Contingency Planning

Survey: Board Directors and General Counsel Struggling with Corporate Risks

August 30, 2007

Corporate Board Member magazine and FTI Consulting Inc., a global business advisory firm, has collaborated on the seventh annual legal study, the findings of which indicate that with the glut of leveraged buyouts (LBOs) hitting U.S. companies, enterprise risk management (ERM) has moved to the forefront of issues facing boards of directors and general counsel.

In their efforts to reduce corporate risk, companies are increasingly turning to ERM, a systematic approach to identifying, quantifying, managing and mitigating risk, notes Roger Carlile, leader of FTI Consulting's Forensic and Litigation Consulting segment. "If crisis management is the remedy to an explosive situation, ERM is the preventive medicine," Carlile says.

While 45 percent of directors and 48 percent of general counsel spent more time on ERM in 2006 than in previous years, only 27 percent of directors and 25 percent of general counsel said they would like their boards to allow more time for ERM in 2007.

"Dedicating more resources to ERM can reduce the number of day-to-day crises that consume directors' and counsel's time," Carlile says.

In other findings, the surveyed groups identified corporate governance and mergers and acquisitions (M&A) risk as the two areas in the most need of an ERM assessment: 41 percent of board directors said that governance changes were the area most requiring additional preparation, compared with 35 percent of general counsel. Approximately one-third of each group said that understanding M&A risk should be their company's highest ERM priority.

The survey also found that today's litany of corporate risks is leading both directors and general counsel to seek their own personal outside counsel: 44 percent of today's directors would seek personal advice from outside lawyers and 51 percent from non-legal advisers. Meanwhile, fully 57 percent of general counsel - usually the ones doing the advising - said they would seek personal advice from outside legal counsel, and 48 percent from outside non-legal advisors. The leading cause for this increased reliance on outside advice is M&A issues, on which 62 percent of directors and 66 percent of general counsel said they would retain personal outside counsel. In second place was compliance with Sarbanes-Oxley, on which 50 percent of directors and 43 percent of general counsel would seek outside advice. General counsel showed much greater interest than directors in seeking personal legal counsel on issues of antitrust (24 percent of general counsel, versus seven percent of directors), bankruptcy (12 percent versus two percent), data retention (11 percent versus two percent) and e-discovery (18 percent compared with two percent). Only about three percent of each sample said they expected to seek outside counsel to defend them against criminal charges.

"The role of the general counsel has become one of the most challenging positions in today's corporate c-suite," says TK Kerstetter, president and CEO of Board Member Inc. "Their advisory duties to the board and its committees, coupled with a GC's day-to-day responsibilities as part of the management team, can test even the best of chief legal officers."

The increased liability stemming from Sarbanes-Oxley has required both general counsel and directors to establish a reporting structure within a culture of compliance.

A majority of both directors (53 percent) and general counsel (55 percent) said that they spent more time on compliance in 2006 than in 2005. However, 62 percent of directors said they would like to spend less time on compliance in 2007 than in previous years, while only 37 percent of general counsel agreed.

"Over the past five years, compliance requirements have become acutely more complex, meaning that general counsel have had to assume a broader corporate role in identifying problems and keeping their firms out of the regulatory maze," Carlile says.

The two groups differed sharply on electronic discovery - the process during which parties to a lawsuit access, compile, analyze and produce electronically stored information from a variety of sources during litigation.

Fifty percent of directors said electronic discovery is not a significant issue for their companies, while only 34 percent of general counsel agreed. Likewise, three-quarters of general counsel reported that they are increasingly concerned over handling and managing electronic data, compared with only about half of directors.

According to David Remnitz, leader of FTI's technology segment, many companies require additional help in this area. "Managing the risks brought on by the information age in dispersed or global company operations is a task few companies are prepared to embrace," notes Remnitz.

In the aftermath of QualComm, Enron and the vast array of new computer threats, directors appear to be taking a greater role in managing corporate crises.

Thirty-six percent of directors reported they spent more time on crisis management in 2006 than in the past, compared with only 27 percent of general counsel. A nearly identical majority of directors and GCs (56 percent and 57 percent) agreed they will spend the same amount of time on crisis management this year as last year.

"Whether it be a natural or man-made disaster requiring temporary relocation, off-site data storage and backup facilities, or a legal or public relations issue threatening credibility and stakeholder trust, advance planning and well-trained internal and external crisis teams are the keys to success and a full recovery," says Harlan Loeb, leader of FTI's Strategic Communications Litigation segment.

- Corporate Board Member; FTI Consulting