Companies face a growing number of legal challenges, from patent wars to increased regulation from bills like Dodd-Frank to highly scrutinized mergers and acquisitions. With all these challenges the services of General Counsels cannot be undervalued in today’s economic climate. The General Counsel’s role has grown in dimension as companies have an increasing need for their top legal officer to set patent strategy, protect the company from harmful litigation while also overseeing increasingly complex legal aspects of M&A transactions. Although typically among a company’s leading executives, often reporting directly to the Chief Executive Officer, compensation for General Counsels is not always included in proxy statements.
Posts Tagged ‘General counsel’
In a special New York Times section on business and law, Andrew Ross Sorkin opines: “As regulations change and the threat of litigation rises, the importance of lawyers has never been greater.” He, and writers in the rest of the section, then go on to talk about the downward pressures on private law firms to sustain profits per partner and the burgeoning crisis in private practice, symbolized by the collapse of Dewey & LaBoeuf and the exodus of young associates.
But from a business person’s point of view, Sorkin and other writers in the section don’t even discuss one of the most important developments of the last 25 years: the rise in the role, status and importance of the general counsel and other inside lawyers employed directly by the corporation. The following two critical trends for major companies in the U.S. — and increasingly in Europe and Asia — are not mentioned:
In the paper, Corporate Governance and the Information Content of Insider Trades, forthcoming in the Journal of Accounting Research, we examine the impact of the firm’s internal control process – specifically, actions taken by the general counsel (GC) – on addressing one specific governance issue, namely mitigating the level of informed trade. In order to investigate the effectiveness of the governance provisions in the insider trade policy (ITP) at mitigating informed trade, we examine the trades made by Section 16 insiders where we know the precise terms of the firm’s ITP. It is illegal for insiders to trade while in possession of material nonpublic information (Securities and Exchange Acts of 1933 and 1934; Insider Trading Sanctions Act of 1984 (ITSA); Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA)). However, prior research finds that insiders do appear to place, and profit from, trades based on superior information (e.g., Aboody and Lev, 2000; Ke et al. 2003; Piotroski and Roulstone, 2005; Huddart et al., 2007; Ravina and Sapienza, 2010). Building on these studies, we test the effectiveness of governance provisions in the ITP by examining whether such provisions are associated with (decreased) insider trading profits and the ability of insiders’ trades to predict future operating performance.
The Conference Board, NASDAQ OMX and NYSE Euronext announced last week a research collaboration to document the state of corporate governance practices among publicly listed corporations in the United States.
The centerpiece of the collaboration is The 2011 Board Practice Survey, which the three organizations are disseminating to their respective memberships. Findings will constitute the basis for a benchmarking tool searchable by company size (measured by revenue and asset value) and 22 industry sectors. In addition, they will be described in the new edition of The Directors’ Compensation and Board Practices Report, scheduled to be released jointly in the fall.
The Conference Board’s annual benchmark series on director compensation was first released in 1939. In the last decade, the database has been expanded to report on a wide array of governance practices, documenting a steady transformation in the role of public companies’ boards and underscoring the increasing importance of directors’ monitoring responsibilities and the growing influence of shareholders.
The role of the chief compliance (and ethics) officer is currently a hot, if confused topic. What does she do — ensure good process or enforce strict compliance? To whom does she report — GC/ CFO or to CEO/board? What is her role in shaping the company’s voluntary adoption of ethical standards — beyond what the law requires?
This issue has been thrust into high relief by regulators and enforcers who, in light of various scandals, want a more independent compliance function in corporations. For example, changes in the federal sentencing guidelines would give corporations extra credit if the “specific individual” in the corporation with “day-to-day operational responsibility for the compliance and ethics program” has direct access to the board of directors. The issue has also received attention in the resolution of various high-profile cases, including a recent Pfizer Inc. settlement of criminal and civil matters with the U.S. Department of Justice and the U.S. Department of Health and Human Services, which required that the company’s chief compliance officer bypass the GC and report directly to the CEO.
Let me offer a somewhat contrarian, more nuanced view about the critical importance of a chief compliance officer, but in a right-sized role.
In a striking example of formalism over realism, the European Court of Justice on September 14, 2010 ruled that the attorney-client privilege applied only when a communication was connected to the “client’s right of defence” and when the exchange emanated from “‘independent lawyers’, that is from ‘lawyers who are not bound to the client by a relationship of employment’.”
In rejecting the privilege for in-house lawyers in Akzo Nobel Chemicals Ltd l v. European Commission, the ECJ was affirming the holdings of a 1982 case (AM & S Europe Ltd v. European Commission) and rejecting the arguments not just of Akzo but of numerous intervenors, both national entities (the governments of the UK, Ireland and the Netherlands) and legal groups (including the Netherlands Bar Association, the International Bar Association and the Association of Corporate Counsel).
At issue were two emails about antitrust issues – obtained in a dawn raid aimed at enforcing EU competition laws – exchanged between a general manager and an in-house lawyer who was a member of the Netherlands bar. Although the in-house Dutch lawyer was just as bound by the ethical rules of the bar association as outside lawyers, the European Court of Justice held the emails were not privileged on the sole ground of in-house employment.
The Fundamental Mission of The Corporation
The foundational goals of the modern corporation should be the fusion of high performance with high integrity. The ideal of the modern general counsel is a lawyer-statesman who is an acute lawyer, a wise counselor and company leader and who has a major role assisting the corporation achieve that fundamental fusion which should, indeed, be the foundation of global capitalism.
I believe that this concept of General Counsel as lawyer-statesman has strong roots in major American companies, is growing in the UK and has adherents in some companies elsewhere in the world. Trends over the past 25 years have made possible a powerful, affirmative leadership role for General Counsels, at least in large transnational enterprises. But to understand the role, it is necessary, first, to understand in some detail what (in my view) should be the mission of the contemporary global corporation.
In the paper, Performance-Based Incentives for Internal Monitors, which was recently published on SSRN, my co-authors (Christopher Armstrong and Alan Jagolinzer) and I investigate the choice of performance-based incentives for the general counsel (GC) and chief internal auditor (IA) and assess whether these incentives enhance or impair monitoring.
We use proprietary and public data that provide details about the incentive-compensation contracts of the GC and the IA to identify the determinants of performance-based incentives of internal monitors. More importantly, we also examine the impact these incentives have on either alleviating or exacerbating agency problems within the firm. We draw inferences regarding the implications of compensating internal monitors with performance-based incentives using a propensity score matched-pair research design, which helps address econometric concerns related to the endogenous design of compensation contracts.
The Harvard Law School Program on Corporate Governance is pleased to announce the availability of the video of its event on transactional practice. The event, which was held earlier this month, is the second of the Program’s series entitled Introduction to Corporate Practice. The series’ aim is to expose students to leading practitioners and their perspective on corporate practice—What do they enjoy about their jobs? What issues do they deal with? And what does it take to succeed in their field? The videos are made public as a resource for law students and young lawyers everywhere who are considering corporate practice.
The three panelists at the transactional practice event were:
- Eileen T. Nugent, co-head of the Private Equity group at Skadden Arps.
- Matthew J. Gardella, co-chair of the Public Offerings & Public Company Counseling practice group at Edwards Angell Palmer & Dodge LLP.
- Christopher L. Mann, a partner in the New York office of Sullivan & Cromwell.
Each member of the panel gave introductory remarks, followed by Q&A. One of the main topics of discussion was how the panelists came to find and love transactional practice. Chris Mann said he had always wanted to be involved in business deals, and got off to a very quick start when he was sent to Papua New Guinea for a finance project three weeks into his job at Sullivan & Cromwell. Project finance is still one of his major areas of practice today. By contrast, Matt Gardella admitted that he had originally wanted to become a defense attorney. He eventually moved into securities work because he valued the long-term client relationship, in which the attorney can take a proactive advisory role. Eileen Nugent discovered her passion for deals as an in-house counsel, and only later moved to Skadden Arps to pursue it. All three emphasized the business orientation of transactional lawyering. The panel also offered their perspectives on career planning issues, including working for law firms or other players in the transactional world, and the types of characteristics they felt were central to the success of associates.
A video of the panel discussion is available for download here.
Vice Chancellor Lamb’s recent memorandum opinion in the Delaware Court of Chancery, In Re SS&C Technologies, Inc. Shareholders Litigation, adds an interesting twist to the “readily available plaintiff” question.
The SS&C opinion and order imposes sanctions on the plaintiffs and their counsel for filing, in bad faith, a motion to withdraw. The defendants contended, and the Court found, that the motion was filed in an effort to cover up the discovery record relating to the “litigation spawning purpose” of a web of partnerships alleged to have been formed to provide plaintiffs in derivative and class litigation against publicly traded companies.
In the recent and well known Lerach and Weiss cases, the lawyers had ensured a stable of potential representative plaintiffs by paying them about ten percent of the attorney’s fees awarded by the court. In SS&C, the defendants allege that the managing partner of one of the plaintiff partnerships manages “a web of small investment partnerships – for the sole purpose of bringing stockholder lawsuits through his attorney.” Each of the nine investment partnerships cited “owns only a few shares … in roughly 60 to 80 public companies.” That would amount to about 500-700 companies subject to suit. Although the managing partner denied that the partnerships served only to bring stockholder lawsuits, he admitted that they were “economically irrelevant to him.” He acknowledged that he had, himself, been a party in fourteen proceedings and had been involved in “bringing roughly 30 stockholder lawsuits on behalf of himself and many of … [the partnerships].” The partnerships are consistently represented by the same law firm.
The Court’s opinion is highly skeptical of the managing partner’s claims. He and his counsel were found to have made a number of statements in documents filed with the Court which, the Court wrote, “are easily susceptible to the inference that they were made to conceal the existence of this web of partnerships and their evident litigation spawning purpose.” (emphasis supplied) The defendants, for their part, characterized the entire operation as “a litigation kennel.”
To support its findings, the Court sets out an extensive series of misstatements, mischaracterizations, inconsistencies and misrepresentations which the plaintiffs described at argument as “honest mistakes.” Although the Court could not find, based on the “sparse record before it,” that the partnerships could never serve as representative plaintiffs, it nevertheless sanctioned the plaintiffs for bad faith and abuse of judicial process in filing a spurious motion to withdraw as counsel.
The full opinion can be found here.