Put Your Corporate Counsel Where Your Business Is

The typical structure for in-house counsel in big companies resembles a law firm, which is not surprising because most corporate lawyers come from law firms and they assume that’s the best way to operate. Company divisions and employees send legal questions to a central law department, and the lawyers react. This traditional arrangement doesn’t always allow the company to get the most out of its in-house lawyers, though. Corporate counsel can also provide valuable counseling in planning and decision making—if lawyers are involved in the right places at the right time. During my four years as general counsel of Borg-Warner Corporation, I retained a fairly small central legal staff but also arranged for our attorneys to play significant roles within each major operating unit. It is unlikely that a completely centralized department could have been as effective as this more decentralized structure in situations such as these: The Chemicals Group sought to acquire a major French manufacturer as the keystone for its European strategy. The French government was the seller and had issued complex and conflicting regulations as part of its denationalization program. The group’s general counsel was able to play an active part in extensive discussions about whether to proceed with the deal in an uncertain regulatory environment. His participation produced the comfort level necessary for a decision, and the transaction was successfully completed. The casualty insurance company in the Financial Services Group began to incur losses that were expected to exceed its assets by a wide margin. As a wholly owned subsidiary, this insurer developed a variety of relationships with Borg-Warner—including provision of insurance coverage and common directors. Because the group’s lawyers had participated in the formation of these business relationships, Borg-Warner has been able to remain insulated from liability claims against the insurer. The continuous involvement of attorneys attached to units that had organized work forces lent appropriate legal weight to discussion and development of strategies by these units regarding their labor contracts and plant closings. Lawyers assigned to the manufacturing units were able to install more cost-effective protection for patents and licensing rights and furnish more incentive for innovation through improvements in the patent application process. From Reviewers to Participants When I joined Borg-Warner in 1967, its law department was typical of those of most large companies. The bulk of the attorneys worked at corporate headquarters, and the department strived to be an in-house law firm. The attorneys were separated physically from the business units and reacted to problems and projects only when called on. At the outset, I was lucky enough to be given a job that departed from the norm. I became the first general counsel of the Financial Services Group located in its central office, a newly created position with no clear boundaries in the job description. My interests gradually took me beyond the lawyer’s traditional role as reviewer and fire fighter into participation with the group’s management in planning and decision making. My next step, six years later, led me to Borg-Warner headquarters and a centralized law department serving the manufacturing units. The contrast between the two positions demonstrated to me how differently in-house lawyers can function. At Financial Services, there certainly were fires to fight, but the most productive work was legal counseling as a participant in managerial planning and decision making—then undertaking projects that arose out of this participation. When I was named general counsel of Borg-Warner nine years later, I set a high priority on establishing legal positions in each major manufacturing unit. First, I assigned a senior attorney at corporate headquarters to each unit and encouraged him or her to get closely involved in its affairs. I selected lawyers who seemed able to step out of their accustomed roles as reviewers and accept responsibility for some risk taking. Such a change does not come naturally to attorneys who, by education and training, are very risk averse. The business units—which did not directly bear the cost of carrying these lawyers—began to use and rely on them heavily. At the end of a year, I asked the general manager of each unit to formalize the lawyer’s participation by creating the position of general counsel of the unit and including the lawyer on its management committee. In order to promote his or her acceptance as a full participant in the unit’s management, I also suggested that each lawyer become part of the unit’s overhead at a compensation level that would be high enough to attract and retain capable attorneys. With some persuasion here and there, the unit general managers agreed to my proposals. As the business units experienced the results of having a corporate lawyer more involved and accessible, the number of lawyers at the units gradually grew and the number at headquarters declined. The law department ultimately reached what I perceived to be a proper structure for Borg-Warner’s decentralized businesses, a small group of legal generalists at each major business entity supported by specialists at headquarters in Chicago. Reducing Risk This partially decentralized structure enabled the corporate law function to serve the company better in the most important way: preventing legal difficulties. Prevention should be the first priority of any corporate law department because it is the key ingredient in reducing the company’s overall legal costs and liabilities. When a company’s attorneys are quartered within a centralized law department on an on-call basis, my experience indicates that they rarely get all the right issues and all the important facts. And whatever they do get is often accompanied by a terminal case of bad timing. By the time management presents a project to counsel for review, the organization already has invested a lot of time, money, and energy in planning and development. Attorneys are then under heavy pressure to approve the action substantially in the form presented, and even minor changes can be like pulling teeth. As a result, counsel can end up tacitly approving a project in a form that exposes the client to more risk than is prudent. Many of Borg-Warner’s businesses were heavily regulated, including insurance, finance, security guards, armored car, and credit reporting. The manufacturing businesses also had to deal with the Environmental Protection Agency, the Occupational Safety and Health Administration, and other regulatory concerns such as antitrust. Regular participation by attorneys in discussions and decision making at business units affected by these regulatory considerations prevented some severe difficulties that could have taken root had the attorneys not been involved. Having attorneys as part of each unit’s management team made such participation automatic. This does not mean that the attorneys were there to prevent the business from moving forward, but they allowed it to move forward in a more trouble-free way. For example: The legal implications surrounding product pricing often generate anxiety in managers, and Borg-Warner’s were no exception. Participation of the business groups’ attorneys in discussions about pricing strategy raised unit heads’ comfort level with decisions. During planning and negotiation for an important joint venture by the Automotive Group in South Korea, the group’s general counsel concluded that joint ownership would pose a very difficult regulatory and cultural environment for the project. She advised that Borg-Warner own the venture 100 % , and management took her advice. Events proved her course to be the better one. Organizing for Best Results At the time I took over as general counsel, the company’s attorneys reported in a variety of ways. One unit’s lawyers reported to the corporate law department, while three other units’ lawyers reported to the management of their particular units. Three business units, including the two largest, had no attorneys assigned and received legal services from headquarters. The attorney who headed the tax department reported to the chief financial officer, and the government relations office had a lawyer who reported to the director of government affairs. I wanted to organize our law function into a more effective and manageable force that could practice preventive law more effectively within a company like Borg-Warner. The structure I created to do this featured group general counsels with direct-line reporting to the business units and functional reporting to me as the corporate general counsel. Having attorneys report directly to unit managers is a widely debated issue. The concern is that it can result in loss of independence—and independence is one of the most important ingredients in quality legal advice. For the general counsel, there is no more worrisome problem than the staff attorney who, faced with the necessity of giving unpopular advice, feels so anxious about job security that he or she waters down the advice to make it more palatable to management. I have learned, however, that direct reporting to the corporate general counsel is neither foolproof nor the only way to ensure this independence. As an alternative, I took several measures to ensure that the functional or dotted-line reporting to me had real substance. For example, I formed a legal management committee consisting of the six group general counsels, the corporate secretary, the general patent counsel, and the head of the tax department. The director of government affairs and the risk manager often participated also, although they were not lawyers. This committee met regularly to discuss issues and create lines of communication. In recent years, the trend toward decentralized reporting in corporate law departments has accelerated as a result of demands by management for service. To help lawyers assigned to units maintain their integrity while reporting to line management, the general counsel should develop ways to maintain a strong functional reporting relationship with them.

Put Your Corporate Counsel Where Your Business Is

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