A private concern

Can companies skate by with their current staff, simply requiring them to work harder and smarter, or do they need more personnel? And if companies do need help, should they continue to pay outside public law firms top-dollar fees or increase the amount of work they do in-house? 

A 2005 study by Foley & Lardner LLP and Corporate Legal Times suggests companies are bringing more work in-house, primarily as a way to control spending, though more direct control over legal compliance in terms of governance is another desired result. When asked how companies had controlled costs in the past year, 68.7 percent of respondents say they brought more work in-house. TXU is cited as the poster child for this trend. Over the past 18 months, the energy company created an in-house legal department from the ground up, thereby reducing legal spending roughly 15 percent in 2004 with another 15 percent reduction expected in 2005. 

Rees Morrison, director and co-head of law department consulting for Hildebrandt International, notes that corporate law departments are feeling enormous pressure to control costs. Worries about outside counsel fees, he says, are ‘incessant’. ‘Any cost center, which is what law is, has to justify its own expenditures more and more. I never see a company that’s not managing the costs of outside counsel.’ 

When it comes to slashing the legal budget, outside law-firm fees are often the most logical places to look for savings. Morrison points out that on average, 60 percent of a company’s legal budget goes to outside vendors, primarily outside counsel and law firms. The remaining 40 percent is earmarked for employee salaries, rent, travel and other miscellaneous expenditures. 

Companies grappling with budget constraints at a time of mounting responsibilities face few choices. They can squeeze more from outside counsel, they can hire additional in-house lawyers, or they can exhort the existing legal staff to work harder. 

Although bringing work in house may look like a good solution on paper, anecdotal evidence suggests that many companies are dragging their feet. James Lootens, assistant secretary at Eli Lilly, notes that his company’s ‘staffing is remaining the same. For the most part, we’re working harder and doing our best to be more efficient with the resources we have.’ When asked whether he thought this situation was typical, he laughes and says, ‘It’s impossible to generalize, but I think that’s what’s happening in most of the companies I’m familiar with.’ 

Geoff Loftus, vice president at the Society of Corporate Secretaries & Governance Professionals (the Society), has a similar story to tell. The Society, he says, has ‘consistent, persistent and anecdotal evidence’ that corporate secretaries are ‘working harder and longer to deal with the increased demands.’ 

A range of options

When it comes to the additional workload created by Sarbanes-Oxley, many law departments have relied on outside counsel to pick up the slack, says Morrison. ‘There’s been a lot of Sarbanes-Oxley work in the past year, especially with Section 404. You don’t want to hire somebody in house for a one-year blip of work.’ 

Morrison also points out that law firms that work closely with regulators and therefore know the latest legal nuance may be better equipped to handle the complexities of Sox than in-house counsel. ‘[Perhaps] some of the largest companies have added a lawyer for this corporate governance work, but I tend to think they’re using outside counsel more,’ he says. ‘If you see $400,000 to $500,000 being paid to outside counsel in an area of law over the next two or three years, it probably justifies hiring an [in-house] lawyer to focus on that area and cut the outside counsel usage.’ In general, he estimates that it costs $200,000 or more annually to pay an in-house lawyer. 

When new hires are made, a natural fit is the lawyers in private practice who have helped the company in the past. Many newly hired corporate secretaries don’t start from scratch, but arrive with some fairly in-depth knowledge of the companies where they’re employed. In a press release announcing Michael Kneller as vice president, general counsel and secretary at Landstar System, the chief executive officer emphasized that Kneller had already worked with the company for the past three years as a lawyer at Debevoise & Plimpton LLP in New York. 

Adam Stone, managing director at the Philadelphia office of Major, Lindsey & Africa LLC, a legal recruitment firm, says that the corporate secretary position might pose an attractive opportunity for securities or corporate lawyers currently working in private practice. Often, he says, a company can name a junior associate lawyer assistant corporate secretary and then let the lawyer do some corporate legal work while assisting the corporate secretary. 

Another option is to use interns or paralegals to take up some of the slack. Dale Moore, corporate compliance consultant at Corporation Service Company, works closely with corporate secretaries at several Fortune 500 companies and believes this is becoming a far more widespread practice. He’s says he often sees companies promote ‘a paralegal who’s been doing the grunt work for a while to the position of assistant corporate secretary.’ 

Home advantage

Controlling costs is only one reason to increase the amount and scope of legal work being performed privately, and it’s arguably not the best reason, contends June Eichbaum, a partner and a leader in the general counsel and corporate secretary practice at Heidrick & Struggles. ‘Increasingly,’ she says, ‘the use of outside law firms is associated with transactional, one-off type matters. It’s the in-house lawyer who’s part of the business team on a day-to-day basis.’ 

She notes that General Electric and other corporate trendsetters have made it a practice to hire top partners from law firms to run their in-house legal departments because ‘they know what’s going to work within that particular culture,’ she says. In addition, ‘it’s helped them control costs. People who have been on the other side know how to evaluate what work should go to outside counsel and what should stay in-house.’ 

Priscilla Hughes, who was hired earlier this summer as general counsel for Thomson Financial, an operating unit of Thomson Corporation, illustrates the trend. She worked with Thomson for the past ten years as a lawyer at the New York office of Morrison & Foerster. 

‘We’ve increased the size of the in-house capability here by three new lawyers in New York, myself included, to support growing contract work,’ explains Hughes. When asked why Thomson chose to beef up its in-house staff, she says, ‘it was determined that it was more cost-effective to do certain things in-house.’ But she also emphasizes that for more sophisticated contract work, it’s necessary to develop the type of knowledge base that only comes from being embedded in the business and seeing day-to-day operations firsthand. 

Hughes has found her new proximity to Thomson to be enormously beneficial. ‘I knew the company quite well from being outside, but it’s never the same,’ she observes. ‘Outside you might hear a summary of how we got from A to B, but when you’re here you actually see the wheels turn. Cost-savings matter, but it’s really the knowledge and being embedded in the business that is important.’ 

A corporate secretary’s lot

Eichbaum notes that corporate secretaries fall into a slightly different category from in-house counsel, and may not be directly affected by the trend for legal departments to bring more work in-house. And yet she says companies are definitely discussing how to manage the added workload falling on the corporate secretary’s shoulders, for it is usually the corporate secretary who is responsible for controlling the information flow and ensuring correct governance procedures are followed. A more complicated legal environment will naturally make this management process more difficult. 

In companies where the general counsel also wears the corporate secretary hat, the situation is most dire, she adds. ‘If the general counsel is the corporate secretary, simply in terms of the amount of work, it’s helpful to have a chief governance officer or an assistant secretary who’s devoted full time to supporting the board. There’s so much that needs to be done.’ 

David Smith, president of the Society, notes that there’s been a heavy increase in the burden placed on corporate secretaries, from new compliance practices and governance initiatives to additional responsibilities for the audit and other board committees, accelerated filing deadlines, and more stringent certification requirements under Sox. And yet, he’s found, there’s been ‘no commensurate addition to the staff supporting the corporate secretary and governance officer.’ 

Moore has seen in-house legal departments reach a variety of solutions to this dilemma. ‘Some are hiring,’ he says, ‘but in general, corporations want to keep costs down, so they put more work on the current position.’ On a more optimistic note, he points out that there is now a host of electronic and other compliance tools that can ease some of the burden. ‘The corporate secretary’s position has more tools to accomplish its stated goals than ever before,’ he says. 

Even if most companies have yet to pony up and create new internal legal positions, this issue is at least becoming more prominent and is being given some real thought by upper management. As more potential liability risk falls at the feet of board members, directors and management, most corporations can be expected to conduct a thorough review of their ongoing legal needs both in terms of cost reduction and also efficiency of complying with all the rules.