Key Governance Take-Aways from the Association of Corporate Counsel Chief Legal Officer Survey

The newly released Chief Legal Officers Survey (“Survey”) from the Association of Corporate Counsel (“ACC”)[1] is an important governance resource on s board’s responsibility to exercise oversight of a company’s legal affairs in general and the operation of its legal department in particular. The Survey confirms the overall value of a CLO hierarchically positioned to both influence corporate strategy and support the role of corporate governance.

The Survey offers a number of helpful perspectives on the interaction between legal and business matters. In that regard, the Survey data help inform the board on organizational structure and the role and function of the legal department; how the CLO interacts with, and influences, business executives and the board; pressing business concerns for the CLO; and professional trends that may affect the functioning of the legal department.

For example, this 2021 edition of the Survey confirms the continued “upward progression” of the CLO to positions of power and influence within the company that entail 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.

All of this serves to support the board’s duty to monitor the legal affairs of the organization. That important duty has historically focused on the hiring, compensation, and termination of the CLO.[2] More contemporary views extend this duty to assuring that the CLO maintains an appropriate hierarchical position within the management team and that there is proper coordination of the CLO’s role with those of executives responsible for compliance, risk, and internal audit.[3] These additional duties support an appropriately functioning department of legal affairs and reflect a corporate culture that highly values legal compliance.[4]

1. The CLO as Valued Business Partner. The predominant conclusion of the Survey is that CLOs are regularly being consulted by the executive team not only on legal matters, but also on business strategy, risk evaluation, and other business decisions. Indeed, Survey data indicate that many CLOs spend on average only one-third of their time rendering legal advice. More time is spent on, for example, advising on business strategy, providing support on corporate governance, and managing the legal department. Similarly, CLOs report that business management skill is a primary attribute sought when hiring in-house lawyers.

These data are consistent with the view 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.[5] Companies that do not position the CLO in a prominent 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 provide an unequivocal confirmation that a direct reporting line from the CLO to the CEO is a broadly accepted practice.[6] Approximately 80 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.[7]

Given this, having the  CLO report to a corporate officer other than the CEO should be viewed with caution by the board. A reporting relationship to a COO may be acceptable as long as the CLO also has appropriate access to the CEO. However, other forms of reporting relationships can be cause for concern.

For example, the Survey notes that, of the CLOs who do not report to the CEO, almost 45 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 the officers’ respective, and potentially conflicting, roles in (i) financial reporting and disclosure [8] and (ii) the development, internal promotion, negotiation, and board review of major organizational initiatives and transactions. Furthermore, the position of many leading observers (e.g., Ben Heineman, Jr.) is that these two positions generally should be on the same reporting level within the corporation because the optimal CFO/CLO alliance resembles a peer relationship, “jointly coordinating and overseeing fundamental corporate issues of performance, compliance, ethics, risk and governance, and organization.”[8]

3. Reporting Relationship to the Board. The Survey results should prompt leaders to consider whether the CLO has effective access to the board. For the second year in a row, only a small majority of respondents indicate that they have a direct reporting line to the board of directors, and almost 40 percent report that they do not have a reporting relationship to the board.

Given that the CLO typically serves the board as its chief legal, this result is 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 Survey results relates to the organizational reach of the CLO position. For example, compliance is by far the function most often overseen by the CLO; over 75 percent of respondents indicated that the company’s compliance staff reports to the CLO. Along the same lines, almost 40 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 areas 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.

In addition, the Survey reports that privacy and ethics functions report to 45.6 percent and 42.5 percent of CLOs, respectively. Twenty-six percent of CLOs oversee government affairs, and 25 percent exercise oversight of human resources. Given the increasing legal implications associated with these and other important internal functions, the board may consider directing management to develop a more comprehensive approach to identifying functions that should have a direct or shared reporting relationship to the CLO.

5. Legal Operations. Survey results reflects a clear progression over the last six years in the percentage of legal departments that employ at least one legal operations professional. 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.

6. Other Noteworthy Results. There are many other Survey results of likely interest to the board. These include:

(i) business risks continue to receive the largest share of management resources in the organization, according to 64 percent of CLOs;

(ii) while industry-specific regulations continue to be viewed as The biggest legal challenges for their organization, the impact of political change is increasingly seen as a major legal challenge;

(iii) cybersecurity has overtaken regulation/compliance and data security as the legal issue CLOs deem most important to the company’s business;

(iv) increased organizational attention to ESG issues is having a significant impact on corporate strategy; and

(v) data privacy issues are expected to accelerate, followed by those relating to diversity and inclusion.

The Survey confirms 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] 2021 ACC Chief Legal Officers Survey, ©2021 The Association of Corporate Counsel, http://www.acc.com/surveys.

[2] See, e.g., “Report of the American Bar Association Task Force on Corporate Responsibility”, 59 Bus. Law. 145 (November, 2003).

[3] 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/.

[4] 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).

[5] 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”).

[6] The 2021 Survey results on this topic are consistent with the 2020 survey result and within the margin of error, and therefore the ACC views the overall trend since 2018 is positive.

[7] See, e.g., f.n. 2,3 supra.

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.

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