Wednesday, January 18, 2017

"Why is our legal department growing faster than the rest of our company?!"

As in-house legal functions grow and add staff, sometimes the rate of their growth actually exceeds that of other, perhaps revenue-generating, functions or the company as a whole.  This leads executive teams, boards of directors and especially Chief Legal Officers and Chief Financial Officers to ask a perfectly reasonable question: why?

There are a few simple reasons that a corporate legal department could see rapid growth.  Occasionally a legal function is only created late in a company's life cycle.  In those situations, many legal needs have gone unmet for years.  There will be a great deal of catch up and clean up to do.  This will often require rapid and substantial hiring to create an effective legal function.

Sometimes a company is undergoing a unique set of changes, such as preparing for an initial public offering, acquiring other companies at a rapid pace or entering into a new business with significant regulatory or other legal-intensive implications.  These situations will also require growth in the legal department.

In my view, these are all "good" reasons for a legal function to grow.

But in many cases a legal function gets bigger because of more nuanced factors.  And that growth isn't always a good thing for the company.

As legal functions develop, a great deal of attention is paid to their skill sets, workload, responsiveness, tolerance for risk and personalities.  Not as much focus is afforded to two critical factors: First, whether those individuals in the legal function are the right people to be doing a certain piece of work.  Second, whether the timelines expected of the legal function are reasonable for the assigned projects given the cost.

As to the first factor, many established companies in particular have grown to like the skills that legal professionals bring to the table.  They are capable writers and communicators, team players and analytical thinkers.  But, even in-house, they are still expensive resources.  So, it's not always efficient to leverage lawyers to do work that can be done by other functions.  I have seen in-house legal professionals do everything from fill out order forms, put together responses to requests for proposals, pick up computers from departing employees, write press releases and set up meetings between sales teams and revenue recognition experts.  Having legal teams spend time on these activities may seem like they help the organization at the time, but they also increase costs substantially and cause legal functions to grow bigger.

The second factor also impacts legal department size and spend.  When requests presented to the legal function are consistently marked "urgent," legal functions need staff to respond appropriately.  Pushing back on aggressive timing isn't always comfortable or culturally accepted, especially by more junior legal staff who may not have visibility about whether a particular assignment is truly urgent for the company to succeed.  Yet, staffing will generally need to increase to satisfy widespread demands for projects to be completed "yesterday."  Experience and judgment are needed to solve these challenges.  It may be helpful to establish basic service level agreements to align expectations with a company's tolerance for legal expenses.

These more nuanced factors are not necessarily healthy drivers of legal department growth.  It's beneficial for General Counsels and their fellow executives to analyze the reasons for growth, what exactly their teams are being asked to do and whether the timelines they are working under are reasonable for the circumstances.

Monday, April 6, 2015

Five requirements of corporate culture for building an effective in-house legal function

In my nearly 20 years of corporate legal experience, I have built in-house legal functions, helped lead large, existing functions and yet also advised in-house lawyers as outside counsel. During this time, I have observed that the success of an in-house function will depend not just on the ability of the in-house legal professionals
running it (which is obvious), but also on the cultural receptivity to legal in the "host company."  As a result I have come to believe that there are five very important guidelines - prerequisites even - to ensure a corporate legal function's success.

The first is being very specific with respect to your job specification in terms of both qualifications and personality type.  Stick to that with conviction.  Is industry experience required?  What substantive areas of law are really arising on a regular basis?  That should be aligned with the ideal candidate's background. As far as personality type is concerned, consider that a spectrum exists with "forceful change agents" and "peacemaking cooperators" at the extremes - what type is best for your organization?  When ready to go find that right person, make sure you understand the difference between hunting and hiring.  It will drive the recruiting approach and likely determine whether you end up with a superstar or somebody who just needed a job.

The second requirement is to be very explicit, internally and externally, about what kind of role is being created when the legal department is launched. This is all part of good human resources practices in providing a candidate with a realistic job preview. There are basically two types of legal functions that get created with the first hire.  There is the best practices function and the...well, not best practices function.  In a best practices function, the candidate will have either a Chief Legal Officer or General Counsel title, will be a named executive officer and paid accordingly, will officially be part of the most senior executive team, will participate in all board meetings, will act as the company's lead decision maker on legal issues, will report directly to an engaged CEO and will have the authority to hire and fire outside legal vendors.  It is possible to create a legal function where these practices are not present. However, it's important to make sure that the candidate is acutely aware of the landscape so that expectations are not mismatched.  A great deal of confusion can be created when legal departments are established with some good practices but not all - this can create tension as the function tries to develop.

The third cultural requirement is to appreciate the need for a legal function to play a major role in developing a risk management philosophy for the entire corporation.  Many corporations evolve without any kind of risk management philosophy. This results in those companies being very aggressive in certain situations but skittish in others, without there being any rhyme or reason for these approaches.  This leads to unpredictable behavior that can frustrate investors, partners and employees.  An effective legal function will help the company develop a consistent and rational risk management approach that fits with the company's point in the corporate lifecycle.  Allow, encourage and expect your legal function to play this role.

The fourth need is to understand the impact that cynicism about the legal profession has on corporate America. Some of that cynicism is warranted. But some of it is not. The reluctance to engage "pricey and pedantic" transactional lawyers, for example, can create problems down the road when poor contracts turn into conflicts. This has a draining effect on the ability to maintain a cost effective and proactive function.  What's more, it can create a vicious cycle.  Companies that ignore or don't seek out legal advice because "those crazy lawyers are so cautious and expensive," will often end up only spending more money on legal services to reactively clean up messes.  Make sure your organization is really open to legal advice.

The fifth point is to ensure adequate resources and in fact require immediate hiring where the volume demands it. This also helps avoid chicken and egg situations.  For instance, a legal function won't have any internal credibility if it can't responsively review commercial contracts.  But, it can't be responsive if it's not adequately staffed.

Sunday, February 16, 2014

How a ton of good luck can be bad and a little bad luck can be good

In his blog he writes about an experience that, had he handled differently, might well have caused him to go jail.  Having the opportunity to hire a star CFO at one of his companies, he jumped at the chance.  The CFO recommended a change to the company’s stock option practices that could potentially have benefited the employees. 

But Horowitz was already a believer in a strong legal function and had his General Counsel review the suggestion.  The General Counsel believed that the practice was illegal and recommended against it.   Horowitz followed his General Counsel’s advice.  Years later, the same CFO would be accused of wrongdoing by the SEC for stock option granting practices at a prior company.  She was asked to leave the Horowitz company and ultimately did spend a few months in jail.  It sounded like a difficult period for Horowitz and one that left a long term impression.

This challenging episode is a great reminder to me that, in Corporate America, a little bit of bad luck can be good and a ton of good luck can be bad.  This seems counter intuitive at first so I will explain.

A few rough seas of the sort Horowitz experienced in his introduction to creative stock option practices can be a valuable learning lesson.  He had enough bad luck to forever remember the lesson but not so much as to sink his company.  I imagine that today Horowitz feels even more strongly that an effective General Counsel will report to the CEO.  That creative accounting isn’t necessarily a good thing.  And that lawyers who simply speak the truth and are heard are an executive’s best protection against going to jail.    

By contrast, companies, executives and boards that have had only good luck tend to lack these war stories.  They don’t have the tough learning experiences to draw upon.  It’s not so much that they are certain to be more reckless, but rather that they may not consider the importance of compliance or ever think about the events that could destroy their businesses or careers.  That is, all the good luck is a bad thing – it exposes their blind spots and allows them to become tolerant of sloppiness that hasn’t (yet) caused major problems.  As a result, a sort of quiet bliss makes them more susceptible to big failures that more seasoned, perhaps hardened, business people will know how to avoid.

Tuesday, February 26, 2013

Spin only making Yahoo's bad new policy worse

Yahoo's latest move to try to shake itself out of the doldrums is an edict that bans telecommuting.  The new policy and the memo that dictates it to employees are both pretty bad.

The memo says, "Speed and quality are often sacrificed when we work from home."  The solution is not working smarter, harder, more efficiently or with better use of technology, but rather just being "physically together."  No data is provided as to how being "present in our offices" will solve anything.  No explanation of the pros and cons of telecommuting is given.  The memo is a superficial collection of flowery phrases offered up in the hope that they will be accepted as fact.

What's really needed in these situations is policy that recognizes the modern way in which global technology work gets done and finds the right balance among a wide variety of activities.  Technology company leaders should want to encourage people to put in the hours necessary to do great work, wherever they might be.  In-office or out-of-office is a secondary outcome.  In-office work can help in collaboration, team building and communication-related activities.  Out-of-office work, away from meetings and other office attractions (food, ping pong and friends), can facilitate efficient consideration of product strategy, long term planning and development of...well, better core human resources policies.

But where the "no working from home" policy goes from bad to just plain weird is some of the spin that has accompanied it.  One recent report provided extensive justifications on the new policy from someone close to the issue, presumably an insider.   This source suggests that the policy came about because some employees were poor performers and "not productive."  These people will theoretically quit rather than comply with the new policy, which would be a good thing for the organization.  So, the source suggests, CEO Marissa Mayer sees this as "a layoff that's not a layoff."

For this, the source suggests that Mayer "turned out to have a lot of courage.  She's dealing with problems no one wanted to deal with before."

This makes no sense.  Yahoo seems to be having a problem with productivity and with management.  If some remote employees are not productive and yet it takes a complete ban on remote work as the solution, then it's clear that those employees and their managers were poor performers.  What's more, there is nothing courageous about using a broad and rigid policy to achieve "a layoff that's not a layoff."  It's much more passive-aggressive than courageous.  And more passive-aggressive leadership is the last thing corporate America needs.

Saturday, December 22, 2012

Why the TechForward victory over Best Buy is so glorious

In some respects, Best Buy's theft of trade secrets from startup TechForward is a fairly routine matter.  Small company pitches idea to large company.  Large company signs an NDA.  But large company likes the idea so much that it basically makes the idea (and the methodology behind it) its own.

The context around the resulting litigation, however, described in a blog post by a venture capitalist whose firm funded TechForward, is fascinating.  For me, it's also uplifting.  "Send your business plans to these guys" inspiring, in fact.  And not merely because TechForward won the lawsuit.

First and foremost, the venture firm, First Round Capital, really understands the importance of the little guy in the technology world.  In deciding to fund a lawsuit against Best Buy, where many would have just moved on, First Round was speaking with actions, not just words, about sticking up for the entrepreneur.  First Round partner Josh Kopelman wrote, "If big companies believe they can violate agreements with immunity because a startup can't afford to sue them, it is bad news for every startup in the ecosystem."

There are a couple other great learnings from this story.  NDAs, those throwaway documents so many business people sign without reading or don't bother to sign at all, can really become a critical agreement that governs the course of a relationship - always make sure you get them reviewed by counsel and signed.  Finally, the litigators that some business people like to point to as "the problem" were, in this case, the solution - while the Best Buy business people were crass and manipulative, the TechForward lawyers saw that justice was done.

Congratulations to the teams at TechForward and First Round Capital.  And thank you, from all of us who work with emerging technology companies.

Saturday, August 11, 2012

Finally, mainstream media provides a balanced piece on copyright

My experience is that the mainstream media struggles to explain legal issues.  Often, in trying to simplify complex concepts, the meat gets trimmed beyond recognition.  Other times the piece becomes an editorial, riding some populist wave that uses a famous case merely as a backdrop.

A recent article in Fortune magazine, however, hits the mark, providing a balanced perspective on the evolution of file sharing services, the related copyright law and what it all means.

My favorite part is actually a sidebar that clearly illustrates that the latest iteration of file sharing, the so-called cyberlockers, is not without victims.  The common argument in favor of file sharing is that the artists will keep producing artistic works, but will find other ways to make money.  The sidebar illustrates that this isn't always true.  An independent filmmaker named Ellen Seidler went into debt to make a movie, only to see it pirated in over 56,000 locations.  Seidler said she "probably won't" make another movie in the wake of that experience.

Some may say that there is no real need to pay for music, for example, when bands make so much money from playing live.  But people became fans of those bands that can fill big stadiums through conventional methods of music distribution.  They paid money for CDs or MP3s, encouraging the bands to make more music, then tour.

Enjoy the articles.  Then go buy a DVD of your favorite movie out of gratitude that the file sharing phenomenon didn't prevent the movie from being made.

Sunday, March 18, 2012

Fenwick's valuable Venture Capital Survey celebrates 10 years

"What is market?"

"What is the trend?"

These two questions are heard frequently in Silicon Valley, but there is too often a dearth of local, original data to answer either one.  For 10 years now, Silicon Valley technology law firm Fenwick & West has been addressing this need in the area of venture financings.

A hands-on team at the firm publishes an in-depth quarterly analysis known as the Venture Capital Survey.  The latest "anniversary edition" was released a few weeks ago for the fourth quarter of 2011 and is available on Fenwick's web-site here.

I read this report every quarter for a few reasons.  First, the amount of data analyzed by the survey is remarkable.  In the most recent survey, 117 companies that reported raising money in the fourth quarter of 2011 were analyzed.  The financings are examined not just for valuation but for some of the key provisions that were used, such as liquidation preferences and anti-dilution features.

Second, the results have a strong local flavor.  The analysis covers Silicon Valley-headquartered companies, giving it a much more relevant feel for our ecosystem than national statistics.

Third, the work is unique and original.  Much of the research on financing terms involves manual labor.  About 10 Fenwick professionals are involved in putting the report together every quarter.

Finally, the authors draw many interesting conclusions that help put the mountains of data into useful context about trends.  In the latest edition, the authors state that some industries, such as Internet/digital media and software, are concerned about a bubble, while others, such as cleantech and life science, are having a tougher time.  Against this backdrop, the detailed tables reveal that in the fourth quarter 80% of the software industry financings were up rounds, but only 29% of the cleantech transactions were up rounds.

To join me in subscribing to Fenwick's Venture Capital Survey, click here.