Editor: Why do you believe the role of general counsel has changed?
McAlevey: The role of the general counsel has changed because the business and regulatory environment has changed. Since 2002 there has been an onslaught of new business regulation, significant courts cases and regulators have become more active in their oversight of businesses. To succeed in this new environment, businesses require careful and practical legal counsel. Business leaders, CFOs, CEOs, and board members turn to the general counsel to be sure they have adequately taken into account the legal and regulatory ramifications of business decisions.
Editor: Why does the general counsel play a unique role in relating to the CEO and the board?
McAlevey: I think the special role of the general counsel derives from the fact that his or her client is the corporation, and often, the board. As a legal representative of the corporation, the general counsel has the authority and obligation to make even-handed decisions on behalf of the corporation and its shareholders. That gives the general counsel an imprimatur of authority and objectivity.
Editor: What are the forces that have impacted the general counsel's role to make it of great importance within a company?
McAlevey: General counsel are typically responsible for the compliance function within a corporation. The person who leads that function in major corporations has a huge policy making function that affects the direction of the corporation and how it is perceived by shareholders and regulators. If this function is not performed well, it can bring enormous harm to the corporation. At well-run companies, reputation is key to investors and doing business well. It also affects your ability to recruit good people and get good customers and vendors.
Editor: Should the board be involved in the compensation and retention of the general counsel?
McAlevey: Independence is key to the general counsel's effectiveness. He has to be viewed as independent by the board and senior management. Business leaders turn to the general counsel to broker peace and bring people together. The good general counsel is effective at doing that. However, this does not require the board to have an approval right over compensation decisions for the general counsel. The board operates most effectively serving in an oversight and advisory role. The board should be advised of how the general counsel is selected and how the general counsel is compensated and then provide advice and consent.
I cannot imagine a CEO hiring a general counsel without having thoroughly vetted that person with the board. At some level the type and amount of compensation that is paid could introduce independence issues for a general counsel, and the CEO and board should be alert to that possibility.
Editor: Does this advisory process increase the general counsel's aura of independence?
McAlevey: It can help. A well-run board and a conscientious CEO discuss compensation issues. There will be full transparency as to how much wealth the general counsel has accumulated in company stock, what they are getting paid, and what compensation plans they participate in. This information is disclosed to shareholders when the general counsel is one of the top five compensated executives in the corporation. Having the board involved in this process is an important check on compensation.
Editor: If dissatisfied with the general counsel, should the CEO discuss this with the board?
McAlevey: Absolutely. I cannot imagine the chief legal officer of a company being terminated, demoted or reassigned or having a reduction in compensation without that being discussed with the presiding director of the board and the chairperson of the management development and compensation committee.
The board needs to be aware of these issues and needs to understand the reasons why the chief legal officer of the corporation is being asked to leave or is being reassigned. To me, a personnel move like that could be a potential red flag.
Editor: Should general counsel attend executive session meetings of the independent directors?
McAlevey: The idea of non-executive sessions of the board is not to have representatives of management present. However, there has to be a mechanism for the non-management directors to communicate directly with the general counsel. Some suggest formalizing this process by having the general counsel attend executive sessions of the non-management directors. In a well-run company, this should be happening organically and does not require such formalization. At GE the independent directors of the board have no reservations about calling the general counsel or me to talk about an issue or for our feedback on something. That is how it should work.
Editor: Does this combined with the up the ladder reporting requirements provide the general counsel with leverage to encourage people to do the right thing?
McAlevey: It is healthy for management to know that the general counsel has an open line of confidential communication with members of the board.
Editor: The Veasey article also recommends that corporations implement and develop policies to ensure the optimal flow of information to the general counsel. Do you agree?
McAlevey: The general counsel requires reliable information in order to fulfill his or her duty and both the general counsel and the board should be comfortable that processes are in place to provide reasonable assurance that the general counsel gets the information required.
Editor: Should the legal department have a critical mass of attorneys to provide advice to management?
McAlevey: Yes. Any properly functioning legal department requires lawyers at all levels within the organization where important business and legal judgments are being made. Lawyers need to be plugged into the informational flow that comes through the finance, control and risk organizations so that they can properly advise management on those issues.
Lawyers must be proactive and understand enough about the business and transactions involved so that they can address concerns before they escalate. It takes time for lawyers to learn about the business and develop enough experience to be proactive. This is an organic process where lawyers are involved with matters over time asking questions in the context of making business decisions. That is how you become a really effective legal advisor because then you can anticipate where the issues are going.
Editor: Does this include attendance at senior management's meetings and the meetings of the business people they regularly work with?
McAlevey: Absolutely. The only way that lawyers can be effective in their jobs is if they are included in the decision making processes. For the corporation and management to get the most efficient use of in-house lawyers, they must be willing to include them in decision making.
Editor: Should legal departments include specialized lawyers?
McAlevey: Yes. In order for the general counsel to do his or her job, they must have specialized legal talent with a thorough understanding of the business that they can seek counsel from. Regulation is much too complicated for generalists to be able to handle effectively. But this is not to say the general counsel must be specialized. To me, the general counsel's core function is mature judgment supported by analytical rigor and experience. You don't need to be a specialist to do that.
Editor: Companies have been charging the general counsel with oversight of traditionally non-legal functions such as internal audit, public relations and tax. How do you feel about this development?
McAlevey: Lawyers should be careful of their role and how it relates to these functions. To the extent that you start overseeing areas like internal audit or more business related functions, it begins to erode the independence of the lawyer and the ability of the corporation to rely on the attorney-client privilege. In-house counsel need to be careful when providing business advice so that it is not misinterpreted as legal advice or vice versa. At a smaller organization, general counsel may be able to oversee these functions and continue to fulfill their legal mandate. For very large organizations, it is nearly impossible for the general counsel to take charge of internal audit, public relations and tax. In large organizations the only way that the general counsel can handle these tasks is to have extremely strong partner level general counsel-types overseeing each of these functions.
Editor: Should there be a direct reporting relationship of all in-house and outside counsel to the general counsel?
McAlevey: In a large legal organization the general counsel has to have direct reporting relationships with the lawyers in charge of the most significant functions and those leading the most significant businesses. For the lower level attorneys, the general counsel has to rely on the functional experts and the general counsel of the business units to hire the best and brightest.
For outside counsel, companies are well served to have a limited number of relationships because it helps for outside lawyers to understand how a corporation works and who the personalities are. They become more effective and closer to what an in-house counsel does. The leaders at the law firms with whom the corporation has the most significant relationships should have an open line of communications with the general counsel.
Editor: What should general counsel do if more resources are needed to effectively carry out the legal function?
McAlevey: If a general counsel faces the challenge of being under-resourced to an extent that it introduces meaningful risk to the company, the first step is to go to senior management and express concern. If the answer is no, then (having told senior management you are going to do so), you would go to the board. If the answer is still no, the lawyer should think about his professional responsibilities and the potential harm to his reputation from mistakes resulting from being under-resourced, and consider resigning, where appropriate.
Editor: Do you believe that the general counsel should bring non-legal issues such as those dealing with corporate social responsibility to the attention of the CEO and board?
McAlevey: Yes. In this world of increased regulatory and shareholder activism where headline risk is significant, lawyers play a big role in being able to anticipate risk. For example, at GE our government and public relations group and in-house legal department played a critical role in GE's Ecomagination initiative. Part of the reason for the Ecomagination initiative was the reality that new regulation of greenhouse gas emission would be passed and so we wanted to get in front of this and make it a competitive advantage for the corporation.
Published August 1, 2007.