How the CFO and General Counsel Can Partner More Effectively
Commentators and researchers have focused on the crucial role of the CEO in leading effective corporate action to promote high performance, high integrity, and sound risk management. What receives far less attention is that, more and more in our increasingly complex, volatile, and fully-globalized business world, the effectiveness of such action depends on a powerful partnership between the Chief Financial Officer (CFO) and the General Counsel (GC). This critical alliance needs and deserves much greater analysis and application.
The CFO-GC alliance has always been important because the finance function and the legal function are truly the nervous system of the corporation—sending critical signals to all parts of the company about the accuracy of the financials and compliance with law. But, the integration of finance and legal is even more consequential today because what the corporation can and cannot do across the globe is affected directly not just by financial and commercial issues which the CFO analyzes but, increasingly, by evolving “business and society” issues which the General Counsel and the corporate law department must address. These issues include legislation, regulation, litigation, enforcement, investigations, geopolitical risk, demands for ethical actions, and public criticism, affecting all the functions of the corporation in their interaction with all levels of global governments (central, regional, local). Especially in light of ever-increasing variety and intensity of stakeholder demands on the corporation, these business and society issues, under the purview of the GC, must be closely fused with the CFO’s financial and commercial analysis to serve the CEO and top business leaders when they make and implement core strategic and operational decisions.
Indeed, due to increased commercial complexity in global companies as well as the growing impact of business and society issues, the expertise, quality, breadth, power, and compensation of the General Counsel have increased dramatically in recent decades. At many firms, the GC has replaced the law firm senior partner as primary CEO counselor, becoming a core member of top management and participating in decisions and actions not just about law but also about business. Also, the GC now often leads units beyond the legal department, such as public affairs, taxes, and environment. In more and more global companies, the CEO, directors and other key stakeholders see the GC as having importance and stature comparable to the Chief Financial Officer. It is primarily the GC who must navigate complex and fast-changing law, regulation, litigation, public policy, politics, media and interest group pressures across the globe, often in a public, outward-facing role as negotiator, spokesman or representative. As a result, the optimal CFO-GC alliance is now much more like a peer relationship, jointly coordinating and overseeing fundamental corporate issues of performance, compliance, ethics, risk and governance, and organization. Here is a brief discussion of how the alliance works in key areas:
Performance. Financial, legal, ethical and risk perspectives obviously need to be integrated when the corporation is making decisions about new deals, about new types of customers, new geographic markets, new technologies and new products. For example, the financial and legal staffs are bound at the hip on the various phases of mergers and acquisitions, from the memorandum of understanding, to representations and warranties, to due diligence, to definitive agreement, to closing and then to deal integration. On major deals, the GC and CFO are strong partners on a personal level because the robust integration of their complementary views on key issues can spell the difference between success and failure, both in closing and in subsequent performance. For example, failure to identify a serious accounting or environmental failure of the target company in due diligence can lead to a major criminal or civil liability for the acquiring company after the deal is sealed.
Compliance. Although the CEO and division heads should, in my view, be the ultimate leaders of the corporate compliance program, the CFO and GC jointly share responsibility for actually designing and implementing the systems and processes that ensure adherence to formal legal and financial rules. Compliance always has been and always will be a basic corporate responsibility, and any such program must be comprised of three essential elements: protection, detection, and response. What’s radically changed in recent years is complexity. Responding effectively to this means the CFO and GC, working with Compliance and Risk, together develop a robust method of process mapping, risk assessment, and risk mitigation relating to those formal rules that apply to all corporate functions—e.g. sales, marketing, manufacturing, intellectual property—in all business units in all geographies. Ideally, the legal and financial staffs together conduct compliance reviews which report up to the CEO, CFO, and GC, and also act as core investigators in the event of a major compliance failure like bribery or accounting fraud in a major overseas division.
Ethics. In exemplary corporations, the CFO and GC jointly staff the systematic processes the CEO and top business leaders use in voluntarily adopting vital global standards for the corporation, which go beyond what the formal rules require. Once the company establishes these ethical positions on key issues—whether on global sourcing or greenhouse gas reduction, or extra consumer protections—they are implemented systematically just like formal, mandated rules. In my experience at GE, what worked best is to have the CFO and GC jointly identify a range of possible ethical issues for consideration; help select a salient sub-set for analysis; and then develop options to guide the ultimate decision-making process by the CEO and the board of directors. Deciding among those options involves a combination of considerations both prudential (enlightened self-interest of the company) and moral (rights of—duties to—others) which vary with context. Decisions about not doing business in a corrupt nation are very different than those considering whether to voluntarily reduce the corporation’s emission of greenhouse gases. And then, of course, there are costs. The CFO and GC determine together whether the cost of a particular voluntary global standard is amenable to hard financial analysis (e.g. cost of reducing pollution) or if it turns on a broad-gauged judgment about corporate reputation without financial precision (benefits of imposing labor standards on third party suppliers).
Risk. The CFO and GC are key in developing together, with business leaders and other staff officers, safety processes, management practices, and a safety culture to handle both economic and non-economic risks beyond legal and ethical threats. One key to this partnership is identifying risk priorities—whether economic (e.g. leverage and liquidity risk, operational and technology missteps, or macroeconomic threats) or non-economic (e.g. injuries to third parties from company processes/products, security and safety, and country/geopolitical risk). A second key dimension is justifying the costs of instituting prevention and response steps for risk events that may not happen—especially for the vexing issue of low probability/high impact catastrophic threats. The CFO and GC can work up pro forma cost scenarios and also look to analogous disasters (e.g. the Challenger explosion, Hurricane Katrina, the Siemens bribery scandal, BP gulf explosion) to explain the types of adverse effects/costs which could happen and which investments in prevention and response make sense in attempting to avoid or mitigate the disaster.
Finally, and most importantly, the CFO and GC must support each other as “statespersons” in a corporation. This means asking first whether a corporate action complies with legal and financial rules, but asking last whether an action is “right” in terms of the corporation’s mission of high performance with high integrity and sound risk management. To be effective statespersons, the CFO and GC must manage a dynamic tension: acting as “partners” to the board of directors, the CEO and top business leaders, but also, ultimately, as “guardians” of the corporation. And they must work together to help create a pervasive culture of integrity under CEO direction. Business pressures, practices, attitudes, and internal politics (a courtier’s desire to please the CEO) can create obstacles to the statesperson’s role, the partner-guardian fusion, and the integrity culture.
A strong, respectful, mutually-supportive partnership between the Chief Financial Officer and the General Counsel is one critical way to overcome these obstacles. More broadly, that alliance has become an imperative, helping global corporations to be more responsive, resilient, and effective in a fast-changing and ever more complicated world where commercial and societal issues are intertwined.