More Thoughts on the GC Role

Two articles piqued my interest today:  The first, from the Economist, weighs in on the increased sway that GCs have in the world of Sarbanes-Oxley.  The second, from Corporate Counsel Magazine, features an interview with former GE GC Ben Heineman, Jr.  Several observations:

1. The theme of power shifting to the in-house legal leader, and the need for greater guidance and statesmanship from the GC feels very real to me.  However, in talking with colleagues, recruiters and others dealing with in-house positions, this hasn't set in everywhere.  I continue to see situations where the GC reports to the CFO, for example. 
2. Walking the line between being a partner to the business and its guardian is the trickiest part of the job, and the one where the GC can add the most value.  But it requires knowing the business inside and out, and being willing to take smart risks whenever they are outweighed by opportunity.  This is a two-handed benefit - it makes the GC the partner of the business, and it provides him or her the credibility to take a stand when a business initiative must be shut down or modified.
3. I'm with Heineman on compliance officers.  As I've pointed out before, I'd be nobody's choice for a compliance officer; I'm not nearly risk-adverse enough.  But the idea of having a compliance officer who DOESN'T report to the GC is a shockingly bad one.  Compliance is an important part of the legal work facing a company, but it's necessarily narrow.  And for too many of those handling the hammer of "compliance", every potential risk can look like a nail.  Far better, then, for the GC - the one executive in the company equipped to sort "compliance" from "bona fide risk worth taking" - to make the final call.

The Permission Culture

Being the general counsel for the largest online rater and reviewer of lawyers, I get my share of heated correspondence from lawyers.  And one common question is why we didn't ask permission before posting an attorney's licensing details online.

It's a vexing question.  Not because the substance of the question is difficult to answer - rather, it's difficult to answer in a way that is not overly rude and/or condescending.  Why? Because it should be blindingly obvious that we don't need their permission.  

Asking for permission implies the conferring of a right not otherwise present.  Decorum also demands that it be limited to those areas where one plans on honoring the denial of permission.  As we have a clear First Amendment right to publish, and no intention of only publishing material for which consent has been granted, it would be both pointless and in bad form for us to ask for permission.  

I wonder, however - as I see the latest round of the NFL trying to prevent use of the term "Super Bowl"without permission (note: I did not obtain, nor ask for, permission to refer to the SUPER BOWL).  Super Bowl, Super Bowl, Super Bowl  . . .

Anyway, where was I?  Oh, yes - this NFL silliness (SUPER BOWL!!!), along with the consistent drumbeat I hear from lawyers over permission, raises the question of whether we lawyers have too strong of a bias for permission.  Just as lawyerly training can lead to a blinkered desire to mitigate every risk, regardless of cost or lost opportunity, does our reliance on case law and statute tend to immobilize us from taking action unless there is clear precedent saying "yes, really, it's OK?" To think that we can't do anything out of the ordinary without permission? My experience would say that it does.

This is a problem, because it leads to situations like the ridiculous demands for permission that I get, or the ludicrous position taken by the NFL and other trademark or copyright holders that even clear-cut cases of fair use are infringing without permission.

A culture of permission-only is a poorer culture all around.  And it's bad for lawyers and their clients, as asking for permission in cases where it's not required leads to confusion and missed opportunities.  Let's limit permission to its intended uses: when we're seeking a dispensation (by asking for a right), or granting one (by letting someone else decide whether we get to exercise a right we already have).

AT&T - T-Mobile Final Thoughts

Monday night, AT&T and TMO announced their $39B merger was dead.  The only surprise was that they did it so quickly; as I've written before, there was a real danger that egos would prevail and AT&T would distract itself by fighting a losing battle with the regulators rather than turning its attention to competing with Verizon.

I went on CNBC's Squawk Box Tuesday morning (sorry; no video link) to offer my thoughts on whether AT&T had made a bad bet.  I'll repeat and expand what I said there:  It was a risky bet - which is why TMO, advised by my former counsel at Wachtell, insisted on the mother of all break-up fees.  But it was a bet worth taking.

The good news for AT&T is that they aren't chasing here.  They can now turn to other options, whether it's acquiring DISH, buying spectrum or capacity from Clearwire, or doubling down on a wi-fi offload strategy.  None are ideal, but they've got to play the cards they were dealt.

Another topic that came up in my interview yesterday was whether scuttling this deal was good for consumers.  It's easy to see why it would be; TMO gets to keep playing to the low end, and there should be more price competition.  But that's also a facile and short-sighted point of view.

This timely WSJ article today touches on, at a high level, some of the fundamental economic headwinds that face U.S. wireless carriers.  It's a vast country, and providing the coverage, capacity and data speeds that consumers want is incredibly costly.  Carriers spent $25 billion on their networks last year.  Only AT&T and Verizon got a return on capital.  Think about that, and what it means over time for consumers.  We're paying for marginal price competition today with hobbled companies and under-investment tomorrow.  A cash-losing Sprint or T-Mobile can't innovate, can't bridge the "last mile" or the "digital divide", and will ultimately fail - leaving the monopoly or duopoly DC is so fearful of - if they can't afford to invest capital in their network.  

So no, the FCC and DOJ did consumers no favors long-term in preventing this deal.   It's time they updated the tools in their "preserving competition" toolbox for the reality of today's wireless industry.

AT&T, T-Mobile & Opportunity Cost

AT&T's acquisition of T-mobile is on the rocks, and it looks like things are going to get uglier before everything settles out.  As I mentioned in this CNN article, I'm convinced the deal is dead. My belief isn't driven by any particular dislike for this deal; in fact, I think it makes a lot of sense.  But it was a big gamble that regulatory approval would come through, and sometimes things don't work out.

The problem here is moving on crisply.  A major consolidating transaction is distracting enough; but trying to push one through the regulatory bog AT&T is facing?  The DOJ has sued to block the merger.  The FCC has referred the matter to an administrative hearing - a near-unheard of event.  AT&T has responded by taking its ball and going home, pulling back its transfer application in the hopes that it can refile once it works things out with DOJ.  All of this spells additional delay and uncertainty.  Neither AT&T or T-Mobile can move forward fully until the merger is resolved, one way or the other.  In the meantime, Verizon can keep taking market share steadfastly, not burdened down by distracting strategic considerations.

It's an object lesson in one of the dark sides of inorganic growth.  Yes, many mergers fail to deliver value.  But even those mergers that likely would work out can backfire if they take too long to consummate.  Company leadership may say all the right things about execution, but merger planning will consume resources and narrow strategic considerations for as long as the deal is pending.  Telecom mergers - with joint review via two separate federal agencies - are inherently time-consuming.  Combine that protracted merger with additional delay, a rapidly-changing industry and a tough competitor leading the market, and it's a recipe for disaster.  Doing a deal with T-mobile probably made all the sense in the world when AT&T drew it up a year ago.  But now that the knives have been drawn, and the best hopes for the merger have dimmed, AT&T must ask the hard question, and ask it soon:  does it continue to throw good money after bad?  For while AT&T is on the hook for a $4 billion breakup fee, there is a very real cost to letting pursuit of a merger prevent full-throated competition in the marketplace with Verizon.

Should Legal Report to PR?

OK, it sounds ridiculous, but consider: Any company of size employs a public relations staff. It's how you acquire, manage and - hopefully - shape earned media. Public relations is taken very seriously, and invested in accordingly. A savvy PR staff can generate an outsized return on an investment in relationships and managing the company's image in the press.

Why then, do companies - like Sony Ericcson - continue to allow their legal departments to undermine that PR work?

Imagine the conversation if the Sony Ericcson legal group reported to PR:

PR: Wait, you want to do what?

Legal: There's a guy running a blog that has the name of one of our products in it. And get this - the domain he's using has our product name in it! We can't have that. We're going to threaten him with a UDRP action unless he shutters the blog and hands the domain to us.

PR: Haven't we talked about this? If there's someone hating on us, it's usually best to just ignore them? You know, Streisand Effect?

Legal: Oh, he's not a hater. It's a fan site.

PR: You want to take down a fan site? Someone is writing nice things about us for free and you want to stop them?

. . . you do know that we spend nearly $1 billion a year on advertising, right?

. . . and that this blogger is giving us free advertising?

. . . and that when he's forced to shut down he, and the 4chans and TechDirts of the world, are going to start saying all sorts of nasty things about us and how heavy-handed we are?

. . . which is pretty much the exact opposite of this department's primary goal?

But you're the lawyer - there must be a very good reason for going after this fan. Is he confusing lots of our customers?

Legal: No, it's clearly a fan site. But he's got an affiliate link where people can buy our products.

PR: Uh . . . we're kind of in the product selling business. So his site must be messing with our SEO, outranking our sites on Google?

Legal: Not yet, but it's a .net domain.

PR: It's a .net domain? You do know that a .net domain is the internet equivalent of second-hand store on a back street, right?

Legal: Look, the issue is that there's a chance that this use of our product name could dilute our brand and cause us to lose the trademarked name of the product. We've got to defend our trademark!

PR: OK. So stacked against the 100% chance that your letter will cost us - at a minimum - hundreds of thousands of dollars in negative publicity, what's the risk that this site being out there causes us to lose our trademark?

Legal: Oh, that would never happen. But it sets a bad precedent.

PR: [facepalm]

Deal Deliberations

Fred Wilson has a post up regarding Foursquare's recent funding round, defending the lengthy process taken by the startup. What started as financing discussions turned into acquisition talks, then ultimately returned to financing as Foursquare decided they'd rather grow organically than cash out now.

That's a respectable, even admirable, choice. It's not without risk, but it's good to see a company swing for the fences. And while I have often urged the virtues of speed in getting deals done, I agree with Fred that Foursquare did the right thing in taking their time through this process.

The distinction lies between the time taken to evaluate alternatives and the time taken to button the deal up once the company has made its choice. During the evaluation/auction phase, the risks of waiting are likely to be heavily outweighed by the benefits of seeing things through. That may mean getting to the best acquisition deal, or arriving at the informed decision to move forward alone (or with new financing).

However, it's once that decision has been made that things need to be moved forward with haste. Even if you haven't chosen your partner and an auction still persists, once the decision to do one type of deal or another is in place it's time to race for the finish. Why? Because at this point the risk scenario is flipped. The risks attendant with delay - new competitors emerging, changes in the macro environment, etc. - strongly outweigh any potential benefits of waiting. This doesn't mean not negotiating hard, but it does mean not allowing any delay due to lawyerly handwringing or people not being willing to work around the clock to get the deal papered.

Or as someone else put more memorably: "Only one thing matters in this life: Get them to sign on the line that is dotted."



I don't know how long it took Foursquare to get their financing closed once they'd made the decision to go that route, but if it took more than a couple of weeks that would be cause for criticism.

Not, however, the time they took to reflect on their options and make the choice between selling now and moving forward independently.

Useless Corporate Lawyers?

Yes, I've known a few . . . enjoyed this brief post from What About Clients, reminding all attorneys out there to quit wringing their hands and give their clients some freaking actionable advice for a change. Also links to WAC's classic "7 Habits of Highly Useless Corporate Lawyers" post.

Getting Help with the Deal

Good post over at Venture Hacks from Scott Walker - 5 tips on getting deals closed. Here they are, with my thoughts on each:

1. Create a competitive environment. Absolutely. As I wrote about in documenting the sale of AT&T Wireless, a competitive environment drives price and terms in the seller's favor. The only thing better than telling one group that their legal ask is "no longer market" is getting a call from another that they are raising their offer. But - I would emphasize Scott's advice that this effort is one where you must have experienced help. It is a very delicate process to get an auction going and keep it alive, and not a place for any entrepreneur or business manager to learn on the job.

2. Leave your heart at home. Listen, listen, listen - and always check yourself for signs of deal fever.

3. Work your balls off. True for getting most businesses to succeed, and true in the crunch time of getting a deal done. Work 40 hours over a weekend to get a deal done while markets are closed? Spend a week in New York without eating a meal outside of a law firm conference room? You bet - everything needs to fall away when you're focused on getting the deal done.

4. Don't let your investors screw you. Doing diligence is always important - but requires focus. Pay attention to tone and priorities. Don't pay attention to things that don't make a material difference.

5. Get good legal help. God know I've spent a lot of time on this blog dealing with the failings of lawyers, and much of my deal experience has come as a principal rather than the lawyer on the deal. That said, you need to get someone who matches your energy and willingness to work your balls off, AND who knows your business and is aligned with your level of risk aversion. I've seen a lot of good lawyers blow (or nearly blow) deals by wasting time on marginal legal issues. Make sure your lawyer can tell the difference between what matters to you and what can be moved past.

Lawyers vs. "Good Enough"

Ron Friedmann has a great post on the recurring problem of lawyers applying "perfection thinking" to all legal problems.

The "Zero-Risk Era"

I could never work be general counsel of a bank - or at least, that's what I've got to conclude after reading this piece in Corporate Counsel about the global risk regulatory paradigm set up in the Basel II Accord. Under Basel II, financial institutions must do sweeping and detailed analysis of "operational risks," complete with meetings, analysis, documentation and record-keeping.

Put aside the process issues and garbage-in, garbage-out nature of this kind of program. Simply think about this: Operating a successful business is a continuous exercise in taking on "operational risk." Hopefully this risk is smart; hopefully it is vastly outweighed by opportunity on the other side. But it involves risks none the same -and working toward a "zero-risk era" is not only fraught with risks of its own, but also does a disservice to that which makes businesses great.

Pfizer and "Compliance"

So Pfizer, which made a high profile GC hiring just a little over a year ago, has been slapped again for illegal marketing practices, agreeing to a $2.3 billion federal fine. That's brutal enough, but what interests me is one of the non-economic conditions the feds imposed on Pfizer (yes, it was a "corporate integrity agreement", but that's about as much an arm's-length contract as DOJ consent decree is).

Under this agreement, Pfizer's "chief compliance officer" must report to the CEO, not the GC. Now, given Pfizer's record, perhaps that's not such a bad idea; obviously, this is an organization that needs some additional focus on compliance. However, check out this quote from Lewis Morris, chief counsel for the inspector general's office:

"The lawyers tell you whether you can do something, and compliance tells you whether you should. We think upper management should hear both arguments."

Pfizer's issues aside, this is an awfully narrow view of how in-house counsel should behave. Good business counsel should be able to give risk-adjusted advice - that is, both what you can do and whether you should do it.

Commodity vs. Premium Legal Advice

A Financial Times piece titled "Law Firms Adapt to a Stark New World" notes:

"Many clients feel that it will no longer be acceptable for law firms to demand premium fees for legal advice that is not contextualised or couched in commercial language."

Amen. A mix of antiquated state bar regulation and attorney information-hoarding has allowed lawyers to charge high rates for what is effectively just legal issue-spotting (e.g., "doing x exposes you to a, b and c legal risks.") However, technological advances, alternative practice models and offshoring are rapidly reducing the value that lawyers can extract from this kind of commoditized counseling.

I've got very low tolerance for counseling which simply spots issues and doesn't weigh them in light of their relative risks. I am increasingly unwilling to pay anything for such advice. Technology has made it easy for me to either directly spot the issues or cheaply hire someone to do it. Those who can't contextualize their advice to my business opportunities won't be hired again.

On the other hand, I am highly insensitive to price when it comes to premium legal advice. Attorneys who understand how my business works and can provide tailored advice that weighs risk against opportunity - particularly on big ticket items - are pure gold.

Unfortunately, a lot of attorneys don't have the pragmatism and confidence to provide premium counseling (ironically, you often see the worst offenders when dealing with low-grade business problems). So, along with self-help legal products and automated solutions, I expect we'll see a continued evolution in the corporate legal world to a bifurcated structure: A small number of lawyers will be able to demand premium pricing, while a much larger cohort will find their legal work significantly devalued.

The Torture Memos, or the Lawyer as Factotum, Not Counselor

The hubbub over the "torture memos" - and particularly Judge Jay Bybee's defense of the memos he signed - illustrates a legal counseling issue deeply familiar to any corporate general counsel: A leader looking for an aggressive interpretation of existing law to support a planned course of action.

Second-guessing by ivory tower types aside, there's little doubt that the memos represent a legally-defensible interpretation of the state of the law in this area. However, in a well-functioning organization, with a strong GC and open communication, the memos would go beyond discussing the outer bounds of what is permissible under the rules to point out the potential downside versus the limited utility of these methods of interrogation.

Bybee's fault is that he's too much of a lawyer's lawyer, providing only the legal analysis and not wading into the risk/reward and policy analysis (to quote from his memo: "This memorandum expresses no view as to whether the President should decide, as a matter of policy, that the U.S. Armed Forces should adhere to lhc standards of conduct in those treaties with respect to the treatment of prisoners"). And of course, he worked within a tremendously dysfunctional structure not noted for its openness.

It's regrettable he couldn't be more of a leader at that uncertain time. However, while you might not want Bybee to be providing strategic guidance to your organization, he's certainly no criminal.

Good News! Businesses Cut Legal Costs

Because sanity dictates I look for silver linings anywhere I can in this economic meltdown, let me offer one up: According to a recent article in law.com, corporate legal departments are going through an aggressive reduction in legal spend.

As I've noted before, there are benefits to a limited-resource approach when providing corporate legal guidance - whether this approach is driven by design or necessity:

- Rethinking how "goldplated" routine legal work needs to be (resulting in more responsive client service).
- Forcing inhouse teams to prioritize around where they can add the most value at the lowest cost (instead of just trying to button up every risk).
- Reducing stupid legal tricks like taking a scorched-earth approach to anything that even has a whiff of a potential trademark of copyright violation.
- Requiring inhouse attorneys to be more creative and engaged with actually driving value in their businesses.

PR: wait... I: wait... L: wait... LD: wait... I: wait... wait... Rank: wait... Traffic: wait... Price: wait... C: wait...

The Virtues of Half-Assed Legal Work

What do felony trials and bet-the-company litigation have in common? You don't want to cut any legal corners on either one - no stone can be left unturned in maximizing one's legal position. There is too much at stake to worry about the cost of all of that legal brainpower.

But not all legal work must be gold-plated. Indeed, the business world absolutely requires that attorneys be comfortable routinely doing a less-than-complete job.

Legal work is expensive. The vast majority of business legal issues don't involve fights for freedom or corporate survival - they're about opportunity and money. The legal work thrown against any issue must be justified by the stakes in play.

Lawyers have counseled businesspeople from time immemorial that investing in legal work upfront is a wise move. Absolutely true. However, and related to my earlier post about lawyers and risk aversion, the point of diminishing returns for legal work in business is often reached very quickly.

Does it make sense to negotiate a low-dollar contract the same way you negotiate a high-dollar deal? Should you aggressively ramp your defense on potential litigation that has no reasonable chance of denting your bottom line, even if everything goes wrong? What about an exhaustive review of compliance options and processes, when the need for compliance is uncertain and the consequences for non-compliance easily manageable?

I'll repeat - legal work is expensive. And there are costs to dithering and over-lawyering in lost opportunities and inability to prioritize. Marshall your legal resources and focus them on the big risks and opportunities. As for the rest of the stuff, "good enough" will almost always be just that.

PR: wait... I: wait... L: wait... LD: wait... I: wait... wait... Rank: wait... Traffic: wait... Price: wait... C: wait...

Whole Foods - A Rare Post-Closing Consent Decree

I've dealt with divestiture trusts on several occasions, both as a buyer and as a seller of assets that federal regulators required to be sold under consent decrees authorizing mergers. While these sales are concluded after the larger deal has closed, the agreement and trust has always been established prior to closing.

So this is a first - Whole Foods, which bought the Wild Oats chain in 2007, has, over 18 months after closing the deal, entered into a consent decree with the FTC to sell the "Wild Oats" name and 32 locations. As I wrote at the time, I thought both the merger AND the FTC's objections to it were out to lunch. When the FTC lost a court battle to obtain a preliminary injunction blocking the merger, Whole Foods quickly closed the deal, despite the fact that the FTC appealed the PI denial. The FTC ended up winning that appeal, and now we have this settlement.

From the perspective of Whole Foods, this settlement is no big deal. There's little chance they ever planned to use the "Wild Oats" name, and the divestitures represent little more than 25% of the total locations acquired. On the other hand, this smells strongly of face-saving by the FTC. The "Wild Oats" name has little value, and of the 32 locations in the divestiture, over half (19) have already been shuttered by Whole Foods.

Lawyers and Risk

For those running businesses, here’s a little secret about lawyers: Many of us aren’t very good when it comes to risk.

Sure, we can find risk – most lawyers can identify risks all day long. That’s what law school trains our already-skeptical minds to do. Spot the issues; identify any ways risk arises in a course of action. But balancing those risks against opportunity? Not so good.

Successful businesspeople know that you win by taking smart risks – risks that are outweighed by opportunities. These risks can be competitive, personal, financial, social or, yes, legal. The problem for most businesspeople is that the law is complex, and attorneys have done a good job making themselves its gatekeepers. How can the non-lawyer businessperson determine the size of the legal risk that lurks on the other side of an opportunity?

Your average business attorney will have little trouble assessing the potential for liability in almost any scenario. With some prodding, they will strive to give you the likelihood that liability will actually come into play. However, it can be like extracting teeth to get many attorneys to combine the element of likelihood of a risk with the likely consequences should that risk materialize.

Why is this important? Because – and I can’t emphasize this enough – legal risks are not created remotely equally. A legal risk may mean a vendor is likelier to send you a pissy letter. It may mean an increased likelihood of being sued. Or it may mean the feds raiding your office with a warrant for your arrest.

Obviously, you don’t want to take a major legal risk for a minor opportunity. Just as obviously, you shouldn’t let a little legal hand-wringing over minor risks slow down your plans. You also wouldn’t want to take those risks that are likely to result in criminal liability, bet-the-company litigation or other such unpleasantness under most any imaginable set of circumstances. Due to the gatekeeping function lawyers play, you must have input from your lawyers to tell which risk is which.

Are you getting this input? Just as potential risks are easy for attorneys to assess, the likely range of potential damages is difficult to come up with. Assessing this range requires not only understanding the worst-case outcome, but also discounting from this scenario to account for the uncertainty of the situation, the circumstances of your counterparties and the likelihood that liability will even emerge as an issue in the first place. All in all, a complex and messy process - and attorneys, being risk-adverse creatures, are often loath to wrong-set your expectations.

Much of this analysis is based on experience and judgment, not modeling or mathematical analysis (there are some exceptions I will write about down the road). If you’re lucky, you’ll work with attorneys who possess these qualities and are willing to fully deploy them for you. Ask yourself – are your attorneys walking you though this way of looking at your risks, or do you get the sense that they believe every risk needs to be eliminated? If the latter, and if getting new counsel isn’t an option, at least try the “worst case” test: Always ask your lawyer what the worst thing that could possibly happen is. You may be surprised by how often even the “worst case” is of little consequence next to the size of your opportunity.