Set the Gold Standard

19 November 2010 Scott Garrett

The significance of a chief legal officer to a company demands a recruitment process that is thorough and exacting. Scott Garrett, associate general counsel at AO Smith, highlights the processes and questions that CEOs should consider when appointing a CLO.

When choosing a chief legal officer (CLO), a company's executive team has much to consider. While these considerations are already known to many seasoned CEOs, it is still a good idea to emphasise the need to clarify the methodology used in the decision-making process and define what is expected from a CLO. Once the job requirements and goals have been defined, executives can embark on the succession planning process and find the right candidate.

The CLO is a core member of the executive leadership team, not least because most of the issues that have a significant impact on an organisation's financial records and reputation often emerge through regulatory or legal issues (all overseen and frequently managed by the CLO's staff). Events that present an opportunity for increased risk, the spending of money (outside legal fees or fines, judgments and settlements) or managing media coverage (print, television and web) often require input from the CLO.

By analysing an organisation's legal needs, and the legal department's function, the CLO selection process will identify the best candidate and drive credibility with the board of directors or key investors.

 When considering a CLO's qualities, the CEO should discuss his or her desires with the senior executive team to build consensus about the skills the CLO should have, and why those skills are important to achieving the enterprise's goals.

This process is an opportunity to improve the status quo. CEOs may also want to use this time to review the executive team structure to ensure that the CLO is appropriately seated at a high level within the organisation. If the CLO is not visible as a senior executive within the organisation, with clear support from the CEO, it will be difficult to drive important programmes to reduce risk.

Hit the ground running

The CLO selection strategy and process is important because the transaction costs of selecting the wrong person can be high, such as compensation packages, relocation costs, lost management time and potentially enhanced enterprise risk. Time should be taken to review legal staffing levels, budgets and the types of matters and risks managed by the legal department.

What is the legal department spending most of its resources on? What are the core areas of focus, risk and expense? By answering these questions, the CEO will be better equipped to find a CLO that meets the board's expectations and shares the vision for the organisation, while assisting in executing common goals to deliver maximum shareholder and investor value.

This analysis will highlight whether a subject matter expert is needed, or a person who is more of a generalist who can spot issues, manage people and execute projects to reach goals. Smaller legal departments (less than ten lawyers) often have a subject matter expert, such as an SEC lawyer or an intellectual property lawyer, who may be qualified to manage the specialised legal issues facing the organisation. Larger legal departments face a more diverse set of issues that require more of a generalist, who also has good management skills.

There are many different considerations that impact a CLO's selection. Some of these considerations include:

  • Public or private company.

Does the CLO need specialised expertise in public filings and board governance matters or the ability to manage others who have this expertise?

  • Size of organisation.

Does the workforce require a legal department to manage transactions and activities of multiple employees? Who will lead the legal department?

  • Global presence.
  • Does the CLO need to manage staff in various global locations? Does the candidate have the gravitas to manage issues involving other executives in various locations? Are foreign language skills needed?
  • Centralised/focused versus diversified business model.

Does the company have a need for specialised product knowledge or does it have a diversified product line requiring a more generalist approach to the management of legal affairs?

  • Heavily regulated business.

Does the company need a subject matter expert to deal with narrow yet frequently recurring issues in a highly regulated field, or an executive who has broad experience of managing a variety of issues?

  • Volume and costs of litigation.

Are the costs of litigation high, thereby requiring expertise in managing these costs? Does it make sense to place management with a CLO who has no experience managing an area that causes the most expense to a company?

  • Size of legal department.

Does the company require a seasoned manager who has vision and project leadership skills as opposed to a pacesetter or subject matter expert with a more narrow focus?

  • Long-term versus short-term company growth strategy.

Does the enterprise's long-range plans involve growth or downsizing, thereby requiring different skill sets from the CLO?

  • New executive staff versus existing team.

Will the CEO bring in a team of leaders as opposed to trying to operate under the current framework of executives? Will the CEO be more effective by having a hand-picked team in place?

Investing time gathering data on these topics will give greater insight into the issues and challenges affecting a company, and help in finding the best person for the role.

Leader of the pack

Emerging markets and aggressive regulatory/litigation environments also emphasise the need for a CLO that can deliver results. As part of the selection process, a reputable executive search firm can help.

"The CLO is a core member of the executive leadership team, not least because most of the issues that have a significant impact on an organisation's financial records and reputation often emerge through regulatory or legal issues."

Many companies also use an executive psychologist consulting firm to evaluate candidates. Finding the right talent for the organisation should include some objective components and an evaluation of internal and external candidates.

Not only will the CLO need the professional experience to succeed in the role, he or she will also need the personal characteristics needed to lead a department and effectively communicate upwards to the executive team, the board of directors, investors and, in some cases, the media. 

The role needs someone able to develop consensus for projects at all levels of the organisation. Examples of critical departments that impact regulatory and legal issues include environmental health and safety, manufacturing, engineering and human resources. 

While the CLO, once in place, will have the ability to shape the structure of the legal department, it is still important to examine the ‘as is' structure to understand how things have been managed previously.

Legal departments are service providers whose clients are constantly evolving in an ever-changing global economy. CEOs should challenge the current legal management team to articulate the rationale and basis for the current structure. What metrics were used to evaluate the appropriateness of the size of the existing legal department? Increased spending in the legal department, under the leadership of a seasoned manager who delivers tangible results, often leads to a reduction in long-term expenses, risk and liability.

Under-investing in legal department resources can lead to excessive reliance on outside vendors and increased expense and risk. Moreover, an understaffed department is always trying to catch-up with the demands from clients or reacting to external pressures. As a result, there is less time to identify future opportunities and execute projects designed to improve processes and reduce risk over the long term.

At the finish line

The CLO candidate should have experience executing numerous process improvement projects that require support or investment from across the business. The candidate should also be able to demonstrate success in meeting goals and delivering valuable results to an organisation.

When a CLO is engaged, and supports investment in the legal department, there is usually a clear reduction in legal liability. In conclusion, when approaching the recruitment of a CLO, the CEO should keep in mind the following questions:

  • What qualities make the most effective CLO?
  • What qualifications should the CLO have and why?
  • What criteria or metrics are utilised when selecting a CLO?
  • If the largest percentage of the legal budget is tied to risk-based events, should the company hire a subject matter expert who knows this area?
  • What kind of leader/manager is suitable and what methodology will identify them?

CLOs are often faced with challenging, time-sensitive and risk-oriented issues. They need to be able to react quickly and make decisions or recommendations based on incomplete or competing facts. They cannot suffer from ‘analysis paralysis.'

By trying to answer some of the questions presented above, the CLO search will result in the best fit for an organisation.

The opinions expressed in this article are those solely of the author unless attributed to another source.