General Counsel Speak Out on Key Business Issues Each month, K&L Gates presents Top of Mind®—a leading in-house lawyer’s take on key issues shaping business and legal strategies. The feature is published in Inside Counsel magazine and posted to klgates.com. This year, compelling topics included balancing global markets and local laws, embracing innovation, managing varied customer and client cultures, navigating changing corporate governance, identifying and managing risk, leveraging an organization-wide perspective, and addressing specialization in the law, among others. As always, we extend a special thanks to the General Counsel who generously shared their valuable insights in our 2009* series. January Sylvain Aird Boralex Inc. July Kelly Abernathy Capital Institutional Services, Inc. February Marc E. Manly Duke Energy Corporation August Kelly W. Clark Holland America Line March David Whitescarver New York Blood Center, Inc. September H. Lynn Moore, Jr. Tyler Technologies, Inc. April Keith A. Smith Carolinas Healthcare System October Martin J. Collins Novellus Systems, Inc. May Deirdre Stanley Thomson Reuters November John W. Holleran Itron Inc. June Joe DiSalvo Glacéau December Christopher J. Zinski PrivateBancorp, Inc. *Interviewees’ company affiliations are accurate as of November 30, 2009. “How do you meet the legal challenges of renewable energy?” “Identify and manage risk.” There are certain businesses that are on the wrong side of history. They may do well for a time, but you wonder about the future of their industries. Not so for renewable energy, which is the core business of Boralex. Newspapers, magazines and television news make clear that the story of the 21st Century will include many chapters on renewable energy. But with opportunities come challenges. And, as the company’s general counsel, the challenge I’m expected to manage is legal risk. When it comes to renewable energy, the risks are dynamic and multi-dimensional, as are the opportunities. In nations around the world, the governmental interest in renewable energy is intense. Public policy is still being formulated in many locations, and the regulatory regime and legal framework are not yet harmonized or completed. To meet the challenge of legal risk, I’ve found it necessary to identify advisers on the ground in each of the many jurisdictions around the world where Boralex generates electricity, or investigates the potential for doing so. Principal among these are legal advisers and public policy advisers with renewable energy expertise. Working with these advisers, I can educate senior management and the board about the specific risks in each country, and how to manage them. But, in addition to identifying and managing risk, I strive to ensure that the legal department helps to identify and exploit opportunities. By playing a proactive role in the company’s Sylvain Aird Vice President, Legal Affairs, and Corporate Secretary Boralex Inc. Montréal, Québec business in this fashion, the legal function, typically a cost center, adds significant value beyond controlling risk. This value-added service is an integral part of the entrepreneurial decision-making process at Boralex as it operates in the fast-changing world of renewable energy. As we say in Québec, where Boralex is headquartered, “Qui ne risque rien n’a rien” or “Nothing ventured, nothing gained.” “How do you get the most out of the general counsel function?” “Constantly remind ourselves that good is no substitute for excellent.” The bread and butter work of corporate legal departments requires the use of advanced technologies, knowledge management techniques, and innovative relationships with our outside counsel. But we must also not lose sight of our core mission as professionals— to strive for excellence and to tackle complex issues quickly and understandably on behalf of clients. At Duke Energy, as with other electric utilities, we are intensely regulated and operate under an array of municipal, state, and national statutes and regulations with rapidly changing expectations and mandates. The legal requirements affecting everything we do seem to have grown exponentially in recent years. With the assistance of the department’s lawyers, the general counsel must have the information he or she needs on any major issue. My department’s lawyers and outside counsel must be able to turn on a dime to get the answer. However, we live in a complex world. It’s just not possible to know every dimension of every existing requirement. Common law reflects the wisdom of the ages, and an instinct based on experience generally provides a correct answer to an issue, but the statutory and regulatory realities of the 21st century can generate counter-intuitive answers. Accordingly, the general counsel has to be able to say, “I don’t know that answer off the top of my head, but let me find someone who does and get back promptly with an answer or an assessment of risk.” And we can’t let these demands for quick answers undermine the quality of our advice. Marc E. Manly Group Executive and Chief Legal Officer Although many otherwise sophisticated clients may not be able to tell the difference between excellent advice and merely passable advice, corporate legal department lawyers must know the difference. We must constantly remind ourselves that good is no Duke Energy Corporation substitute for excellent and have pride in the work we do, notwithstanding impossible Charlotte, North Carolina time pressures in sorting through complicated matters. “How do you manage the IP legal function in a nonprofit institution?” “By creating and promoting a culture of invention.” Before entering the nonprofit healthcare sector, I managed an intellectual property legal team in the for-profit healthcare sector. My background in the for-profit sector has been extremely useful as I perform my role now. In for-profit organizations, the IP legal function is naturally focused on inventing and patenting. One would think that this focus would translate entirely into the nonprofit sector. But it does not. At least it does not without some balancing work. Nonprofit organizations generally perceive IP as a consequence of fulfilling the organization’s mission and not the mission per se. More important to the nonprofit’s mission is rapid public dissemination of research results and information. A balance must therefore be struck between the need for rapid public dissemination and patenting. With the right balance, everyone benefits from the growth of a nonprofit’s IP portfolio – the public, the organization, licensees, and inventors. The trick is to get scientists to be continually alert to potential inventions that address real commercial needs in the course of their basic research activities. The key to success in this area is creating and promoting a culture of invention. Legal leadership can and should play a primary role. Scientists must be aware of and motivated by the possibility of patentable inventions arising from their research. The rewards system of the organization must also reflect such contributions. Continuing education should David Whitescarver Vice President, General Counsel, and Secretary New York Blood Center, Inc. New York, New York reinforce a culture of invention. And “wins” should be publicized so that all understand the value added by scientists who secure patents for inventions arising from their research. “How do you maintain an organization-wide perspective?” “Be ever mindful of your professional obligation to your client.” An in-house lawyer acts as advisor, advocate, negotiator and evaluator. Serving the client in these various roles requires the in-house attorney to understand the organizational client’s big picture. If the legal team embraces the idea that maintaining an organization-wide perspective is a necessary component for providing superior client service, then in-house attorneys will find ways to better understand the client’s business. As general counsel, my role is to set the expectation of superior client service, explain how organization-wide perspective is essential to delivery of that service and make sure that the client sees our group as reliable and trustworthy. To accomplish this last objective, I have over the last several years created opportunities for our lawyers to spend time with organizational leaders. For example, I invite organizational leaders to have lunch with the in-house attorney group. We average six of these lunch meetings per year. We have no formal agenda, but I ask each guest to tell us about his or her areas of responsibility. Similarly, each attorney describes his or her practice to our guest. I am fortunate to work for an organization that understands the value that in-house attorneys can add to the enterprise. I’ve invited our CEO and all of the senior leadership team to lunch and every invitee has accepted and participated enthusiastically. When leadership sees that the in-house attorneys want to better understand the business, and the attorneys see that the executives believe that a “no agenda” meeting with the legal staff is worthwhile, we have set the stage for good communication and effective relationships between client and attorney. I ask each lawyer in the Carolinas HealthCare System Office of General Counsel to maintain a current knowledge base germane to his or her practice, keep abreast of trends in the health care business sector, and understand the big-picture goals, hurdles and interconnectedness of our organization. This may seem like a tall order. I believe, however, that most people who Keith A. Smith Senior Vice President and General Counsel become lawyers—and certainly the people I want to hire—want to be helpful and derive professional satisfaction from believing that the work they do is important. So, when I am effective in communicating how important it is to the client that in-house lawyers Carolinas HealthCare System bring an organization-wide perspective to all that we do, and I provide examples of how Charlotte, North Carolina matters that may not appear mission critical actually are important to the organization, the in-house team rises to the challenge. “How do you manage an information company’s legal function in the age of globalization?” “Use a multi-layered, subtle and risk-sensitive approach.” It’s now commonplace to observe that markets are global. Even businesses that do not themselves purport to be global must embrace this fundamental fact of life. For businesses like Thomson Reuters, which are inherently global—the market for information is worldwide and many of our customers operate internationally—there are very real and immediate consequences for the services that our legal department provides. While markets are global, law is local. Of course, there are general principles that are global, regional and often cultural which shape national and local laws. But compliance with law must take into account the actual rules of the specific jurisdiction, as well as how those rules are enforced locally. Our approach to the law, therefore, must be multi-layered, subtle and risk-sensitive. In our legal department, globalization impacts us in three major areas: First, we have a complex corporate structure due to our incorporation in two countries—Canada and the U.K.—and our listing on four stock exchanges in three countries. While there is substantial overlap in securities regulation and stock exchange rules across these jurisdictions, there are substantive differences as well. A big part of our job as corporate counsel is the harmonization of our practices to achieve compliance in each country and with the rules of each stock exchange. Second, our business is information intensive and technology driven. Aspects of our information products can be subjected to different legal requirements in different parts of the world. Data privacy and data protection, for example, are hot issues in many of our key jurisdictions. Our legal function works with our businesses to ensure that the marketing and content of our products are sensitive to the relevant legal requirements in the countries in which those products are sold. Similarly, we must stay attuned to subtle differences in intellectual property law and its enforcement in multiple jurisdictions. Third, we emphasize an ethical culture throughout our company. But globalization complicates this because ethical behavior should incorporate compliance, and the specifics of compliance Deirdre Stanley Executive Vice President and General Counsel Thomson Reuters New York, New York with laws in multiple jurisdictions may not always be intuitive. So our job as corporate counsel is to provide the training and guidance that helps our businesses navigate the maze of law, ethics and culture, all within the day-to-day commercial reality in which we live. Events of the past year have made it abundantly clear that no part of the global economy lives in isolation. This reality heightens the significance of a globalized approach to managing the corporate legal function. “How do you manage the legal aspects of continuous market innovation?” “Know the business from top to bottom.” Glacéau continues to achieve its success in the market for enhanced water with a cutting edge, hip and sophisticated approach to brand positioning. In a very real sense, the role of the legal function is to ensure that our brand managers are making good judgments about the business as they advance our products into the marketplace. So how do we do this? There is no substitute for in-house lawyers knowing the business from top to bottom. In our industry, this means an implicit understanding of the activities, expectations and plans of regulators, competitors and consumers. We mine this knowledge, and then we synthesize and disseminate it in a way that helps to shape the company’s course of action. I like to think of our legal function as the hub of a wheel with spokes projecting in a variety of directions. Synthesis of information and data takes place at the hub, knowledge is transmitted along the spokes and implemented on the front lines of our business by our operations, sales and marketing teams. Our core legal knowledge is blended with an understanding of regulatory requirements, consumer preferences and the competitive landscape, and the result is sound advice for the company. At our company, the general counsel’s office is one where everyone is welcome to— and frequently does—stop by for consultation and advice. The question of the day may present prospective issues, or it may be some pressing matter with which the client has to deal immediately. In both cases, the legal function helps present the larger backdrop of risks and benefits so the client can be deliberative about his or her options and derive a sense of the context in which the final decision will play out. Joe DiSalvo Vice President and General Counsel Glacéau Whitestone, New York At Glacéau, we understand that there is no contradiction between being hip and edgy, and being on top of the fundamentals that are required for sound legal judgment. “How do in-house counsel maintain an advocate’s edge?” “Embrace innovation.” No one would dispute that in-house counsel must add value by advocating their companies’ positions. At least no one at my firm, Capital Institutional Services, Inc. (CAPIS), an institutional broker dealer, would dispute this proposition. The question is: how can in-house counsel create an edge so that their advocacy is not only successful, but seamlessly blends into the decisionmaking of the enterprise? I believe the answer lies in in-house counsels’ ability to embrace innovation. The core to any successful company is the ability to be innovative. It is even more important in a rapidly changing market, like the securities industry. In-house counsel must be open to new ideas and partner with the business so these ideas can be advanced to successful conclusions, especially in a highly regulated legal environment. This presents both a challenge and an opportunity. The challenge is that in-house counsel must master the cutting-edge business strategies of the company. The opportunity is that in-house counsel, if provided a seat at the table, can influence the direction and shape of innovations so they will comply with anticipated regulatory and legal requirements. Simply put, if given the chance, in-house counsel can be the pivotal advocate necessary to help create business solutions for problems the rulebooks have yet to consider. In order for in-house counsel to provide this type of advocacy, a company must have a culture of compliance. If such a culture exists, compliance is built into every business process and the legal and compliance officers are able to contribute on the front end to add value to the bottom line. If that culture is not present, compliance is often considered something that happens “in another office.” Instead of serving as an active advocate, the role of in-house Kelly Abernathy General Counsel and Chief Compliance Officer Capital Institutional Services, Inc. Dallas, Texas counsel is relegated to the “beat cop,” who only patrols for risk and points out obstacles. For a company’s executives, it’s really a simple question: Are your legal and compliance professionals able to advocate for you in a way that helps bring innovative products to market through a partnership with senior management? At CAPIS, due in great part to our culture of compliance, leadership has enthusiastically answered “Yes” to this question. “How do you navigate the company’s business through multiple legal regimes?” “Think thematically.” With the velocity of life in the world of international business, it’s sometimes useful to think thematically about how we approach our roles. As the general counsel of Holland America Line, a leading cruise line, three themes emerge when I think about the challenges arising from the multiple and often overlapping legal regimes in which we conduct our business. First, corporate counsel must understand the business. We have to wrap our minds around the business as it now stands, and we also have to understand new directions that the business may take. For example, on a daily basis our primary operational obligation is to keep our passengers and our crew safe, and our mission is to provide a unique experience to every guest. As legal issues arise in real time onboard our ships, both objectives must be taken into consideration when determining the legal solution in whatever jurisdiction we may find ourselves. Just as importantly, our basic business model may change over time and we need to understand those changes. For example, in some jurisdictions -- the European Union and Australia are examples -- we are now moving toward direct sales instead of operating through general agents. This means deploying personnel and targeting our marketing efforts in new jurisdictions. And, of course, such changes will include a variety of new legal and compliance challenges. Second, we must focus on legal trends. Not that long ago, cruise lines could operate on the basis of U.S. legal requirements and feel comfortable that they were achieving substantial compliance internationally. Those days are over. Now, with more legal regimes taking steps to regulate our industry—the European Union and its member states spring to mind—we have to watch the direction of legal developments across the world. When you consider the emerging and disparate legal requirements in the areas of data protection/privacy and environmental regulation, for example, you can comprehend how important the direction of legal trends can be to our company. Third, we have to put ethics first. I mean that in two senses. We have to frontload ethical considerations in our decision-making process. And, we have to prioritize ethical considerations in our decisions. Why? In a world composed of myriad legal regimes that are constantly in flux, it is imperative that we always have an articulable, ethically grounded Kelly W. Clark Vice President and General Counsel Holland America Line Seattle, Washington explanation for every decision. We never know when our customers, regulators or stakeholders will ask tough questions on a variety of fronts. When our touchstone for decisions is ethical, we feel that we’re always ready to respond. And, more fundamentally, ethical decisions tend to be sound decisions. This is how our corporate legal function helps to maintain our company’s reputation for excellence in the complex legal world of the 21st century. “How do you reconcile increasing specialization in the law with a generalist’s perspective?” “Use guidelines to help achieve balance.” From Tyler Technologies’ inception in the late 1990s, I have sought to serve the company’s interest both as the chief legal officer and as a senior member of management. With the increasing specialization of law, I have to work hard to achieve a proper balance, and I’ve found that it helps to have in mind certain guidelines. First, I simply have to maintain a broad-based knowledge in law and other fields important to the business. To be effective, I not only have to render advice in areas in which I’m comfortable, but I also have to spot issues for experts elsewhere in the company or for outside counsel. Ultimately, I add value through knowledge and judgment, and development of a proper knowledge base takes continuing work. Second, our company’s core business and its business objectives have to be second nature to me. I must understand them implicitly, and together they must form the prism through which I view the myriad issues teed up to me on a daily basis. Third, sometimes it’s necessary to become expert in a non-legal field that is crucial to the job. For me, whether I’m negotiating contracts or handling an acquisition, it’s imperative that I know accounting rules applicable to the software industry. I doubt that any law school offers a course in software revenue recognition, but I couldn’t do my job without knowing that subject very well. Fourth, I embrace my role as a knowledge integrator across disparate fields and disciplines. The legal function gets inputs from many precincts within the organization, and the ability to synthesize and make sense of these inputs is of great value to the organization. Fifth, it’s always useful to play a role in setting reasonable expectations for the management team. H. Lynn Moore, Jr. Executive Vice President and General Counsel Tyler Technologies, Inc. Dallas, TX Sixth, I never forget that I’m the only member of the senior management team who has knowledge of the law. A special responsibility attaches to that role. Finally, any general counsel worth his or her salt will work hard at educating outside counsel on the company’s business and culture. I always want our outside counsel asking themselves the question, “What’s important to Tyler Technologies in light of its business objectives?” “How do you manage multiple customer and client cultures?” “In my business, the answer is: ‘Go East, my friend!’” As the general counsel of a U.S.-based public company with 80 percent of its business in Asia, I had to face up to the future soon after my appointment. To understand the culture at the customer interface, I would need to spend time in Asia. And that’s what I did. For a year, I lived and worked in Singapore, and my appreciation for customer and client cultures grew enormously. We’re well into a post-American world, to borrow a phrase from Fareed Zakaria. Although American principles are still influential, they seldom are dispositive outside our country. Moreover, for many U.S.-based companies, future growth will be from outside the United States. I want our legal function to be a favorable differentiator for Novellus, and that means our lawyers have to appreciate the distinct cultural lenses through which we and our company are viewed. To manage a global legal function, you literally have to walk around the planet. This is what “managing by walking around” means in the 21st century. We may provide legal services to our sales force by interacting with them directly or through our regional counsel, but the real action is not at the interface between lawyer and client. The real action is at the interface between client and customer. As corporate counsel, we simply must immerse ourselves in these culturally distinct customer interfaces around the world in order to understand them and indeed to understand our own business. The challenge doesn’t stop once you wrap your mind around different cultures. In fact, only then does the challenge become really interesting. Once you have some insight into distinct cultures, you must then allow that newly found knowledge to wash back over all of your Martin J. Collins Senior Vice President, General Counsel, and Chief Compliance Officer Novellus Systems, Inc. San Jose, California policies and processes. Re-architect them. Make them adaptable to the world of your company’s present and future. One more thing: Even if your company’s markets are more U.S.-bound than my own, you will almost certainly have personnel in the company thinking about emerging markets. Do you know who those people are? When’s the last time you had lunch with them? “How do you adapt to changing corporate governance requirements?” “Offer thoughtful counsel and establish legal priorities.” The large number of proposals for corporate governance reform now under consideration present challenges for companies and their legal counsel. Less than a decade after enactment of Sarbanes-Oxley, we’re back at it again. And the consequences of reform could be just as far-reaching. Consider just a few examples. In the wake of the financial services industry meltdown in late 2008, there are various efforts to rein in the risk appetite of companies by making boards of directors responsible for overseeing company “risk.” While there may be some merit in processes which more clearly highlight risk, I am not convinced that politicians will develop a manageable process. There is little or no attempt to define what is meant by risk or to acknowledge the reality that one size doesn’t fit all among industries’ tolerance for risk. It’s hard to imagine that these proposals won’t cause directors into risk avoidance strategies that are inimical to the ability of our corporations to compete in highly competitive global markets. It may or may not be fashionable to say, at least in Washington, but our capitalistic system depends upon our businesses embracing risk. We avoid it at our own peril. Another example involves the proposed elimination of broker discretionary votes for directors. In a variety of ways, this proposal would change the playing field. Yet there is little attempt among the proponents to address the predictable consequences of the change. Finally, reflect on the executive compensation proposals that are being bandied about. Clearly, any such proposals will be driven in part by a highly emotional and political backlash to events in and leading up to the financial collapse in 2008. There is little sign that the proposals will allow for careful thinking within companies on what compensation outcomes are in the John W. Holleran Senior Vice President, General Counsel, and Secretary Itron Inc. Liberty Lake, Washington best interests of the organization or that they will leave time for proper implementation. All that’s clear is that there may be a mad rush to implement new plans that comply with the new regulations at some risk to thoughtful discussions. From the standpoint of the legal function, as we position our companies for the onslaught of reform, there is no substitute for offering thoughtful counseling, establishing legal priorities, and allocating resources efficiently and in the client’s interest. “What’s next for financial services companies?” “Six priorities, starting with aggressively managing regulatory relationships.” For financial services companies as for other major players in the national and global economies, the last 18 months have been nothing short of epochal. We’ve been dipped into the cauldron of the deepest recession since World War II; the absence of meaningful M&A activity has brought exit strategies to a halt; credit losses have mounted to staggering levels; liquidity stress has been acute; and government has become a co-owner of major enterprises through its recapitalization efforts. At a conceptual level, boards and management have learned in this environment that enterprises that are not equipped to cope with change and are unwilling to address the fears of their stakeholders operate at a competitive deficit. For our industry, these are great lessons drawn from the Great Recession. But what are the priorities going forward? I see six for financial services companies, but they may have applicability beyond our industry. First, financial services companies must aggressively manage their regulatory relationships. Establishing high credibility with regulators is not a discretionary act. Second, liquidity and capital are key priorities for all financial institutions. It’s not hyperbole to say that it’s now all about liquidity and capital for the next several years. Third, it’s imperative that we manage our human resources so that we continue to attract and retain the best executive talent. The HR strategy must be comprehensive, and it must be geared toward finding and incenting the organization’s current and future leaders. Fourth, we have to rely on our great operators—the financial and operational experts that can achieve for our companies the optimal financial and operational performance. Fifth, we now know that we have to manage political risk by factoring it into business decisions. Optics matter, as does an accurate understanding of legislative headwinds. Christopher J. Zinski General Counsel PrivateBancorp, Inc. Chicago, Illinois Sixth, the shareholder rights movement is changing the paradigm of corporate governance. We have to learn to live and flourish in an environment in which corporate governance issues—for example, executive compensation, separation of the offices of board chair and CEO, and enterprise risk—consume enormous amounts of time and energy. With challenge, of course, comes opportunity, and a financial services company embracing these priorities will be positioned to take advantage of the opportunities as they present themselves. About K&L Gates With lawyers in 33 offices in Asia, Europe, the Middle East, and across the United States, K&L Gates is poised to help your organization achieve its global business objectives. We constantly strive to strengthen our relationships with our clients so that we can continue to be responsive to their business needs domestically and abroad. Thanks to this philosophy, in 2010 the BTI Consulting Group named K&L Gates one of the top 30 law firms in client service as compared with more than 500 other leading firms. To learn how we can help your organization succeed, please visit www.klgates.com. 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