The newly released Chief Legal Officers survey (“Survey”) from the Association of Corporate Counsel (“ACC”)[1] is an important governance development to the extent that it supports a board’s ability to exercise oversight of its company’s legal department. Overall, the ACC findings underscore the organizational value of a CLO hierarchically positioned to influence corporate strategy.
A board’s ability to evaluate the Survey results depends on the board’s appreciation of its specific fiduciary obligation to monitor the legal affairs of the organization. This responsibility is most directly satisfied through oversight of the department of legal affairs and extends to satisfaction of the hiring, compensation, and termination of the CLO.[2] The essence of the obligation is to assure that the company highly values legal compliance.[3]
This 2020 edition of the Survey confirms the “upward progression” of the CLO to positions of power and influence within the company and to assume duties beyond those of technical legal expert. The results ratify as “best practice” a direct reporting relationship of the CLO to the CEO, but suggest that more work needs to be done with respect to the CLO’s interaction with the board. The results also provide interesting observations on the coordination of the legal, risk, and compliance functions of the company.
Key board takeaways from the 2020 Survey include the following:
1. The Business Value of the CLO. The overarching conclusion of the Survey is that CLOs are increasingly being consulted on matters of business strategy, risk evaluation, and other relevant business decisions, as well as on legal matters. This is supported by data indicating that many CLOs spend on average only one-third of their time rendering legal advice. Their remaining time is spent on more diverse activities, including advising on business strategy and other non-legal matters and providing support on corporate governance, as well as managing the legal department. Similarly, CLOs report that business management skill is a primary attribute sought when hiring additional in-house lawyers.
This is all consistent with the view of leading observers that the role of the CLO extends beyond that of technical legal adviser to encompass the additional roles of wise counsel and business partner to management.[4] Companies that do not position the CLO in a prominent hierarchical position and that limit her involvement to purely technical legal matters are increasingly likely to be viewed as out of the corporate responsibility mainstream.
2. Reporting Relationship to the CEO. The Survey results should remove any doubt that a direct reporting line from the CLO to the CEO is a broadly accepted practice. Eighty-five percent of U.S. respondents confirm that in their organization, the CLO reports directly to the CEO. This practice is consistent with traditional corporate responsibility principles and with the increasingly accepted view of the CLO as a valued business partner to management.[5]
In this regard, boards should view with caution circumstances within their own companies in which the CLO has a reporting relationship to an officer other than the CEO. A disturbing result from the Survey is that of the CLOs who do not report to the CEO, almost 50 percent report to the CFO. This is potentially problematic for two reasons. First, a CLO-to-CFO reporting relationship has long been considered inappropriate due to their respective roles in financial reporting and disclosure.[6] (This might logically extend to the CFO’s role in many transactions on which the CLO must advise.) Furthermore, the position of many leading observers is that these two executive positions generally should be on the same reporting level within the company.[7]
3. Reporting Relationship to the Board. The Survey results should prompt leadership reconsideration of whether the CLO has effective access to the board. Disappointingly, only 53 percent of respondents indicate that they have a direct reporting line to the board of directors. Given that the CLO typically serves the board as its chief legal adviser (absent the presence of any divergence of interest), this result is something of a yellow flag. The absence of such a direct line of reporting may needlessly complicate the ability of the board to monitor the role of the company’s legal department and can serve to marginalize the role of the department for both internal and external audiences.
This concern also extends to the ability of the CLO to attend board and committee meetings. It is vitally important for the board, and its key committees, to have access at meetings to its legal advisers so that (i) directors can directly present questions to their legal advisers; and (ii) those advisers can comment during board discussion on the legal feasibility of particular initiatives.
While the Survey indicates that approximately 75 percent of CLOs do attend regularly scheduled board meetings – a number that clearly sets a standard of accepted practice – it remains surprising that 25 percent of CLOs do not attend such meetings. In addition, less than half of the respondents regularly attend board executive sessions, despite the corporate responsibility benefits of doing so. Board leadership may wish to work with the CEO to confirm the value of the CLO’s reporting relationship to the board and her participation in meetings and executive sessions.
4. Reporting Relationships to the CLO. One of the most interesting of the Survey results relates to the organizational reach of the CLO position. Notably, over 75 percent of respondents indicated that the company’s compliance staff reports to the CLO. Along the same lines, over 36 percent of the respondents indicated that the members of the company’s risk division also report to the CLO. In other words, the two corporate areass that most commonly report to the CLO are compliance and risk.
These data confirm a subtle shift over the last several years in the CLO’s relationship with, and supervision of, the compliance and risk functions. This shift reflects a growing recognition that the legal, risk, and compliance functions are so closely intertwined that it is in the best interests of the company to encourage direct communication and coordination among these officers. Of course, such an approach should also be accompanied by secondary reporting relationships to the audit committee or full board.
The data also suggest that responsibility for managing the legal function is sometimes shared with compliance and, to a lesser extent, risk management and finance/treasury. More analysis of this data would have been welcomed, but it does serve as a reminder for the board to avoid any blurring of fundamental responsibilities of these separate functions.
5. Legal Operations. A positive trend from multiple perspectives is the increasing employment of legal operations professionals in support of the CLO position. More than half of the respondents indicated that their department employs “legal ops” personnel. According to the Survey, this is the highest percentage reported since 2015 and the first time the numbers have crossed the 50 percent threshold. As the Survey notes, this suggests increasing acceptance of the role and value of legal operations personnel. The value of legal ops should be supported by the board, as it typically contributes to a more organized, efficient, and productive department of legal affairs.
There are many other Survey results of likely interest to the board and to the committee directly responsible for oversight of the department of legal affairs. These include (i) the percentage of management resources devoted to legal risk (only 15.4 percent); (ii) the legal issues CLOs deem most important to the company’s business (regulation/compliance, data privacy, and cybersecurity); (iii) strategic initiatives underway in the department of legal affairs (e.g., digitalization and the use of technology); (iv) the need to implement legal process management and technology solutions for the department; and (v) the impact of enterprise digital transformation on the department.
The 2020 edition of the ACC Survey represents an important resource for helping a board effectively exercise its oversight of the CLO and legal affairs. Its findings confirm an increasing acceptance of the CLO as a key corporate adviser with a broad portfolio (technical expert, business partner to management, wise counselor). The board committee responsible for the oversight of the department of legal affairs may benefit from a review of the Survey and a discussion with the CLO of its results and observations.
ENDNOTES
[1] 2020 ACC Chief Legal Officers Survey, ©2020 The Association of Corporate Counsel, http://www.acc.com/surveys.
[2] See, e.g., E. Norman Veasey & Christine T. Di Guglielmo, Indispensable Counsel: The Chief Legal
Officer in the New Reality, (New York: Oxford University Press, 2012); Peregrine, “Bernie Ebbers and Board Oversight of the Office of Legal Affairs,” Harvard Law School Forum on Corporate Governance and Financial Regulation, January 11, 2020. https://corpgov.law.harvard.edu/2020/01/11/bernie-ebbers-and-board-oversight-of-the-office-of-legal-affairs/.
[3] See, e.g., Ben W. Heineman, Jr., William F. Lee & David B. Wilkins, Lawyers as Professionals and Citizens: Key Roles and Responsibilities in the 21st Century (Harv. Law Sch. Ctr. on the Legal Profession 2014).
[4] F.n. 3, supra; The Association of the Bar of New York City, REPORT OF THE TASK FORCE ON THE LAWYER’S ROLE IN CORPORATE GOVERNANCE (2006), p. 96-111 (“NYC Bar Report”).
[5] See, e.g., f.n. 2,3 supra.
[6] NYC Bar Report, supra at 105.
[7] Ben W. Heineman, Jr., How the CFO and General Counsel Can Partner More Effectively, Harvard Business Review, July 26, 2016. https://hbr.org/2016/07/how-the-cfo-and-general-counsel-can-partner-more-effectively.
This post comes to us from Michael W. Peregrine, a partner at the law firm of McDermott Will & Emery, who advises corporations, officers, and directors on corporate governance, fiduciary duties, and officer and director liability issues. His views do not necessarily reflect the views of the firm or its clients.