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Contributing editor Charles Hann interviewed Michael C. Ross, who has recently joined the Altman Weil consulting staff. Ross is a former senior vice president and general counsel of Safeway Inc. Prior to becoming Safeway’s general counsel, he was a corporate partner with Los Angeles’ Latham & Watkins. HANN: You had the benefit of working for one of the premier law firms in the country and serving as a senior executive of an extremely successful Fortune 50 company. Would you please comment on some of the principal differences between working as outside counsel and inside general counsel? ROSS: For the entire seven years I was Safeway’s general counsel, I marveled at the dramatic difference in perspectives of outside counsel and inside counsel. No matter how conscientious and well-motivated the outside counsel, at the end of the day the legal problems, whether transactional or litigation, belong to the client, not the outside lawyer. This is obvious, but the consequences are pervasive. If the client loses a case or a deal fails to close, the outside lawyer gets paid and goes on to the next matter. The general counsel and other inside attorneys live with the results; it is their company’s losses, lost opportunity or tarnished reputation. I am not sure that many outside lawyers appreciate just how personally inside lawyers feel about results. HANN: How does the different perspective affect outside counsel’s advice? ROSS: Often, outside counsel is less sensitive to the practical aspects of legal problems. For example, it is relatively easy to advise a client to conduct timely, thorough investigations of alleged discrimination and harassment. It is much more difficult to ensure that the resources are allocated to the investigations and that prompt and sensible judgments are made about which claims deserve priority and what, if any, remedial action should be taken. Similarly, advising a client to have its board of directors approve an action is easy. Calling a special meeting, distributing useful summaries in advance and obtaining appropriate director attention involves a lot more effort. HANN: Does the difference in perspective affect the efficiency and timeliness of outside counsel’s advice? ROSS: No matter how responsive the outside counsel, they do not appreciate the internal pressure to obtain some answers almost immediately. Some legal issues affect real-time marketing decisions or safety issues, and delay means additional cost and risk. Often senior executives just want advice right away so they can determine whether or not some alternative is viable. Outside counsel wants all of the facts and would like to address all of the relevant legal issues rather than focus on the facts at hand and the most critical issues. HANN: Might part of the difference be that outside counsel does not have a sufficient understanding of the client’s business? ROSS: There are some outside counsel who are much better on this score than others. Many do not take the time to understand the context in which the legal problem arises and, therefore, its potential nonlegal consequences. Sometimes, outside lawyers do not understand how publicity about a case will affect business. Other times, outside counsel do not appreciate how much settling claims made by some plaintiffs’ attorneys will create risks of future similar claims. HANN: Is outside counsel’s distance from the client’s business, senior executives and practical problems ever helpful? ROSS: Outside counsel can be particularly helpful in supporting a general counsel who has to address shareholder, director or management conflicts of interest. The pressure on general counsel, as a member of senior management, to be a “team player” and not to be “legalistic” can be very strong. Although regular outside counsel may suffer from the pressure to maintain favorable client relations (which include relations with executives other than the general counsel), a professional reputation and a healthy measure of independence are very valuable resources. Often, an opinion from an independent law firm can help management visualize the likely consequences of not handling the conflicts properly. HANN: Speaking of conflicts of interest, what is your advice to inside counsel about how to manage them? ROSS: It is unfortunate that it has taken the Enron debacle to awaken some companies and boards of directors to the potentially serious consequences of failing to address conflicts of interest in a responsible way. Now the stakes are higher than ever before, and there is a significant risk of investor and public overreaction to some conflicts. The first step is to develop a consensus, if there is not already one, about the importance of administering an effective compliance program. No program can be very successful without visible leadership and support from the top, i.e., the chief executive officer and the board of directors. An effective program consists of more than a written policy and a compliance officer. The policy should set clear standards, provide helpful, real life examples and cogent explanations about why the policies and procedures make sense. Senior management should communicate the policies and procedures regularly and frequently to employees, suppliers and customers. Opportunities should be afforded for employees to ask questions and seek guidance. A successful program will also reflect a strong sensitivity to internal and public appearances. There is no formula or recipe for all companies; the program must be tailored to the specific company. HANN: Is this largely a defensive undertaking or are there other benefits from having a strong ethical posture? ROSS: Historically, boards of directors and senior management have adopted ethics codes for defensive reasons. Disclosure requirements, litigation avoidance and potentially embarrassing publicity have been some of the principal motivators. Although these are bona fide considerations, and perhaps even more important in today’s environment than they were just a few years ago, they are less powerful than the offensive reasons. This is not an issue of whether or not to adopt moral and ethical standards that conflict with companies’ business objectives. A strong case can and should be made that proper treatment of conflicts of interest enhances shareholder value, and, therefore, benefits management by increasing equity values in its stock ownership and options, and enhancing job security. Although conflicts of interest usually involve direct and indirect costs to business, an effective compliance program can dramatically reduce, if not eliminate, these costs. Such costs include employee productivity, inefficient purchasing and selling and, often, fraud. Once senior management and the board of directors appreciate the benefits of a strong ethical approach to conflicts, the rest will fall into place. If the positive approach is not persuasive, there are new defensive reasons for more scrutiny of conflicts. In the wake of Enron and other recent failures, investors will have little tolerance for ethical red flags. The question is much less about lawsuits than it is about shareholders’ opposition to management and selling their shares. If shareholders start “voting with their feet,” it should not take management and directors long to realize that their own future is in serious jeopardy. HANN: How hard is it for a general counsel or outside counsel to “blow the whistle” on actual or potential conflicts? ROSS: It depends, obviously, from company to company. In companies with strong ethical programs, it should not be so difficult as in companies where ethics get little positive attention. Even less sensitive companies should be more receptive to warnings from inside and outside attorneys than they were several years ago. Nonetheless, there can be strong pressures to “go along” and not to “rock the boat.” So long as law firms base compensation on business production (and that may be for a long time to come), it will be difficult for the outside lawyer to give advice that jeopardizes his account. There are, however, a few outside lawyers who are learning (some of them, firsthand) about the costs of not giving the “tough” advice. When a conscientious lawyer, inside or outside the company, sees a red flag, he or she will find a way to take it to the appropriate level of review. That is what is supposed to separate the legal profession from, and elevate it above, other professions: the ability to make difficult judgments under pressure and in a publicly responsible way. HANN: What effect, if any, do these issues have on the future of corporate legal services? ROSS: It is hard to generalize, but I think that general counsel will rely more and more upon the outside firms and attorneys in whom management has trust and confidence. There will be an even greater premium on outside counsel understanding the client’s business and more focus by both sides on the importance of a mutually beneficial long-term relationship.

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