How Would You Rate Your Legal Eagle?

Within today’s headlines, it doesn’t take long to see just how quickly a thorny legal issue can spell corporate catastrophe. That’s one reason companies conduct regular legal counsel audits—to ensure ongoing compliance and to minimize the chances that preventable risks disrupt growth and success.

Yet despite the importance of the legal function of any business, experts warn that too many C-suite leaders aren’t routinely giving it a so-called operational review.

“In many cases, the legal process is perceived as more mysterious than other operations within the business,” says James Scott Fargason, a certified internal auditor and attorney who authored a report on auditing the legal process for The Internal Audit Foundation, the research arm of the Institute of Internal Auditors based in Lake Mary, Florida. Believe it or not, this lack of attention can sometimes border on obliviousness, which too often leads to what Fargason calls “severe under-control” of legal counsel.

This arms-length view isn’t ideal from a number of perspectives. For one thing, given the heightened enforcement environment, auditing the legal department is critical for addressing areas of regulatory compliance, financial reporting, and operational efficiency.

And for another, because a firm’s general counsels (GCs) are now becoming the go-to counselors for the chief executive officer (CEO), the chief financial officer (CFO), and the board on everything from law, ethics, public policy, corporate citizenship, and all types of business risk, they really do wield lots of power inside a company.

The Integral Relationship: CFO and GC

In fact, Ben W. Heineman, Jr., a former GC at General Electric and a senior fellow at Harvard University’s Belfer Center for Science and International Affairs, points to the relationship between the GC and the CFO as a particularly critical, internal team force.

The CFO and GC must support each other almost like “statespersons” in a corporation, says Heineman, who also authored the book, The Inside Counsel Revolution: Resolving the Partner-Guardian Tension (2016). This means asking first whether a corporate action complies with legal and financial rules but asking last whether an action is “right” in terms of the company mission of high performance with high integrity and sound risk management.

To do that, the CFO and GC have to manage what he calls “a dynamic tension,” that is, acting not only as “partners” to the board of directors, the CEO, and top business leaders but also as “‘guardians” of the organization. And then, to top it all off, they need to work together to contribute to creating a pervasive culture of integrity under CEO direction.

Key Steps in a Legal Checkup

Evaluating such an integral role may seem a tall task. The objectives of auditing the legal department may vary, but there are several key questions that should be asked, experts advise. A comprehensive check may examine a wide range of issues, of course, but at its essence, the legal audit lays the groundwork for the maintenance of an ongoing legal compliance and prevention program. The key aim: to ensure that your company’s goals, structure, and ongoing operations match up with the latest developments in business and corporate law.

In a legal audit, the company’s management team meets with the GC to discuss strategic plans and objectives, review key documents and records, and analyze and identify current and anticipated legal needs of the company. Depending on your business complexity and company size, internal auditors may do the job.

Naturally, you also want to focus on the goal of improving legal outcomes, while at the same time more efficiently using the considerable resources you probably devote to the function. And lastly, you want to polish that relationship between the GC and top management.

Where to start? In framing your legal-operations review, begin by asking:

  1. What are the objectives of the legal department? And do they truly fit the goals of the firm?
  2. What’s the GC’s role in governance oversight, including managing risk and compliance?
  3. How can we boost the efficiency and effectiveness of our legal methods?

In tomorrow’s Advisor, we’ll jump into more specific areas within these blue-sky questions to craft the cooperative legal appraisal you’re after.