Cisco's System

In a drab little corner of Dilbert-land, Mark Chandler’s office at Cisco Systems Inc. radiates about a candle watt of clout. Sans mahogany desk, original Rothkos or Persian rugs, Chandler’s office is a festival of Formica — more lowly computer programmer than Silicon Valley power lawyer. Yet that’s exactly what Chandler is. The recently minted general counsel of San Jose, Calif.-based Cisco, Chandler is one of the few attorneys who with a single e-mail can send shudders through the likes of Brobeck, Phleger & Harrison or Cooley Godward. He has control over one of the biggest budgets for outside counsel in the Valley and — despite the economic downturn — handles legal matters for one of the most potent technology dealmakers in the country. But Chandler has ascended to Cisco’s top legal job at a critical moment in the Internet hardware maker’s 18-year history. The company has seen its stock value brutalized by the Nasdaq’s decline — taking it from a market cap in excess of $584 billion in March 2000 to $104 billion today. That slide has weakened Cisco’s ability to buy other companies through stock deals — its primary way of snapping up smaller competitors. Cisco’s also battling sluggish sales caused by a glut of high-tech hardware, and it’s facing heavy competition from the resale market — which is flooded with Cisco’s own equipment. And then there’s Enron. The Texas corporation’s scandal-soaked collapse has been a 7.0 on the Valley’s legal Richter scale. Corporate counsel at many of the top tech players have been rethinking just about every aspect of financial reporting, disclosure and corporate governance. “It’s all Enron all the time around here,” said a top in-house lawyer at another high-profile technology company who spoke on the condition of anonymity. As Daniel Cooperman, general counsel of Oracle Corp., puts it: “I don’t recall in my entire professional career a period of two months where so many corporate governance issues and questions have been asked.” And by most accounts, it should be a big issue at Cisco. The company has long been the target of criticism from investors about the way it handles its books — from accusations that it hides the true costs of acquisitions to using stock options grants to score big tax breaks. In one case last year, Cisco made the unpopular move of writing off $2.2 billion in inventory. Investors sharply questioned the decision, saying they couldn’t fathom how so much equipment could suddenly become worthless. They also wanted assurances from Cisco that it wouldn’t count the sale of parts toward earnings at a later date. Nonetheless, the company did just that. “There’s a certain amount — in the investment community — of distrust and no one can give you chapter and verse what they’re doing wrong,” Robert Willens, a tax and accounting analyst at Lehman Brothers Inc., said of Cisco. “There’s just a feeling that there’s something going on that you can’t put your finger on. “The inventory write-off issue left a bad taste in everyone’s mouth,” Willens said. “I just don’t know what it would take to get them out of the doghouse.” Willens was quick to add that he believes much of the criticism is unfair, because the company is following generally accepted accounting practices. But the accounting earthquake seems to be causing barely a tremor at Cisco. Even though lawyers at other tech giants are in a tizzy, Chandler said he’s not even working on the issue — that’s up to Cisco’s chief financial officer, Larry Carter, he said. And even if he was handling such matters, Chandler says he’s confident that Cisco is absolutely in the clear. “In my experience, Cisco has always used transparent [financials] and that makes my job very easy,” Chandler said. Chandler’s sanguine attitude may come as a surprise to his Valley peers. “I would be surprised if any general counsel isn’t spending a great deal of time on the issue,” Cooperman said. “It’s a watershed event for us all.” And for some, the lack of focus on the issue highlights one of the biggest criticisms of Cisco’s legal department: that it’s too reactive. Or as one high-ranking lawyer at a similarly sized tech company described Cisco: “They deal with issues as they come up. They don’t anticipate issues.” For many years, Cisco clearly didn’t have much of a choice. The company — like most in Silicon Valley — was simply flying by the seat of its pants, going from nowhere to $22.2 billion in annual sales in the span of a decade. In the legal department, fast growth meant a heavy reliance on outside lawyers. Cisco has traditionally expected more from its outside counsel — primarily Brobeck — than other tech companies. “We never had the human resources we needed; the company was in hyper growth mode,” said Daniel Scheinman, Cisco’s vice president of corporate development who served for many years as general counsel. “We had no choice but to bet on technology.” Scheinman, who was succeeded by Chandler in October, came to Cisco in 1992 and built the legal department from 15 lawyers to nearly 80. He also developed the company’s tight relationship with Brobeck. He’s close to Tower Snow Jr., a partner and the firm’s former chairman, and recruited Edward Leonard, a partner, to make Cisco a top priority at San Francisco-based Brobeck. Leonard has since left Brobeck. During Scheinman’s tenure, the company went on one of the biggest buying sprees in corporate history. In 1999 and 2000, for example, Cisco purchased 41 companies. An acquisition is actually what brought Chandler to Cisco. He was GC at StrataCom Inc. when Cisco bought it in 1996. And even though that would usually mean a lawyer would lose his job, Chandler was picked up by Cisco. He essentially created a position for himself overseas, managing legal operations for the company’s European operations. He hired lawyers and set up an intranet that enables lawyers to discuss the nuances of legal issues as they unfold worldwide and puts them in direct contact with one another. At one point, Scheinman said Chandler discovered one individual was devoted to tracking documents through Europe and ensuring they were signed by all the parties involved. He put that person to work doing something more meaningful and installed a computerized tracking system, Scheinman said. “He became very passionate about building applications and not just hiring people to solve problems,” Scheinman said. Scheinman was impressed by the innovation and tapped Chandler as his heir apparent. The move up Cisco’s ladder is the culmination of a long march through Silicon Valley for Chandler. Before Cisco and StrataCom, Chandler spent six years as general counsel of Maxtor Corp. and was also in corporate marketing at Siemens Corp. for two years. “I like building an organization that’s directly tied into the company’s business, and you can’t do that within a [private law] firm,” Chandler said. The 45-year-old Stanford Law School graduate is a big cheerleader for Cisco, trumpeting the company’s place in history as one of the key forces behind the growth of the Internet. As he sees it, the in-house team should focus on what’s most important to the company — aiding product development and sales. Time-consuming specialties, like litigation and mergers and acquisitions, along with less crucial issues — like employment matters — should go to outside counsel. Chandler’s focus has tended to be on operational issues. He devotes a lot of energy to maintaining an Internet-based legal repository that helps the company’s managers generate standardized legal documents. The system is also designed to help in-house counsel with their own legal questions. Chandler said he is also working on staff retention. He manages the equivalent of a midsize law firm, with 80 lawyers and 35 nonlawyers worldwide who oversee the company’s intellectual property and licensing transactions. “I have an incredible team of people working in this organization, putting in long hours, and they need to feel as an organization that I care about them,” said Chandler, who estimates that 40 percent of his time is spent on dealing “with issues on how to make people productive and happy.” Chandler also has to manage the relationship with outside counsel, and in Cisco’s case, that can mean working with up to 20 different law firms, including players like Palo Alto, Calif.’s Cooley Godward — which handles a number of patent issues — and New York’s Weil, Gotshal & Manges, which picks up IP litigation work. The most prominent relationship, though, is with Brobeck. Cisco is the firm’s largest client, and at any given time, some 50 Brobeck lawyers are working on Cisco-related matters, Snow said. That number was higher in 1999 and 2000, when Cisco was in the midst of its buying spree, he said. Chandler, however, makes it clear that he’ll be opening the door for other law firms to bid on work, primarily outside the San Francisco Bay Area. “I anticipate we will be doing more of that. Cost pressures are increasing,” Chandler said. “Everybody is looking to save money in the current economic environment. It’s a chance for us to meet different lawyers and get a sense of different firms’ capabilities. “The traditional law firm billing model is the last vestige of the medieval guild system to survive intact. And it’s going to change,” Chandler said. “Firms should be marketing to me on the efficiency of their operations and transparency of their billing.” While comments like that are bound to scare firm managers, Brobeck’s long history with Cisco continues to give it a leg up on the competition. Nevertheless, a number of Valley lawyers say ties with the firm have suffered because of the disappearance of key players who developed the relationship. Therese Mrozek, a partner who replaced Leonard in managing the Cisco-Brobeck relationship through the late ’90s, has left the firm. Chandler says outside criticism that Cisco needs to be more proactive in handling potential legal problems is off base. He contends streamlining internal operations and improving staff morale as well as the company’s relationship with outside counsel will give him more time to deal with challenges the company may face. He counts trade, government regulation and general litigation among those issues. But he repeats that an Enron-style accounting debacle is not in the cards. “Companies that have very complex financial transactions and complex corporate structures,” he said, “are going to have issues that Cisco just doesn’t have.”