expected to be a business partner and knows what makes the company tick, they are not merely legal. At BellSouth the lawyer's business judgment is very much appreciated. This is important to maintain the client's perception of the value that we add".

A Law Department will contain lawyers with varying mixes of common sense, legal prowess and commercial instincts. It is the effective General Counsel who is able to manage the allocation of the corporate lawyer for the task. Compliance and Governance issues now loom large for every Law Department. Corporate lawyers are increasingly running these programs.

Conclusion

To obtain Maximum Momentum for your career as a corporate lawyer it is essential to have an idea of where you want to be in the near term, mid term and longer term. If you want to move into management, start planning now. If you want to move into board roles now is the time to start planning. There is regular cross over between corporate practice and private practice. This enriches both sides.

Lawyers can successfully move out of the silo of legal practice into broader business as Graham Bradley and David Gonski, who are also on the panel today, have done so well. Above all, if you are interested, make the commitment early.

In summary

1. A modern corporate lawyer needs to understand the environment in which they operate, what is the purpose of their business and how do they achieve that purpose. Life of the corporate lawyer involves continual evolution.
2. Chief Executives value most those lawyers who can discern what is legal, what is commercial and how to accomplish a strategy which is both legally sound and commercially successful.
3. Members of a corporate Law Department need to be early adapters to maintain the confidence of the Chief Executive and management.
4. The corporate lawyer is inherently well positioned to be the trusted adviser to the Chief Executive. This takes character and personality in addition to sound legal capability.
5. Corporate law is as much about relationship management as it is about black letter law.
6. The law is the easy part, how to accomplish something is the tough part.

Remember - understand the business, be evolutionary in outlook and implement perfectly.

Above all: Think like a CEO, act like a lawyer