In her new role as the Director of Corporate Solutions for the National Association of Corporate Directors (NACD), Stephanie Mullette is exploring opportunities to forge stronger relationships between the general counsel and the board of directors. “When we think about good governance at an organization, most of us associate those practices with the board of directors,” she explains, “which seems logical as the board is typically the final decision maker. But if you dig a bit deeper, you quickly recognize the influence of the general counsel as an internal advocate for strong governance practices.” Below, Mullette discusses the interaction between corporate boards and general counsel, their roles in M&A, and how to optimize the relationship. Her remarks have been edited for length and style.
MCC: Please tell us about your background as it relates to your new role as NACD’s Director of Corporate Solutions, particularly your focus on enhancing engagement with general counsel.
Mullette: After studying in Germany, I worked for White & Case. One of our clients at the time was a company dealing with activist investors, and so when I came back to the U.S., I wanted to continue working in governance. I joined ISS as an analyst in the retail sector, which involved a lot of work with our M&A team, including some high-profile proxy contests. Engaging directly with boards and shareholders is a great way to understand all sides of an issue. When I went to CEB, I worked more specifically with general counsel and focused much of my work on the GC’s role in both supporting and advising the board on governance and other issues. NACD’s goal to promote exemplary board leadership ties a lot of my experiences together. It’s been encouraging to see how GCs use and benefit from the resources we provide to the director community.
MCC: Depending on the nature and strategy of the company, GCs and corporate board members play highly varied roles in M&A. Talk about the spectrum of approaches that boards and GCs take in working together in anticipation and support of their organization’s deal-making activity.
Mullette: I agree with the term “spectrum” because you learn quickly that general counsel approach M&A in a variety of ways. Speaking broadly, I’ve encountered three main types: general counsel who are a strategic force when it comes to deal-making activity; general counsel who may have been hired for another reason and, by choice, play a more limited role; and general counsel who want to be part of the M&A process but have yet to assume a strategic role.
The first two categories are often born of hiring decisions. For example, if a company is in a highly acquisitive mode, there is a good chance that its management team will hire a GC who has been part of a successful M&A practice, and that GC can hit the ground running: He or she would play a greater role in any deal-making activity and have more immediate buy-in of senior management and the board. On the other hand, you can imagine a GC who is hired for a specific area of focus – let’s say IP – and who may have less experience in the realm of M&A. In that case, he or she may still provide strategic support given the inside knowledge but may defer certain parts of the transaction to outside counsel. The third category are those general counsel who want to play a more strategic role in M&A but might be at a smaller organization where they’re still struggling to get a foothold in those strategic conversations. In that case, they’ll need to look for opportunities to demonstrate their value directly to the management team and the board and increase their contributions over time.
MCC: NACD has focused a great deal of attention on the role that board members can and should play in corporate strategy, but it’s not always as clear what the GC role is in strategy. How can the GC become more of a strategic asset to the board in an area such as M&A?
Mullette: It starts with a seat at the table. It’s crucial for any GC to establish his or her presence as a strategic advisor and not simply be seen as someone who reviews deal terms. One of the obstacles I hear most often from GCs is that they are brought into a deal too late; management has already decided to proceed. And so the GC is immediately forced into execution mode. This usually happens when the CEO or others in senior management view the GC more as a roadblock and less as a partner.
The board can be a great ally in this regard. If you think about it, the GC and the board play similar roles in that they both bring a skeptical eye to a proposed transaction. The board tests management’s assumptions underlying the deal, and the GC casts a critical eye on the legal, regulatory and compliance implications the deal may present. Both parties provide an objective view of the transaction because there needs to be someone willing to tell management no if proceeding is not in the long-term interest of the company. So it’s important for the GC and the board to establish direct lines of communication.
MCC: Are there strategies that GCs can employ if they are struggling to get a seat at the table?
Mullette: They can be more proactive in getting information to the board. They sit in many board meetings, often as the corporate secretary, and can use those opportunities to develop an opinion and provide more information about the legal or compliance risks related to strategy. It might be through their interaction with a board committee; for example, we often see compliance and ethics funneled through the audit committee. The GC can use those opportunities to begin building a reputation internally as a strategic asset. One of the common criticisms of lawyers is that we begin with “it depends.” Often management is looking for something more definitive, especially from an in-house lawyer. Having a stronger opinion can also be helpful in elevating the role.
MCC: Board members face certain legal risks arising from a company’s M&A activity. Tell us about the risks and how GCs can help ensure that board members are comfortable enough with their roles in the deal evaluation process to exercise effective oversight.
Mullette: It typically falls to the GC to make sure that the board understands its oversight responsibilities. That happens most often through the on-boarding process, but ideally it’s a topic reinforced through continuing education. Recently, I attended NACD’s Director Professionalism course – the “101” governance course in our director education series. In one of the sessions, a faculty member provided a compelling account of the board’s oversight responsibilities and the judicial standards of review. I kept thinking how management and even seasoned directors would benefit from a refresher on director duties. It’s not a one-and-done issue, and the GC is in a good position to reinforce that notion, especially in the context of M&A.
Directors are legally bound to play an active role in the oversight of any material transaction. And that means not simply rubber-stamping management’s proposal; they need to demonstrate that they asked the tough questions. NACD recently released “Director Essentials: Strengthening Oversight of M&A.” It’s been a great education tool for both GCs and boards in that it provides an overview of the different standards of legal review for director conduct. It also includes some really tactical questions that directors can ask at different stages of a deal’s life cycle. I think most members would agree that it never hurts to re-examine how their boards and management teams approach a major transaction.
MCC: Ongoing board education is a core aspect of the value that NACD provides. Talk a bit more about the general counsel and board education.
Mullette: Obviously, the GC plays a crucial role in making sure that it’s an ongoing process. The board needs to constantly learn – about its changing duties, shareholder expectations, and new and emerging issues on a regular basis. Directors can really benefit from outside perspectives and learning how another board dealt with a similar issue. What was so interesting about the Director Professionalism course was to see firsthand just how much directors rely on peer networking – learning about the best practices of other boards from active directors and why what works for one board may not for another. That’s one of the most important parts of the education process, and NACD does a great job facilitating those conversations.
MCC: There are many stats and much commentary concerning the high failure rate of deals. Key factors undermining deal success include ineffective integration and weak due diligence. NACD’s publication “Governance Challenges 2016: M&A Oversight” highlights cultural alignment as a key success or failure factor, albeit an especially difficult factor to evaluate. How can the GC contribute in evaluating this for M&A transactions?
Mullette: It’s funny because the term “cultural alignment” does not lead many to think of a general counsel. But what I’ve learned over the last few years is that much of what general counsel and their compliance colleagues do is actually closely tied to culture.
One of the first documents that a GC might look at to understand a target company’s culture is its Code of Conduct. This legal document – typically drafted by the GC, sent out by the CEO and blessed by the board – can speak volumes about the culture that you’re inheriting. Has it never been touched since outside counsel sent over a template? Does it emphasize certain high-probability risks, like anti-corruption, that the acquirer needs to consider? Are employees encouraged to bring issues to management’s attention without fear of retaliation? These issues can often be identified and further scrutinized during the due diligence process, and they can provide real insight into potential risks or future liabilities. If the risks are accepted as part of the deal, it’s going to be important for the GC to highlight those issues for management and the board as part of the diligence process, and then incorporate the issues into postintegration planning. It might mean coordinating additional training for new employees, preparing managers to identify issues early on, or working with HR and other departments to measure corporate culture. It’s important, however, that the issues are addressed.
This idea of a culture of compliance and ethics is something that has received a lot more attention from boards over the last few years. The Yates Memo, which was published in September 2015, emphasized director liability for corporate malfeasance in cases in which the director was aware of red flags or failed to act or follow up on such activity. So directors need full information and also need to know that issues are being addressed. One of the resources that NACD’s GC members have found useful in reviewing and sharing with directors is our “Director Essentials: Strengthening Compliance and Ethics Oversight.” The topics raised in the guide can start a conversation about compliance and cultural indicators. No company wants to inherit a legal or compliance risk that it should have identified in the diligence process, especially if it’s an indicator of a much broader problem in a target company.
MCC: It’s important that boards and management understand their relative roles in a company’s M&A process. What’s the optimal role a GC can play in ensuring that management and the board together are advancing the company’s best interests in its deal making?
Mullette: The GC can help align the expectations of directors and management. Many directors struggle to define the line between day-to-day management and board oversight. Often, they are still executives who want to be involved in the details of a deal. While directors should be involved in any transaction that is considered material to shareholders, there are often discussions that don’t rise to that level.
That being said, M&A should be a regular part of strategy conversations – even if there is no deal on the horizon. Building that dialogue with the board early on helps all parties determine when the input of the board is required and builds alignment around the point of escalation.
The approach varies usually, though, based on the size of the company, the type of deal. You might see the board more involved at a smaller company: Management might lack M&A experience while some of the directors may have been pulled onto the board for their deal-making backgrounds. In that case, you might want to bring in the board earlier. A larger company that has an entire department dedicated to M&A or strategy might carry the transaction a bit further, and so the board joins the conversation at a later point. The real issue is that both parties understand and are comfortable with where that line is.
The GC can help reinforce those conversations by keeping directors on top of best practices in the boardroom. Boards should have a process for M&A review that takes into account management’s and the board’s expectations but that also calls on the GC to provide parameters consistent with judicial standards of review. Some companies form special committees with a charter outlining the committee’s roles and responsibilities. This is also important from a litigation standpoint as directors want to be able to point to strong and regular internal practices should their oversight be challenged.
The board and the GC are both expected to provide an objective view in terms of the long-term interests of the organization. They’re not just there to support management’s goals and say, “This is a great deal. Let's move forward with it.” They’re there to pressure test.
Published September 1, 2016.
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