A guardian and a guide

Chief legal officers have more power than ever before
ONCE upon a time, in-house corporate lawyers were dismissed as plodders. Partners at law firms make far more money. Only someone who couldn’t hack it as a legal brain-for-hire would seek the dull security of a salaried job, people assumed. But the power of in-house lawyers has grown hugely in the past ten years. The chief legal officer (CLO) is now one of the mightiest figures in the C-suite.

The main reason is that the legal thicket has grown thicker. In America, the 2002 Sarbanes-Oxley act inserted federal law deep into corporate governance. The Dodd-Frank act of 2010 made running a financial business much more complicated. The penalties for rulebreaking have grown harsher, too. Companies can be turned inside out if a junior employee bribes someone on the other side of the world. Bosses can go to jail for infractions hardly anyone understands. America’s mighty prosecutors can indict a corporation, thus destroying it before any accusation is aired in court. Add to this the endless threat of lawsuits, class-action or otherwise, and life-or-death battles over patents. The top lawyer is now part of the inner circle, and big firms are finding it worthwhile to build large and talented legal departments.
Meanwhile, the notion that all the clever lawyers are chasing fat fees at white-shoe law firms is passé. Those fees are under pressure, thanks to a glut of young lawyers, the use of technology and even offshoring. In-house jobs are now just as interesting, and demand saner hours.

Norman Veasey and Christine Di Guglielmo, a former judge and his former clerk, argue in a new book, “Indispensable Counsel”, that a CLO must be a “courageous Renaissance person”. By this they do not mean that he must fight the trial bar with one hand while painting frescoes with the other, but that he must perform more than one role. He must be a business partner and a guardian of corporate integrity. He (or she—20% of America’s big-company CLOs are women) represents the entire corporate entity, not just its managers. He answers directly to the board as well as to the boss. Professional ethics often require the CLO to say no to the other suits in the C-suite. One CLO complained to Mr Veasey and Ms Di Guglielmo that: “They sometimes view you as the ‘Business Frustration Department’.”

But saying no is an integral part of the job. Tom Sabatino, the CLO of Walgreens, a pharmacy chain, says that before taking the job, a lawyer should interview his chief executive. If you can’t say no to that person, “you don’t want to work for that company.” Other CLOs agree. Ben Heineman, the top lawyer at GE for many years, puts it like this: “If you’re a naysayer you don’t even get invited to the meetings. If you’re a yeasayer, you can get indicted.”

Steven Woghin, Computer Associates’ former general counsel, went to jail for backdating contracts to inflate revenue. Howard Udell, a former general counsel for Purdue Pharma, was barred from working for a drug company for 12 years. He committed no fraud, but failed to stop the marketing team from playing down the addictiveness of OxyContin, a painkiller. Sarbanes-Oxley, in particular, has increased the lawyer’s responsibility to keep his company straight, or face punishment.

A CLO must be independent. But unlike outside lawyers, his financial future depends on just one client: his employer. He must protect the company’s reputation with customers, suppliers, journalists and non-governmental organisations. And he must do more than merely tell managers what they can get away with. As Susan Hackett, a former director of the Association of Corporate Counsel, says: “Most lawyers will look at legal rules and say: ‘Here are the ways you can do it.’ A good [general counsel] says: ‘Of course it’s legal, but it’s stupid.’” Diplomacy is as important as legal analysis in delivering this message.

Perhaps the hardest balancing act for a CLO is that he must be both a cautious lawyer and a member of the strategy team. Only the best CLOs excel in both roles. A visionary thinks about the future, but a lawyer’s stock-in-trade is precedent. If he gets too involved in business, he may forget to be a lawyer. (American courts have ruled that a CLO’s purely business advice is not covered under attorney-client privilege.) Yet if he stays too cautious, he will never rise to the top.

Are the two roles in conflict? Not necessarily. Good lawyering can be good for business. A sharp legal department can enforce a sound anti-bribery policy, while rival firms run into swamps. It can knock down competitors’ patents—handy when so many technology firms are warring over intellectual property. It can smooth takeovers—tricky in any industry under scrutiny by trustbusters, such as telecoms or airlines.

From courtroom to corner office

A few CLOs become chief executives. Kenneth Frazier won the top job at Merck, a drug firm, after defending it against lawsuits related to an arthritis medication. Jeff Smisek was Continental Airlines’ general counsel before taking over the company; he now runs United Airlines, which merged with Continental in 2010. Both lawyers thrived in heavily regulated industries.

But it is hard for a lawyer to jump straight from CLO to CEO, says Mr Heineman. Business experience is crucial, which is why Jack Welch, GE’s former boss, plucked several stars from the legal department and gave each one an enormous division to run. Two became CEOs of other companies: Jeff Kindler ran Pfizer, another drug firm, and Frank Blake runs Home Depot, a chain that makes shedloads of cash out of sheds and patio furniture. Amy Schulman, Pfizer’s top lawyer, also runs the firm’s nutrition division. She says a lawyer should not “go native” in a business job, but must speak the natives’ language. So add “interpreter” to the job description, and to the workload of the modern CLO.