The Wall Street Journal: Love Thy Lawyer (article of interest to Shell General Counsel Richard Wiseman)

EXTRACT: Once a problem has erupted, it is often the legal response that determines whether and how quickly a company recovers, as in the skillfully handled crises at Tyco, Marsh & McLennan, Royal Dutch Shell and others.

By BRUNO COVA and LEIGH DANCE
December 20, 2006

The short-term risk most likely to influence a company’s future today is legal risk and its consequences. Just look at the crises that hit ABB in 2003, Marsh & McLennan in 2004 or Hewlett Packard late this year. Several factors are driving legal risks to the forefront: aggressive development and enforcement of regulations in the U.S. and Europe; more cooperation and communication among regulatory authorities world-wide; and a public and media happy to punish companies that appear to “misbehave” or break their promises.

A regulatory investigation or an abrupt fall in share price often triggers costly disputes and litigation, followed by management reorganizations, fines, takeovers, loss of market share, and more binding regulations and regulatory policing. A poorly handled legal problem can push a successful company into insolvency, prevent the achievement of business objectives, and cost the jobs and reputations of chief executives and board members.

Often, what initially seems to be a marginal legal issue — a regulatory approval or a violation of banking regulations in a remote subsidiary, for example — grows into a bet-the-company type of risk. And even once the threat or problem is resolved, legal disputes and regulatory inquiries may linger on for years in other jurisdictions, causing far-reaching damage and costly distraction. Just consider the competition problems Microsoft still faces in Europe, years after the company settled with U.S. authorities.

Boards, particularly of European and Asian companies, sometimes fail to leverage their company’s legal department to prevent a legal problem or to advise them in a crisis. Directors may spend hours discussing finance or audit issues related to a financial-disclosure issue, but often they have never met with the general counsel and are unaware of the available legal resources.

A duly empowered legal department can help directors govern better, and shield them from liability. Legal and regulatory issues can be a huge driver of a company’s strategy: Think of how the European energy industry has transformed itself as a consequence of EU regulatory changes. They can also be key tools for achieving a business objective or prevent a competitor from reaching it, as demonstrated by the recent wave of protectionist measures introduced to thwart cross-border takeovers. Once a problem has erupted, it is often the legal response that determines whether and how quickly a company recovers, as in the skillfully handled crises at Tyco, Marsh & McLennan, Royal Dutch Shell and others.

Some boards’ failure to pay attention to legal issues is even more surprising considering that, more and more often, authorities explicitly direct corporations to identify and demonstrate how they are reducing legal risks, such as implementing compliance programs. Increasingly, regulators sternly punish those who fail to do so.

Compliance reaches deep into the company’s operations, and therefore problems are not easy for directors to spot. This is why the legal compliance function is critical. At the first sign of a serious problem, the chief legal or compliance officer can alert the board quickly. An internal investigation may be merited in any of the company’s activities, anywhere in the world.

European and Asian companies are beginning to follow America’s lead in building highly capable legal teams that know the business intimately. Many in-house counsels of Europe’s (and, to a lesser extent, Asia’s) leading companies have far more compliance and risk-management responsibilities, including tracking legal and regulatory compliance throughout the company. The general counsel and chief compliance officer have demanding roles: They implement and oversee internal controls, support ongoing business transactions, and manage in-house and outside advisers across broad territories.

But while the position of the corporate counsel has improved, there is still a ways to go, particularly in Europe and Asia. No longer can in-house lawyers be seen as narrow legal practitioners, called in to rubber-stamp a decision. They must work along side business management.

Besides assisting the board with internal controls to defend against a crisis, in-house counsel can shed light on opportunities unfolding in the business. Laws and regulations can be used to find the most efficient route to enter certain markets, or to better defend market share and retain key intellectual property assets. Early and consistent interaction with the general counsel puts directors in a far better position to help the company compete effectively and deliver shareholder value.

Because they can provide additional armor for directors and help protect the company overall, general counsel (and where they exist, chief compliance officers) need to communicate freely with the board. Often they are disarmed by reporting relationships that don’t allow proper access to executives and directors, or that discourage directors from exercising effective control of the legal function.

Chief executives and directors of international companies should be more interested than ever to link to the general counsel and to ensure that the legal department has the talent, tools and structure to effectively inform corporate governance.

If you are a director and are not sure about your company’s status on these issues, beware. What you don’t know may hurt you. We know that you want to avert crisis or scandal, minimize loss, and maximize the company’s ability to grow profitably. On your way to the boardroom, don’t forget your legal shield.

Mr. Cova, who was chief legal adviser to Italy’s Parmalat during its restructuring in 2004-05 and previously general counsel of Fiat, is co-managing partner of Paul Hastings’s Milan office. Ms. Dance is president of ELD International, a consultancy to global law departments and law firms.

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