Marsh & McLennan Co.'s Lucy Fato explains how she helped to restructure the company’s legal department in response to the new regulatory challenges of today
For a multinational corporation like Marsh & McLennan Companies, having a top-performing legal department is a must. Lucy Fato, the firm’s vice president, deputy general counsel and corporate secretary, helped to restructure the company’s legal department in response to the new realities of constant regulatory changes and the need for more engagement in the face of increased shareholder activism – two challenges that all publicly traded companies must navigate. Corporate Secretary recently sat down with Fato to get her insight into how legal departments can be structured to handle today’s challenges and the expanding responsibilities of the corporate secretary position.
As Dodd-Frank legislation continues to roll out, legal departments must be prepared to handle a new set of regulatory changes each year. Most recently legal departments have been adjusting to new rules regarding say on pay and executive compensation disclosures. Stepped up enforcement of the Foreign Corrupt Practices Act by the Department of Justice and the SEC has also given companies a lot to contend with. Add to this the growing need to comply with industry-specific regulations, fend off various shareholder actions and determine ways in which to mitigate litigation risk across a number of areas, and it’s clear the legal department has its hands full. Corporate legal departments must deal with all of this and more while at the same time handling the job of the corporate secretary, which includes managing the board of directors’ relationship with the management team and the company’s shareholders.
Fato emphasizes that to meet all her department’s responsibilities she consistently hires lawyers who are expert and skilled enough to handle more than one role at the company. It’s a balancing act she herself performs as deputy general counsel and corporate secretary.
‘What we’ve done at Marsh & McLennan is this: we’ve taken people whose regular day jobs in legal include things like SEC reporting, stock exchange compliance and general corporate governance and had those people devote a portion of their time to corporate secretary-type work,’ she explains. ‘We’ve made a decision that we’re going to have the company lawyers who do the day-to-day corporate and regulatory type work also be the primary advisers to our board and the relevant committees.
‘I actually act as secretary to our board’s corporate governance committee on the governance front. Because we have got all these committees and they sometimes meet at overlapping times, we’ve had to divide to conquer, and that’s the way we’ve chosen to do it – by putting people with the relevant subject matter expertise in charge of these committees.’
Split responsibility
Marsh & McLennan has a 13-member board, and Fato splits the corporate secretary responsibilities with several other lawyers in her department. She is the board’s primary adviser on governance matters, and she has three other lawyers who serve as secretary and primary adviser for the audit committee, compensation committee and the corporate responsibility committee. One of her colleagues attends all the compensation committee meetings, helps advise the committee and is usually one of the primary drafters of the compensation discussion & analysis and executive compensation sections of the company proxy statement. Another helps with the audit committee, which produces earnings releases, 10Qs and 10Ks and makes sure they are following best practices; and a third handles government relations matters and provides advice in support of the work done by the corporate responsibility committee.
The concept of having legal team members working multiple jobs extends to everyone. For example, one lawyer at the company who happened to specialize in the area of data privacy was assigned to help the board during the company’s board portal adoption and iPad roll-out. Even paralegals are given opportunities to stretch their abilities by assisting with Section 16 filings and general corporate housekeeping type work. But Fato emphasizes: ‘These are corporate paralegals who are doing other work as well as spending a good portion of their time helping on board matters.’
The fact that everyone can potentially work on something that directly affects the board is a unifying factor for the department. It’s no secret that someone may be asked to step in at a moment’s notice to help complete a project, so communication between Fato and the three other committee secretaries is of the highest order. ‘When there are issues that touch the board, we probably tend to over-communicate among ourselves to make sure nothing falls through the cracks,’ she says. ‘We all keep each other in the loop and connected.’
Positive results
This type of structure produces a number of positive outcomes. ‘The benefit to the company is that we are leveraging existing resources – people, in other words – who already have subject matter expertise and handle a lot of other things. It’s very efficient,’ says Fato. Instead of spending on a new hire, the company gives lawyers in its ranks an opportunity to step into leadership positions within the department.
Giving others an opportunity to work in different subject areas also builds in extra support for times when unexpected help may be needed. If an emergency arises and additional clients need assistance in a particular area, others in the company will be skilled enough to contribute. ‘I feel we’ve got back-up,’ Fato says. ‘So if someone is out for some reason for a while, someone else can step in and take over.’
Fato also notes that her approach provides career benefits that help strengthen the team over the long run. ‘It is better for us as lawyers because we’re getting a broader experience – we’re not just doing earnings releases and 10Ks and 10Qs quarter after quarter,’ she explains. ‘We’re actually dealing with issues that affect our board, which can be interesting and challenging. It’s a unique situation to be in: for young lawyers to have exposure to a board and what’s going on at the board level is a great experience, professionally and otherwise.’
Fato concedes that other companies may need to structure their legal department differently to address increasing shareholder activism and related issues. ‘There are some companies with more dedicated corporate secretarial groups that do the proxy statement and all of the board matters, but they may not necessarily do the earnings releases and the 10Qs and 10Ks,’ she says. ‘I think that works for a company that has 20 shareholder proposals coming in per year – and there are those types of companies. They may very well need a more dedicated staff who are literally just dealing with shareholder proposals and the proxy process, and in that context that team will handle all the board matters.’
Engagement gets results
At Marsh & McLennan, the sharing of the board responsibilities has also allowed Fato to make significant strides in the area of shareholder engagement, which improves the information she can provide to the board as it makes decisions on governance issues. Two years ago, the board requested more shareholder input on say on pay, and that has led to the company developing a policy of more regular and direct contact with investors and shareholders as a best practice.
The key is Fato and Keith Walsh – the firm’s vice president and head of investor relations – working very closely together on engagement strategy. The goal is to get out in front of potential issues shareholders might have, gathering real shareholder opinions and suggestions that are relayed back to the various board committees. ‘We do outreach both on the governance side and the investor relations side,’ Fato explains. ‘The fund managers or portfolio managers who cover us or follow us receive a lot of direct contact from our IR team, but then I always reach out to people on the governance side as well, and often we’ll come together and hold joint calls. We also do annual calls with ISS and Glass Lewis, which is a very good practice that I don’t think a lot of firms are doing, but I would encourage them to do it.’
As Marsh & McLennan’s annual meeting is held in May, Fato prefers to schedule meetings with ISS and Glass Lewis in the fall ‘to get ahead of the coming proxy season before they start getting really inundated. And we want to do it long enough after proxy season so that we can get some meaningful feedback from the proxy advisory firms on what happened during the year.’
By talking to the firm’s 20-25 largest shareholders and having regular dialogue with ISS and Glass Lewis, the legal department has been able to get to the underlying reasons for shareholder discontent and regulatory concerns. By talking to shareholders about key issues like say on pay, majority voting, the right to call special meetings and other governance concerns, Fato can collect first-hand insight the board can then use to make better decisions on governance policy.
The results speak for themselves. During the first year of say on pay, 68 percent of shareholders approved Marsh & McLennan’s compensation plan. ‘We were not happy with that – we were really disappointed,’ says Fato. ‘So that’s when we started in earnest doing these joint meetings with the investor relations department and then the second year our approval went up to 80 percent. This year it was 95 percent.’ It’s hard to argue with a structure that produces results like that.
What makes a good legal team member?
Lucy Fato, vice president, deputy general counsel and corporate secretary at Marsh & McLennan Companies, says she prefers members of her legal team to have certain qualities and skills.
Subject matter expertise: having in-house experts on key areas of law is vital to any legal team. For Marsh & McLennan, lawyers with expertise in corporate governance, compensation and benefits, CSR and securities law are major contributors.
Multi-tasking capabilities: legal team members are expected to handle more than one job and may be called upon to handle legal issues for the company and corporate secretary-type duties for the board.
Good organization and communication skills: the legal team has great responsibility across a broad scope of areas, so team members must be able to stay organized and talk to each other about the progress made on numerous projects.
Ability to present advice to executives: Fato says not everyone has the right personality to deal with the pressure of discussing critical matters with demanding board members and senior management. ‘You don’t want to put just anyone in front of board members – it has to be someone who is very discrete and understands that the information he/she has access to is very confidential,’ she says. ‘And having really good judgment is key.’