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Editor’s note: Texas Lawyer recently brought together six ranking in-house lawyers at energy companies based in Texas at a roundtable discussion, where they talked about how their jobs have changed in the post-Sept. 11 and post-Enron world. It’s no longer business as usual, with the downfall of Houston’s Enron Corp., once a high-flying energy trading company, having the most impact on the legal function at the energy companies. The lawyers talked about how they are paying more attention to ethical issues, more attention to what their companies disclose in securities filings, and more attention to board oversight. And while the deals business has been down in recent months, the in-house lawyers say due diligence is more important than ever. They also talked about how Enron’s troubles may change the relationship between lawyers who work at a company and the company’s outside legal and accounting advisers. The discussion, held Feb. 25 at Enron Field in Houston, appears below, edited for length and style. Brenda Sapino Jeffreys, senior reporter, Texas Lawyer: Briefly tell us how you got to your job and a little bit about your career path and your legal department. Neal Sutton, senior vice president, administration, general counsel and secretary, Smith International Inc.: I started in private practice in Houston in 1972; and after doing that for five years, went to work for a company [that] … is no longer around. … [It] was bought by Cooper Industries in 1989, and I spent a year there and went national. Our legal function is a little unusual. We have four … separate business units that have some separate administrative functions, but we provide some of the administrative functions, including a law department on a shared-services basis. … We have 13 lawyers in the various business units. Our business is primarily international right now; probably 60 percent of our business is outside of the United States, about 40 percent inside the United States. We’re about a $3.5 million oil services company. Jeff Steen, general counsel, North America, Schlumberger Oilfield Services: Schlumberger … is a very international company that has lawyers spread all over the world. I think we have 128 lawyers currently spread out in 47 countries. My duties are for North America, which is Mexico, U.S. and Canada. We have the world divided in four geomarkets similar to North America: South America, Europe/Russia, South Africa and Far East. And each of the general counsels in those four regions has a team that ranges in size from 10 to 20 lawyers, depending upon the particular needs at the time. … But my team in North America consists of lawyers in Mexico, Canada and in the U.S. based here in Houston, or in Sugar Land, and range in size from as many as 20 to down to as few as 11. … I grew up in Cuero [, Texas,] attended Texas A&M University and South Texas College of Law. After Texas A&M, I was involved in the political arena, having run for the Texas Legislature at the ripe age of 22. It was good for Texas and good for me … that I lost, I think. Then I went to Washington for three years and worked for Sen. John Glenn. … [Then I] came back and went to law school. … Scott Rozzell, executive vice president and general counsel, Reliant Energy Delivery Group: … I graduated from the University of Texas law school in 1975 and went to work for Baker Botts, stayed there for 26 years. During the last 20 years of my stay at Baker Botts, my principal client was first Houston Lighting & Power Co., then Houston Industries, then Reliant Energy. And when Reliant Energy announced its intention to divide its company into two separate parts, one regulated company and one unregulated company, I came over from Baker Botts to take on the general counsel’s role to the regulated company, which will be, once we finally get it approved, called CenterPoint Energy. And I started in that capacity a little under a year ago. … We have 25 lawyers who are engaged in the regulatory practice, most of whom are located in Houston, but a few have been located in our business units around the country. CenterPoint Energy will own the transmission and distribution component of what used to be Houston Lighting & Power Co., which, as many of you know, has been divided pursuant to state law into a generation company and transmission and distribution company and a retail electric provider. And then we also own two interstate pipelines … and then local gas distribution companies … in six states. … Rick Plaeger, vice president and general counsel, Burlington Resources: Burlington is the fourth-largest producer of natural gas in North America. … We’re not a household word because we don’t retail-market, but we are very serious about the future of natural gas, particularly as a fuel source in the United States [so we] can become less dependent on foreign sources. I was born in New Orleans. I went to Louisiana State University and clerked for [a] federal [judge]. … I [joined a firm] and one of my clients, LL&E [Louisiana Land & Exploration Co.], hired me to form an in-house law department when I was with [the firm] after about 10 years. It was in 1997 that … I was very involved in [the] negotiations [for the] … merger of LL&E and the Burlington … [and I was asked] to move to Houston in a senior role [with Burlington]. And after six months here, [I was] made … general counsel. … We have 20 attorneys worldwide … an international group and a domestic group. The international group is located in London, and also some of the international lawyers are here in Houston. For the domestic group, they’re located in our various domestic offices around the United States, and we now have our Calgary office, where we have three lawyers. And in Houston, we have most of our specialists with respect to securities laws, human resources, environmental health and safety. Keith Fullenweider, senior vice president and deputy general counsel, Dynegy Inc.: … I was a partner in Vinson & Elkins. Dynegy was a very good client for a number of years, and I joined the legal department there in September. … Dynegy is a physical asset based on power and gas and big stream assets. We also are the leading marketer of trade of gas, power and coal and have … a utility subsidiary in central Illinois, and our recently acquired pipeline system that is subject to a right of Enron to repurchase at the end of June. My background is: I’m a native of Houston. Grew up here, went to law school at the University of Texas [School of Law] and joined Vinson & Elkins in the corporate group upon graduation from UT. Brent Bailey, senior vice president and general counsel – energy services, Duke Energy: I’ve been in the law practice about 19 years now, approximately half of which were in local law firms here. … I went in-house with Enron in ’93, worked for a company called Enron Capital Trade, which morphed into Enron North America, which became Enron Wholesale Services. I’m not sure what they call it this week. But I’m very proud of my days there. … I left in 1998, and basically Duke made me an offer to become general counsel for their fledgling power development group at the time, which was called Duke Energy Power Services, now known as Duke Energy North America. I was in that role for three years until last September, when I succeeded to the role of senior vice president, general counsel to the energy services group, which essentially has responsibility for all of unregulated gas and power activities worldwide. Duke’s legal department is largely set up like Dynegy’s and Smith’s in that we’re mainly decentralized. We have about 70 attorneys spread out all over the world with probably half of them here in Houston, another third or so probably in Charlotte, [N.C.], which is where our home office is, and then the rest spread out internationally and then some in Denver. TROUBLING TIMES Jeffreys: We’re now living in a post-Sept. 11, post-Enron world, and I’m wondering what it is that you’re doing differently today that you wouldn’t have been doing six months ago? How are you running your legal departments differently? What are you looking at or what is different today? Plaeger: One of the things that I’ve tried to emphasize to everyone in the law department is that we, as a law department, have a function within the organization of making sure that we not only comply with all the legal requirements but also do our business in a very ethical way. And I’ve told people that one of the important functions that a lawyer has is to try to bring to the very senior levels of management any issues that they see, that they need to feel the confidence to be creative but also feel the confidence to raise issues when they believe that they may not be in the best interests of the company. I’ve tried to remind all the lawyers that their client is Burlington Resources, and we have people looking out for the best interest of the company and the shareholders. And [I] told them also, since I’m the chief compliance officer for the company, that it’s incredibly important for me to have information brought forward as quickly as possible so that we can make sure that we live by the values that we’ve instilled in Burlington and make sure, too, that the very senior levels of management know very quickly if there are concerns, that we can resolve those concerns in the way that we think is proper. … [W]e’ve tried to work very hard to … make sure that, in keeping with the recent FCC pronouncements and also with the public sentiment, that our financial statements are very transparent and very readable. We just filed our 10K two weeks ago, and that was one thing we worked very, very hard to [do - make] sure that … anybody that is reading those financial statements understands our business and understands the segments of our business, understands the risks that are involved in our business. Sutton: … [W]hat impacts us probably more than 9-11 is what happened with Enron … it’s just another example of how we really have to pay attention to the ethics … within the legal department and … within the business structure. … [I]t didn’t really change anything that we were doing so much as it re-emphasized some of the things that we were doing. One of the things that Rick alluded to was perhaps some additional disclosure. I know that’s what we’re looking at this year at both our 10K and our proxy, and perhaps we’re being a little more open with disclosure. Most companies tend … to do whatever they feel is absolutely necessary and no more than that in order to inform investors and shareholders. I think we’re probably going to go a little further this year, particularly when it comes to some of the audit committee disclosures. … [S]mith’s auditor is Arthur Andersen … and as a result of what happened with Enron, we have a pretty significant analysis by the audit committee of whether that relationship ought to continue. So, we will probably do some disclosure along those lines. … One thing that always happens, of course, is, when you get into a situation like this, you get a lot of questions from your employees [like], “How does this affect us?” and “Does this affect us?” … [W]e have looked at responding in an appropriate way to what we can do to get information out to our employees over and above what they’re currently getting. … I’ll say one thing for my relationship here, over the years [the company has] been very, very good about coming to the legal department with questions. The legal department has been very involved in all of the major business decisions. … [O]ne of the things that I’ve always pushed has been relationships with the law department and the business people as being absolutely critical to our success. Rozzell: Let me give you … a little bit different perspective. In Reliant, we’re in the process of really creating two companies. There aren’t that many new lessons. You just get to relearn the old lessons over and over again. … My side of the Reliant business is the utility side. And utilities have to conduct their business in the public eye at all times. So we’re accustomed to this notion of having not only the regulators looking at us from time to time when we particularly approach them for a subject, but all of the time. And as a result, a lot of the kinds of issues that we’re talking about now — strict compliance, strong ethical guidelines, transparency of what you’re doing — is nothing that’s really new to us. But it’s something, I think, that we all find benefit from emphasizing repeatedly how important those particular factors are. And any time you have something that produces as much publicity as the recent event of Enron … it gives you an opportunity to re-emphasize the importance of those characteristics that you hoped you had been good about emphasizing all along. Bailey: … [W]hen I look at the question, what’s surprising me is really how little our business has changed in light of Enron. Some of the day-to-day stuff, obviously, is different because we’re suing … a creditor of Enron. We’re on the creditor’s committee. … But overall, in the way we look at the business, it really hasn’t changed in too many aspects. … But one of the things that I don’t think anybody has touched on yet is really the public policy rule that we’re now struggling with. Enron, for better or worse, whether you agree with them or not, is a huge voice on public policy issues, especially up on the Hill, and that voice is all but silenced now. And we hear it from our congressmen all the time who are dying for information on what’s going on in the energy industry, and it’s up to us and companies like Dynegy and Reliant to figure how we fill this void going forward, because there’s a lot of information that needs to get out there to congressmen to help battle some of the misperceptions that are going on. Steen: I can tell when I talk to senior management, whether they be in New York or Paris or anywhere in the world, actually, that they seem much more interested in listening about compliance and little issues that before they would wave away. … And a word that’s come up in some management meetings that I’ve been in recently … is “perception.” And perception becomes reality. We’ve seen a couple of local companies here that are very strong companies whose stocks have been battered because of the perception, and where it’s announced that it’s a $10 or $20 million problem, not a $100 million problem, nobody seems to pay attention to that. So, there’s a perception and a feeding frenzy, if you will, through Wall Street. We’ve got analysts going all over the board reacting to things that in a normal climate perhaps don’t mean anything. So, it’s a period of introspective review for all of us, I think, to go back and review and make sure that our policies are in place, that we’re out there re-emphasizing ethics and compliance for our clients, and making sure that when we move forward with any transaction, whether it be a partnership, joint venture or acquisition that due diligence has a new level of … excitement that it’s never had before — if due diligence can be exciting. Jeffreys: Is that due diligence changing? Are you looking at deals differently than you might have before? Fullenweider: I think you’re going to see people pay more attention to due diligence. I think that’s inevitable when you have something like this. What I’m hopeful [about] is, as a practitioner, that when we get through the next months and this year that a distressed company will not be permanently damaged by what happened with Enron. … It’s very important to all of our industries for companies that are in stressful situations to be able to find willing buyers, and clearly Enron was in such a stressed situation when they contacted us and asked us to take a look at a merger. And I would like to believe that, when this is all over, the legal system’s contractual provisions that many lawyers in Houston for years have used will be enough to protect a company that does save a distressed company in a major transaction. But I think you’re going to see a lot of anxiety, and I think, unfortunately, you’re going to see companies that probably don’t get saved here in the very short term that may well have been worth saving just because of the anxiety around what happens if you’re in a failed Enron-like situation. Plaeger: I think clients are much more focused now on due diligence as being something that’s important to the entire company. It’s not just a legal issue that the lawyers have to take care of. … Concerning Sept. 11, one of the interesting things that we’re seeing is your “material adverse change” clauses. We were doing a $3.5 billion acquisition in early October right after the events of 9-11, and it turned out that the MAC clause, which always is an interesting clause to try to negotiate, took on importance because, in this particular case, the banks that were providing financing were very interested in having a MAC out dealing with terrorist events or acts of war. And prior to 9-11, those wouldn’t have caused a lot of concern. But then we got into literally hours and sometimes days of negotiations over what exactly would constitute a terrorist event or what would constitute an act of war. What we ended up doing in our particular transaction was trying to tie the MAC clause to an event that would affect the financing markets. We had a situation where we indicated if the stock exchange was closed for 10 or more business days, whether that would be an event that should trigger the MAC clause. … So, the balance we were trying to strike after 9-11 was quite contentious, quite interesting. REINFORCING RELATIONSHIPS Jeffreys: Arthur Andersen, Enron’s former accounting firm, is being sued in litigation here in Houston, and V&E, Enron’s primary outside firm, was sued, although those suits were dropped. I’m wondering if this has changed your relationship with your outside counsel. Does that make you more or less likely to hire outside counsel to do your work? Steen: … [O]ne of the interesting things that I’ve noticed … out of the Enron debacle and V&E’s role in that, is that we always have a rule that we don’t hire law firms. We hire lawyers. And they may be a large firm, a small firm or perhaps a solo practitioner. We want to have those relationships externally that we can count on for different layers of expertise in different deals in different parts of the country or the world. And I think you probably should be a bit suspect if one law firm gets all your business, because then it becomes a very tenuous relationship — they’re relying on you heavily to keep your doors open, and you’re relying on them heavily for information, advice and legal counsel, and that’s difficult. … Good corporate governance, I think, requires us to make sure that those relationships, whether they be with auditors or with law firms, be scrutinized and so it doesn’t become … a relationship that’s there just because it’s there. Sutton: The way that I run our relationships with outside counsel has been basically that — one of relationships. I’ve always hired the lawyer rather than the law firm. And what I have found over the years is that even with doing that, though, and building good relationships, you still have to keep a business distance. I have had situations where I’ve had outside firms that I still use who have helped me in a particular transaction, and then perhaps a couple of years later there will be an issue with regard to that transaction that will come up, perhaps an interpretive issue. … I don’t go back to the law firm typically that did the work if it is a serious issue. I’ll go to a different law firm and have them review the work because I’m really looking for an independent opinion. I think that’s part of a problem with being in a relationship where you have one law firm doing all of your outside work or most of your outside work is that they’re checking themselves. And sometimes that’s just not an appropriate thing to do. So, we watch that fairly carefully. And the outside firms that I work with, although they’re not real happy when I do that, they understand it, and it’s not affected our relationship. Rozzell: I think it bears repeating, once again, that there has to be a healthy tension between a company and its outside advisers. … [I]t doesn’t matter whether you have one law firm or 15 law firms that do your work, whether you have an auditing firm that does your audits and consults with you or whatever. There has to be attention that both management and the professional adviser both recognizes and encourages. Because if that attention does not exist, then the company is not getting good service from its outside advisers, and the company is not being well served by their advice. What do I mean when I say a healthy attention? A set of professional advisers is not there just to facilitate the company’s goals. It’s there to advise the company on how best those goals can be accomplished or whether or not they’re accomplishable at all. And we all want advisers that will help us shape transactions, shape deals, shape our approach to our relationships with other businesses and regulators in a way that optimizes value for the company. But it’s important that, at some point, your advisers be encouraged and empowered to say no. If they don’t know that they can say no, then … we, as companies, have not established the correct relationship with our advisers. Jeffreys: I would like to talk a little bit about the relationship between the legal department and the board of your company, the audit company, the finance committee. Has that relationship changed and in what way? Sutton: In my situation, it has changed principally with the audit committee. We have a small board. It’s a very active board — people who are familiar with the industry. So they really tend to get involved in board meetings and presentation. They’re very involved with our review of Arthur Andersen, our outside auditor. … [W]e now have an audit committee meeting before every quarterly year-end release of earnings when, before, that was just sometimes a telephone conversation with the chairman of the audit committee about what the results were. And it’s going to get that way going forward. Some of you have seen, I think, some of the proposals for amending audit charters. There’s going to be a lot of work done … about what additional oversights the audit committee should provide. That is going to be balanced with, “Do we get too involved? What happens if we do too much as an audit committee? Are we offering ourselves up to additional exposure that we should not otherwise have?” So, there’s going to be a real tension, I think, that the legal department and the board, particularly the audit committee, are going to be dealing with in how to perform appropriate oversight of the audit function. Steen: I’ve seen very much the same reaction internally at Schlumberger. The sensitivity level is obviously much higher with your board members and your audit committee members. We’ve even had a gentleman who wanted to resign from the audit committee because he … didn’t feel like he could put in the time necessary for some of the new directives we have for our audit committee. So, I think there’s going to be a heightened sense of urgency to make sure that our shareholders and those that are watching our company are comfortable that they know the entire story and the audit committee is accomplishing goals they’re supposed to do. I think probably everyone on the panel has represented a company or a client before where the audit committee at times might have been a rubber stamp, to some degree. I don’t think you’ll see that again in public companies. So there will be a new sense of urgency of the role of the audit committee and how active they’ll be in making sure these relationships we have with consultants or law firms or internal policies and making sure that they are put forth and vigorously promoted within the company. Plaeger: With respect to Burlington Resources, we’ve had a very active audit committee for quite some time [that] has had a direct relationship with both the general counsel and with our internal auditors. I do see across corporate America a change in focus where audit committees will be more focused on their own financial training, something that the SEC … [and] the stock exchanges had indicated was important. I think you’ll be finding more knowledgeable audit committee members with the seriousness of the issues that they have to deal with and the complexity of the issues that they have to deal with. Fullenweider: … [I]f you look at industry and at corporate America as a whole, you probably all can guess that audit committees, at least in some instances, have not been vigilant, especially where companies, by all appearances, are doing very, very well and their stock price is going up. And we lived through a time in the ’90s where rising stock prices [were] taken as a proxy for “all is well.” I think that’s the bubble that’s been burst. Fortunately, I think the bar and stock exchange and the SEC have done a lot of good work in various audit committees over the last year, year and a half. There is a good tension right now between putting responsibilities on directors and providing a reasonable amount of work that you can expect from outside directors. You’ve got to be cautious not to go so far that nobody is going to want to serve on an audit committee or serve on a board of directors of a company. And I think that we’ve got a lot of good development that’s pre-dated Enron, and if basic corporate governance guidelines are followed, we’ll find that it is sufficient to stop the sort of problems that we’ve had in the Enron situation. And really, it goes back to the basic principle of what is an individual director really going to do when he gets up in the morning and goes to audit committee meetings. Is he going to ask the questions? Is he going to take the time to develop the relationship with the audit partner and manager? Is he going to put in the extra hours it takes to really do that job? It really kind of comes back to all of our basic training. Are you going to ask the questions? Are you going to drill down? Are you going to do what you ought to do?

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