TheCorporateCounsel.net

Occasionally, we get asked about how someone who’s in-house can make the case to their bosses to obtain more staff for their department. In our “Hiring More Staff” Practice Area, I have posted a six-page PowerPoint that you can modify to make your own business case.

I’ve talked to some in-house members about this – and here are some responses:

– Aggregate the outside legal bills for the subject matter at hand and then estimate the savings (and remember to argue the benefits of internal expertise).

– If trying to add a lawyer, one hard part is how to quantify the intangible benefits of having counsel pro-actively involved in matters, and how to quantify the opportunity cost of having someone else in the company (typically a controller, accountant or even the CFO) tackle the things a lawyer should do – minutes, coordinating meeting materials, Section 16 filings, etc. One general counsel I spoke with also placed value in having less volatile cost fluctuations, which she viewed as flattening out slightly with in-house counsel.

– In my experience, companies bring a lawyer in-house when outside counsel bills get so high that it just makes sense. Outside counsel can often recommend someone to the company – or even one of their lawyers decides to go in-house.

– The typical justification is based on the difference between (a) the avoided cost of outside counsel, usually based on hourly rates, versus (b) the fully-loaded cost (i.e. including benefits and other overhead) of in-house counsel performing the same functions. This does not assume that in-house counsel fully displaces the need for outside counsel – which is not practical for a lot of reasons. For some, there is about a 3-to-1 cost advantage. That doesn’t take into account enterprise risk management, efficiencies and other benefits that might be gained from using in-house counsel who may be more proactively focused broadly on the business than outside counsel who are typically engaged for more narrowly-defined purposes (e.g. a particular transaction or litigation matter).

– ACC has an info-pak titled “Establishing the In-House Law Department: A Guide for an Organization’s First General Counsel.” One relevant discussion in that publication says: “The simplest metric that a first GC can use to demonstrate the law department’s value involves calculating the hourly cost of performing work in-house in order to compare this cost to outside counsel hourly billing rates. ACC’s Value Challenge Tool Kit Resource, “Demonstrating the Law Department’s Value: Calculating In-house Counsel Costs,” provides a template to use and a description of the required calculations necessary for determining this metric. In general, this metric calculates total law department employee expenses (including adjustments for the costs of salaries, benefits, and facilities expenses) and divides by the total number of law department hours worked. The resulting metric will provide a number for the hourly cost of performing work inhouse, which can be compared to the hourly rates charged by outside counsel. This comparison can demonstrate to company management the amount of money that is saved by performing work in-house.”

Nasdaq’s “Regulation Reform” Proposal

Recently, Nasdaq published its own version of a blueprint to modernize the equity markets & streamline regulations. Like other reform proposals, its comprehensive – covering the “Big 3” of: restructuring the regulatory framework; modernizing market structure; and promoting long-termism.

Also see this op-ed published in the WSJ by Nasdaq’s CEO Adena Freidman…

Two Competing Visions of GOP Regulation

As we continue to post memos in our “Regulatory Reform” Practice Area about the Choice Act & other reform efforts, this WSJ article by Ryan Tracy & Andrew Ackerman is interesting. Here’s the intro:

The 2008 financial crisis was a global economic catastrophe that triggered years of new regulations designed to prevent another meltdown. Now that tide of rules is cresting, with officials across the globe talking about pulling back regulations instead of adding new ones. The defenders of the current regime are fighting to save it.

At the heart of the debate are opposing philosophies about free markets, regulation and the role of government. After 2008, the Obama administration in the U.S. pursued an aggressive rule-making path, injecting the government further into bank boardrooms, loan-underwriting decisions and conversations about retirement advice—all in the name of protecting citizens from a financial crisis and risky financial products.

With Republicans in control of the White House and Congress, the U.S. is seeing a resurgence of a different philosophy, one that favors freer markets and is skeptical of Washington’s recent approach to overseeing Wall Street. The government, these critics say, has repeatedly overreached in trying to prevent another crisis. It should take stock of all the work that has been done since the crisis—and consider rolling back many rules that critics say aren’t working as intended or weren’t needed in the first place.

As the debate rages on, here’s a closer look at the two competing visions for financial regulation.

Rein In the Banks: The Need for Discipline

Advocates who support active financial oversight favor an approach that can be summed up this way: Let the markets work, but within significant regulatory constraints to protect society from excesses. Left to their own devices, financiers can cause a lot of trouble, advocates say. Big banks have incentives to seek short-term profits without regard for the long-term consequences of their actions—and the 2008 crisis provided an example of just how much damage they can do if they succumb to those incentives.

Financial firms and consumers lent or borrowed too much, and regulators failed to act on warning signs before this excessive risk-taking spiraled out of control. Worst of all, the government bailed out some firms because it determined they were “too big to fail” without the financial system imploding. The result was a panic so sweeping, it dried up credit for Main Street and threatened the entire economy.

Regulatory hawks concede that government housing policies may have played some role in inflating the housing bubble but say it wasn’t central to the meltdown. Lack of oversight was. So, they argue, the government has an obligation to protect the economy from risky behavior—by banning those behaviors entirely or adopting policies that act like a tax on it, making it less attractive in the short term. Financial firms and their customers may have less freedom under these rules, but these advocates say that the effects of those restrictions pale in comparison to the cost of a huge financial crisis.

The 2010 Dodd-Frank law, approved by a Democratic Congress and signed by Democratic President Barack Obama, expanded the government’s power to react to what it viewed as emerging risks in financial markets. Firms considered “systemically important” to the economy now face tougher rules and more intrusive oversight than smaller competitors. A new regulatory committee can designate any firm for these tougher rules.

The idea is that if these firms pose an outsize risk, they should pay for it though higher regulation, even if those rules are complex. Federal Reserve Chairwoman Janet Yellen has said huge banks must “bear the costs that their failure would impose on others.” If the firms don’t like the regulation, so be it, these policy makers say: They can shrink or split themselves apart.

Tougher rules have meant that regulators take a far more active role in the continuing management of large firms, and to some extent smaller ones as well. The pro-regulation advocates acknowledge that such involvement might be uncomfortable, but say it’s a lot better than burdening taxpayers in the event of future bailouts.

Take the case of dividends. Large banks can no longer decide on their own to raise the dividend they pay to shareholders. They must get permission from the Federal Reserve first as part of their annual stress tests. The Fed justified the restrictions by pointing out that in the lead-up to the 2008 crisis, big banks paid out capital via dividends, then months later needed capital from taxpayers to stay alive. These restrictions are just one example of the myriad extra rules firms must now keep in mind as they make day-to-day business decisions.

In another case, when financial firms started ramping up a practice bank examiners considered dangerous—“leveraged loans” to companies already deep in debt—regulators at the Fed and the Office of the Comptroller of the Currency responded with prescriptive lending standards that they relentlessly enforced. Critics say the regulators should have let firms make their own lending decisions, but the Fed and Office of the Comptroller say that when a type of lending poses a risk to the broader economy, they have an obligation to try to nip it in the bud.

– Broc Romanek