"There is significant value to be gained or lost in how the issues that are legal in nature are addressed."
--- GREGORY L. PHILLIPS, HOUSTON BUSINESS ATTORNEY
At the highest level, the greatest role of an executive management team is to create and preserve value in the business. From product development to marketing, to sales, to business development, opening new business lines and markets, streamlining old ones and fending off competition, these are all strategies for creating and preserving value in a business. Keen understanding of the business and strategic thinking are tools that the executive brings to bear in all these areas to maximize that value. There is significant value to be gained or lost in how the issues that are legal in nature are addressed. They are just as surely a part of the business as marketing and sales; they can have just as big an impact on your bottom line as an increase in productivity on the shop floor. How effectively the company addresses them is hugely significant relative to your competition.
The first step in effectively addressing legal issues in a company is for management to establish a culture of compliance with laws and openness in raising issues and concerns about non-compliant behaviors. The Federal Sentencing Guidelines provide the outline of core elements regulators require for an effective program.
Standards and Procedures
While there are certain standards and laws that apply to all businesses, they may vary in significance, complexity, or priority in different industries. Understanding which regulations and laws apply to the company is essential to compliance. Once the standards are understood, developing procedures that are effective in meeting those standards requires customizing to the characteristics and structure of the company.
Oversight and Independence
Part of a good compliance program is management support of the enforcement and execution of it while also allowing enough independence to effectively address compliance issues wherever they may arise in the company.
Training and Communication
Having an ongoing program for training and communication in areas of compliance is critical to developing understanding, keeping the company up-to-date, and reinforcing the culture of compliance.
Internal Reporting Systems
Systems that take into account confidentiality and minimization of retaliation are key to promoting good communication from employees to management so that issues are identified and worked through effectively and timely.
Incentives and Discipline
Job descriptions and performance metrics should include compliance as a component. Incorporating compliance into these and other areas of the company help to reinforce the importance of compliance in the culture.
When complaints or alleged violations are raised, it is important for the company to have a process that stops the misconduct, prohibits retaliation, investigates promptly, cooperates with enforcement agencies, takes remedial actions, disciplines wrongdoers, and follows up on corrective actions.
Because third-party relationships can create a significant risk, a company should conduct risk-based due diligence, obtain commitments of compliance from its counterparties where appropriate, and provide warning of consequences for non-compliant behavior. Governmental agencies like the Department of Justice and the Securities Exchange Commission consider such due diligence an important element of a compliance program.
Monitoring and Auditing
There must be mechanisms to continuously monitor the effectiveness of programs and the actual adherence to the company’s policies. Failure to follow what the company has adopted can be as bad as, or worse than, having no policy at all.
Ongoing Risk Assessment
As a company grows and evolves, it is important to continue to assess what risks have grown, been introduced, or changed. To do so helps ensure that the highest priority issues are being addressed.
STEP 2: Understand the Legal Issues
Managers need not be legal experts, but they do need to understand how legal issues intersect with the business strategy. There are legal aspects to every corporate strategy; the law is not separate and apart from the business strategy. Good management recognizes the importance of the law to the Company’s overall success and, although not a lawyer, understands the legal trends and how they impact the business. This understanding can be achieved through focused legal news updates and periodic training. Sometimes a monthly or quarterly lunch with the company's lawyer where he/she is updated on company developments and the lawyer discusses the law is a good idea.
Good management accepts responsibility for managing all aspects of their business. Management doesn’t delegate decision making for legal issues; legal issues aren’t “thrown over the fence” to the lawyer. Ultimately, decisions made around legal issues and disputes are business decisions like any other. Legal issues may require more specialized input and there may be more deference given to the counsel provided if it is outside the expertise of management, but it should not be made without ultimately rolling it up to a consideration of what is best for the business.
STEP 3: Relationship with the Lawyers
Too often management views lawyers as a necessary evil to be kept at bay from the business and brought in only upon a clear legal issue surfacing that only a lawyer can address. This distant relationship may be due in part to the special nature of legal issues and in part to the traditional manner of payment…the billable hour. In many instances, the issues related to law and regulation must involve outside agencies, investigators, judges, and experts, resulting in costs that are impossible to totally control. Hiring a lawyer at a billable rate, while necessary, often feels like part of the problem and there is a misalignment of interests. Even though these are often realities that cannot be altered, how management relates to lawyers and legal issues can directly impact its ability to control them. By taking certain steps, the “runaway train” of litigation and violations can be greatly reduced.
Following are some key steps:
Get a Business Lawyer
Identify a lawyer(s) who is business savvy and is willing to learn the company’s business. The value of a lawyer providing advice with context about the company, its industry, its risk tolerance, its competitive position, greatly increases its value. It also requires a lawyer that is willing to invest in a relationship with the company and develop it over time. The lawyer is a business partner and counselor, rather than a cop.
Involve the Lawyer Early
Incorporate the lawyer early in the business planning process. Involving the lawyer in business discussions early provides issue identification before business strategies are set, while options can be considered. Positioning the lawyer in this way greatly improves a company’s issue identification process. Catching the potential issue before it is a fire is a great way to avoid the runaway train situation referenced above.
Manage the Legal Function
When a company has an in-house legal team, it requires the General Counsel to manage the legal function much like other business functions. That is, legal activities should tie into strategic initiatives of the business, maintain some budgetary accountability, and strive for process improvement. Much like other aspects of a business, thinking this area through will increase issue awareness and allow for substantial gains in performance.
One of the key impediments to the proactive, strategic and partnering relationship with lawyers that delivers the most value to a company is the method of compensation. Where there is total unknown about legal service, many forms of litigation, regulatory investigation and other areas, often hourly billing is the only way to go because of lack of control of the process. However, in engaging a lawyer(s) proactively or by committing to an ongoing service, agreeing to a fixed fee or a flexed fee with upside for savings or penalty for overage can result in better alignment of objectives and better value delivered. To be effective, the goal of both parties must be that it works for both sides.