New England Biz Law Update
In-house legal departments, charged with the duty of assessing risks, get called a lot of names by salespeople and management: The “business prevention” department. The “No, you can’t!” guys.
But in truth, in-house lawyers can be as much a part of business development as anyone. Their role needn’t be — and many say, should not be — limited to drafting contracts long after key business decisions are made.
Experts advised in-house counsel to:
• Make senior management aware that in-house lawyers should be included in business-planning meetings;
• Don’t wait to be asked for ideas – keep a sharp lookout for business opportunities and aggressively bring them to the attention of company leaders; and
• Think outside the traditional legal role by suggesting ways to boost the bottom line.
“Lawyers can be a lot more than lawyers,” said Gant C. Redmon, general counsel for Arbor Networks, Inc. in Lexington, Mass., a leader in software for preventing “denial of service” attacks. “We can actually make money for the company.”
Redmon takes that mindset to one extreme, spending about 30 percent of his time as a salesman procuring contracts with the federal government.
“I had looked at enough deals come across my desk that made no sense. I decided I can do this better,” said Redmon. “I convinced the CEO that this would be good use of resources, and he’s allowed me to do this.”
Companies can benefit significantly from their lawyers playing a role in business decisions.
“Instead of putting together other people’s large government deals, I know how to create them from the beginning, so they close faster on the back end,” Redmon added, noting that it’s “a tremendous amount of fun. It’s also deepened my respect for the sales force and created a bond that wasn’t there before.”
While GCs actually making deals is somewhat unusual, lawyers don’t have to hit the streets with a sales portfolio in order to assist their companies with growth.
For instance, Eric Finkelman, the Delaware-based general counsel for Ciba Specialty Chemicals, a multinational company with 15,000 employees, often becomes the point person for new business.
“Any lawyer supporting a business should be a driver of growth,” he said. “Our company has all these initiatives to grow. It’s a very big priority. If you don’t grow and innovate, you have to keep cost-cutting and shrinking.”
Like any part of the management team, Finkelman has an eye out for new opportunities. For example, during an inquiry about the merger of two rivals of Ciba, the Federal Trade Commission suggested that approval might be conditioned on forced divestiture of part of one of the companies.
The FTC turned to Finkelman asking him whether Ciba would be interested in that line of business.
“I said, ‘I’ll check.’ I came back, and said, ‘Definitely,’ and I wound up taking the deal through to its completion,” Finkelman recalled. “It was a small deal, $5 million, but it was a complementary line of business we could really use. It was a matter of circulating the idea to the right people, taking it further with the FTC, and further with the other company, and then on to closing.”
Gail Sciacchetano, general counsel for University Physician Associates, a health-care group in Kansas City, Mo., said in-house counsel facilitate business growth by being creative and flexible.
“There are ways to accomplish everything totally legally,” Sciacchetano said. “You have to be part of the process, or it will not work and you’ll always be at odds with your folks. It’s very important for the general counsel not to say, ‘this is the law, this is the way you will do it.'”
The specific legal structure of a business deal depends on many factors, according to Finkelman.
If two companies have separate areas of expertise, and if they want to keep their assets separate, a joint venture may be appropriate, he said. On the other hand, if the two look to be a good fit and combined can create a good business synergy, an acquisition may be preferable, Finkelman noted.
Some countries such as China have stringent rules on allowing foreign partners to invest in their companies, so a joint venture may be the only option, Finkelman added.
Craig Ingraham, vice president and senior counsel for MasterCard in St. Louis, also takes an active approach to improving his company’s bottom line. “Anything you can do within reason that doesn’t violate professional strictures, I think you would want to do,” he said. However, he cautioned, “You can’t pursue it so single-mindedly that it takes away from your main mission of practicing law.”
Ingraham was in on the ground floor of a MasterCard joint venture with a partner in India that provides customized software at about one-third the cost of average American software engineering prices.
When he runs into other lawyers for high-tech companies, Ingraham pitches to them the advantages of MasterCard’s joint venture.
“I’ve brought several companies in to take a look at it,” he said. “I haven’t actually got anyone to bite on it, but my clients get a kick of the idea that their lawyer is pushing the product, too. It’s incidental, and I don’t take a whole lot of time out of my day to do it. But if the opportunity presents itself, I make the pitch.”
In a former position with a telecommunications company, Ingraham would sometimes agree to price concessions if the customer agreed to purchase additional systems. “The guys on the sales side loved me,” he said. “There are ways even in the pure practice of law to enhance the business of a client.”
For many in-house lawyers, this kind of creative deal making is the most enjoyable part of the job. “That’s the fun part,” said Finkelman. “Everybody likes doing deals.”
Maybe It’s Not A Good Idea After All
Not everyone shares the rosy-eyed view of lawyer deal-making.
“At a level below the GC in the legal department, I absolutely think in-house counsel’s job is not to make strategic decisions, because they weren’t trained to do it,” said Terrence W. Mahoney, a mergers and acquisitions expert in the Boston office of LeBoeuf, Lamb, Greene & MacRae.
“They’re not out in the market place in the way operations people are,” said Mahoney, who has also served as general outside counsel for several companies. “Their job is to follow marching orders. A decision is made to do something, and the lawyer’s job is to execute that.”
However, Mahoney is well aware his position is in the minority.
“I’ll probably be shot for saying that,” he joked.
And Mahoney conceded that it’s precisely the opportunity to be part of decision-making that so many in-house lawyers enjoy. Many, in fact, hope someday to leave the legal department in favor of management.
Redmon agreed.
“Someone who wants to be GC of a smaller company does so to become involved at the top levels,” he said. “I’ve seen GCs that aren’t as involved, but I find them to be in a minority. You’re also seeing more GCs migrating to other business roles,” such as COO or CEO.
Hands On, Early On
For many in-house lawyers, it’s satisfying enough to be part of the deal-making process at an early stage so that problems are prevented before they become intractable.
For example, Sciacchetano of University Physician Associates said she couldn’t do her job well if she came in at the very end of important decisions.
“I just got off the phone with another in-house counsel, who isn’t always invited to meetings,” Sciacchetano said. “So, when they’re asked to draft documents, they don’t really have the flavor of the intent and the history of the deal. It makes it much, much harder to do the drafting.”
When she took the position at University Physician Associates, Sciacchetano invited herself to key meetings so others management would recognize her value as more than just a document-drafter.
She also wanted them to realize that deals would be more likely to work well if she was informed from the beginning of brewing transactions. “It’s very difficult to insinuate yourself at the beginning, but you want them to look at you as part of the team,” she suggested.
Part of gaining acceptance, she said, is to not be seen as a deal-breaker and naysayer while at the same time providing a clear-eyed view of the law.
But this role is different from actually making decisions for the company, Mahoney noted.
“To me, that involvement at the early stage is 90 percent listening, and the, ‘What did you think of X?’ is 10 percent,” he said.
Moving into the realm of suggesting new markets and new partners worries him, because when lawyers become more interested in opening new markets than assessing risk, there’s no one playing devil’s advocate to exciting but potentially disastrous new ideas.
“Then there’s no one there except a regulatory agency,” Mahoney said. “Some will argue that’s what happened with Enron: The accountants and lawyers and everyone went on the risk side of the line and patted themselves on the back for being creative, and everything broke.”
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Knowing Accounting Basics A Must These Days
Aside from helping companies grow in ways beyond a strictly legal role, in-house counsel these days have to also be on top basic accounting issues.
In the wake of the Enron, WorldCom, and similar scandals, in-house counsel have a greater responsibility than ever for keeping their companies out of legal trouble due to accounting irregularities. For that reason, some formal education in accounting principles and related matters is a necessity.
“In the past, it was possible to do a decent job as in-house counsel with little more than a dilettante’s knowledge of accounting,” said Michael P. O’Brien, a corporate attorney in the Boston office of Bingham McCutchen.
But no longer. “Lawyers don’t have to become CPAs, but they at least need more knowledge of GAAP than in the past,” he said.
Some, such as Paul Marcela, associate general counsel and assistant secretary at Dow Corning Corp. in Midland, Mich., find that an MBA degree is very useful. “To one degree or other, an in-house counsel needs training in the accounting world,” he said. “It’s very helpful in working with businesspeople.”
For those not so inclined, continuing legal education courses are highly recommended. Fortunately, a variety of professional groups including the Association of Corporate Counsel America, the American Society of Corporate Secretaries, and corporate sections of state bar associations offer seminars on corporate accounting in general, as well as new federal legislation that affects corporations.
The Northeast Chapter of ACCA, for example, presented a seminar in Boston on Oct. 8, “A Corporate Counsel’s Guide to Understanding and Managing Difficult Accounting and Financial Reporting Issues,” to assist lawyers in identifying problem areas and advising corporate leaders on how to avoid them.
The course, to be presented again in the future, focuses on alerting lawyers to accounting pitfalls, said John Sullivan, a CPA at the Huron Consulting Group in Boston and one of the lecturers. “You don’t want to be an accountant, but you want to know where the red flags are so you can get someone else [with specific expertise] involved,” he said.
The hot topic these days is the Sarbanes-Oxley Act of 2002. Enacted in order to protect the public from future corporate accounting disasters, it imposes a long list of requirements on publicly traded companies including new standards for accounting, auditing, and corporate accountability. Since the law is complicated and its criminal penalties severe, most corporate counsel would do well to attend professional seminars directly related to it, experts advised.
“In-house counsel will have to know more about this than they might like,” O’Brien said. For example, one provision requires that management make certain certifications regarding a company’s internal controls. “It’s very burdensome,” he said. “It’s a whole network of internal controls not limited to financial reporting, and public companies should be busy right now implementing that.”
While it’s imperative that in-house counsel be intimately familiar with the law, it’s fast becoming a niche practice in itself. For that reason, MasterCard, based in St. Louis, has staff attorneys whose specialty is ensuring compliance with Sarbanes-Oxley and related SEC rules, noted Craig Ingraham, vice president and senior counsel for MasterCard. “They need special training,” he said.
Despite the current attention to corporate accounting problems, the primary role of in-house counsel remains the same, noted Terrence W. Mahoney, a partner in the Boston office of LeBoeuf, Lamb, Greene & MacRae, and a featured speaker at the ACCA seminar.
“I don’t think the accounting irregularities and all the things we’ve been reading about [makes it] any different from what lawyers have always done,” Mahoney said; namely, working to keep the company from violating any laws. “One guy I used to work for described lawyers as the conscience of a company, not in a moralistic way, but as a central compass point. That’s the role of the lawyer, whether they’re dealing with accounting problems or anything else.”
