Legal Counsel

Redefining In-House Counsel

Lawyers are shifting out of purely advisory roles to play an active role in risk management.
By: | October 15, 2014

Twenty years ago, the in-house lawyer might have drafted a detailed memo warning fellow executives to steer clear of some legal pitfall — and then moved on.

But for general counsel today, a strictly advisory role no longer suffices. Once stereotyped as risk-averse deal-killers, attorneys are more engaged than ever in business decisions. As a result, they are just as likely to be managing risks as urging colleagues to avoid them.

It’s a trend with implications for risk managers, who are seeing general counsel take a more active role in matters ranging from buying insurance to developing crisis management plans.

“It’s been a sea change over the past couple decades,” said Veta T. Richardson, CEO of the Association of Corporate Counsel, an international membership group based in Washington, D.C. “General counsel have evolved beyond just being looked at as someone you go to to ask for legal advice.”

The evolution is driven by several factors, boiling down to the growing complexity of law, business and technology, according to Richardson and other observers. Regulations are proliferating both in the United States and in other countries. And regulators seem to be taking a more aggressive approach in areas such as privacy, anti-corruption, antitrust and tax avoidance.

Insurance policies are another area of growing complication, according to Finley Harckham, a shareholder with the law firm Anderson Kill in
New York.

Counselors De-Code Policy Language

While insurers and policyholders often battle over claims, the disputes drew more attention after Superstorm Sandy in 2012, said Harckham, who represents policyholders. Companies learned that buying insurance did not mean they’d be covered.

Harckham advises in-house attorneys to scrutinize insurance contracts and bring their legal knowledge to bear. “Lots of policies have clauses which stack the deck in favor of the insurance companies and against the policyholder, and it’s important for in-house counsel to evaluate those clauses before they end up in the insurance policies,” Harckham said.

While the review might cause friction with risk managers, who might feel they are being second-guessed, he said, it can help both parties by avoiding contested claims and unforeseen exposures.

“I have seen it work well and it ought to work well, because the lawyers can add value to what the risk manager’s doing,” he said.

Even as they share the load, risk managers will still be needed. But like in-house attorneys, they also may have to take a broader view of their companies, especially as risk management matures, said Donna Epps, a Dallas-based partner with Deloitte Financial Advisory Services.

“Those people who don’t move with it run the risk of losing the value that they’re bringing to the organization,” she said.

Teamwork Boosts Value

Successful risk managers already seek input from across their companies as they develop risk-transfer strategies, said John Peterson, Chicago-based co-leader of U.S. retail sales for Aon Risk Solutions.

From attorneys, risk managers can learn about a company’s most pressing legal risks. Attorneys can learn from risk managers about insurance policies or other solutions that might help address those risks, Peterson said.

“That teamwork certainly has proven to be quite effective.”

“General counsel that we interviewed recognize that there has to be some risk-taking to run a business. Their contribution can be to help evaluate and manage that risk.”  — Bryan Jones, global and Americas head of dispute advisory services, KPMG, Dallas

Attorneys also may help in probing the root causes of recurring claims, added Bryan Jones, global and Americas head of dispute advisory services for KPMG in Dallas. To understand the changing role of general counsel, the consulting firm surveyed in-house lawyers worldwide in 2012 and 2014.

“General counsel want to contribute value by not only reacting to claims but also by preventing them,” Jones said, adding that attorneys are less risk-averse than the images of old. “General counsel that we interviewed recognize that there has to be some risk-taking to run a business. Their contribution can be to help evaluate and manage that risk.”

But while in-house lawyers may be pitching in more often, risk managers still report primarily to CFOs, controllers and other finance executives. According to Aon’s 2013 Risk Management Survey, 51 percent of risk management departments reported to finance, down from 62 percent in 2009. Nine percent reported to the general counsel, compared to 8 percent in 2009. Highlighting greater executive attention to risk management, 12 percent of departments reported to CEOs, up from 6 percent in 2009.

Diversify Knowledge and Services

At PubMatic, an advertising technology company based in Redwood City, Calif., risk management has been shared by the legal and finance departments, according to Nadine Stocklin, the company’s general counsel.

Besides contributing her legal knowledge, she also learns as much as she can about the company’s operations and tries to become involved early on in new initiatives, such as partnerships and acquisitions. The efforts paid off after the vice president of finance left, and she took over insurance buying.

“If I didn’t understand the business, I wouldn’t know what to say to our insurance broker about what we need to be covered,” she said. “Now, I’m the primary liaison with our broker.”

Stocklin follows what she calls a balanced approach to risk management that accounts for both the risks and rewards of business. “Legal is often viewed as a roadblock,” she said. “So I think it’s important for people to see that I’m doing this risk-reward analysis on a day-to-day basis to understand what’s best for the company.”

At Safway, risk management gradually migrated from finance to legal over the last decade, said Curt Paulsen, who joined the company in 2003 as its first general counsel. Based in Waukesha, Wis., Safway is a scaffolding and worker access company with branches around the United States and Canada. The company also provides industrial painting and insulation.

When Paulsen began, he worked closely with the company’s CFO on risk management, which still came under finance. But after a few years, risk shifted to the legal department. A lawyer working under Paulsen now heads the company’s risk management department, Paulsen said.

The change stemmed, in part, from the legal aspects of handling claims, Paulsen said. But it also seemed to make sense, given the growing complexity and importance of risk management. “That doesn’t mean that, gee, you need a lawyer to do it,” he said. “But given its importance for some entities, I think it can quite easily, for some companies, just morph into the legal department.”

Where they don’t have direct oversight, lawyers often join risk management teams, and take part in risk management discussions, said Dan Cahoy, a business law professor in the Smeal College of Business at The Pennsylvania State University in State College, Pa.

“You could argue that we have some very special additional legal complexity that hasn’t existed in the past, and you’re not going to be able to quantify it unless you get some specialized legal knowledge at the table,” Cahoy said.

But lawyers are not always trained to make business decisions, Cahoy added.

“So, to the extent that you bring in a counsel whose answer is ‘no’ 99 percent of the time, that may not help your business.”

In-House Conflict

Much depends on the personalities of the people involved, Cahoy and others said, but risk managers and in-house attorneys can learn to work together, given that their expertise and their concerns often overlap. Both departments are charged with identifying what can go wrong and mitigating the damage.

“The friction is between people who want to or feel that it’s important to do risk analysis, and the business-development types that don’t want to hear it because they don’t want to hear any naysayers.” — Eric Esperne, legal counsel, Dell Inc.

“They’re both a slightly different approach to similar problems operationally,” said Laura Peterson, chief risk officer — and a trained attorney — at the University of Wyoming in Laramie, Wyo.

Conflict could arise, however, over issues such as when to press an insurer for coverage, Peterson said. A lawyer might want to fight, while a risk manager may have an eye on the costs of outside counsel. On the other hand, she said, a risk manager may want to contest a claim, to avoid setting a precedent and inviting even more claims. An attorney, with an eye on the strength of the legal case, might choose to settle.

Friction also can arise if in-house lawyers focus solely on legal issues, said Scott Goodreau, chief sales officer for brokerage HUB International in Chicago. “What’s important is for general counsel to ensure that they understand the fact that it’s not just about the legal risk,” he said. “It’s also about the total impact to the company.”

The greater tension, however, is not between attorneys and risk managers, said Eric Esperne, counsel in the legal department at Dell Inc., based in Canton, Mass. He has written and spoken about risk management for legal audiences.

“The friction is between people who want to or feel that it’s important to do risk analysis, and the business-development types that don’t want to hear it because they don’t want to hear any naysayers,” Esperne said. “All they care about is creating opportunities to generate revenue.”

Joel Berg is a freelance writer and adjunct writing teacher based in York, Pa. He has covered business and regulatory issues. He can be reached at [email protected].

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