The second session of The Economist’s General Counsel Roundtable was a panel on the topic of “Balancing the growth imperative with escalating risk.” Matthew Bishop, the US Business Editor for The Economist moderated the panel, which included John Lynch, US General Counsel of BP America and Deirdre Stanley, the Executive Vice-president and General Counsel of Thomson Reuters.
Lynch started with his view of the role of the general counsel in risk management, based on his own experience. He feels there’s an element of getting ahead of governance and reporting to the Board, but the role of the GC is different for each company, based on its needs. The answer to the role of the GC lies with the unique factors of the company, subject to risk, which is a broad topic. He then defined what he sees as the four different types of risk: compliance risk, legal risk, function risk, and event risk. Stanley said that at Thomson Reuters, it is lightly regulated, so their strategies and processes aren’t tied up in a lot of regulation. She sees the role of the GC as risk identification and risk environment identification, which she defined as the point at which they trip up on a new regulation that wasn’t applicable before. As the Foreign Corrupt Practices Act seeks to become increasingly global, the articulation of risk itself is important, because changing operations increases the risk that they might not have otherwise identified. Mitigation is the third part of a GC’s responsibilities and requires the close integration of legal with operations.
Bishop then asked, with the push to be more global, how do they help managers to understand how to do business in China, for example. Lynch answered that they tell them that risk management is what they see in the case law around governance, not what Seth Harris described about deciding whether to comply. Bishop followed up by asked about the trade-off between growth and risk management. Lynch agreed that he feels that there is a trade-off, but they’re trying to prevent it at BP. He said that to grow, they can either access a new country or become more efficient, which is tougher. To grow, they need to identify the risks, a mitigation plan, and how to fund it. Stanley said that she doesn’t see it as a trade-off, but as a balance. As in any business, without risk, there’s no reward. The challenge is how to grow in a greater risk environment, so she works to instill risk management awareness in managers and encourages leaders to be involved in all incremental changes. Lynch added that it’s important to have legal and compliance in the same complement as the business is expanding, and not after or towards the end of planning.
Bishop asked about their experiences in safety and health that could be generalized into lessons for other GCs. Lynch said that he looks at the refinery section of BP from a distance, but has seen how the company has changed the process of how they identify and manage risk. Now, risk is into the business and away from the assurance functions and he’s trying to change the culture to get everyone thinking about compliance. Bishop asked about putting profits over compliance, and Stanley said that they don’t have a separate risk function at Thomson Reuters. She said there needs to be more ownership in the business and giving them the resources they need, and said that over time, there can be financial recourse for those who don’t take compliance into account. Lynch said that the BP America Board has changed governance and oversight of the Board. Stanley said that they thought about having a risk committee as part of their Board, but felt that they didn’t want another committee and wanted the Board to see the risks that the company faces. Since risk aligns with strategy, it seems unfair to put it in a committee that has no tie-in to funding. She said that it’s a different environment now, because there is more funding for enforcement because of the assumption that companies won’t do the right thing. They are expecting new regulations, but they’re taking time, which is ominous. Lynch agreed, saying that after having had a negative outcome with enforcement agencies, it has riveted people’s attention, so BP is self-motivated to comply.
Bishop then asked if the trend for more legislation in the US makes it less competitive. Stanley said that looking at antitrust, where they are expecting additional scrutiny going forward, it is more of a catch-up with Europe. Though there’s less regulation in developing countries, there is still other kinds of risk. She thinks that just looking at the regulation piece is too narrow, and that the competitiveness of the US over time is a complicated issue. Lynch said that there are regulatory regimes around the world, and where there aren’t, they have often been asked to provide them. He sees this as an opportunity for GCs. Bishop questioned whether they as GCs would talk to the lobbyists, and Stanley said that their lobbyists report to the GC. Lynch agreed that he would talk to them, but said they don’t report to the GC.
As it was opened up to the audience for questions, TK Kerstetter, President and Chief Executive Officer of Board Member Inc/Corporate Board Member asked about balance. He said that he worries about how companies split out risk and compensation, because the strategic planning process is where risk belongs. He worries that they’re focused on independent things, like legislation mandating risk committees, and so much transparency, and wondered if it was over the top. Stanley agreed, saying that risk shouldn’t be isolated. She does think it’s different because of transparency and activities in the past weren’t as highlighted as they are now with the internet. But that’s the environment, so the real question she asks her managers is to think about whether their actions are something they want to end up on the front page of the New York Times. Lynch said that Kerstetter was right about risk management being a part of strategic planning. In terms of transparency, he said that when they train people, they tell them to assume that any action will show up on the front page of the paper. He said that this has motivated people to do the right thing. Margaret McLean, Vice-president, Chief Legal Office, and Corporate Secretary for CH2M HILL, said that their audit committee used to handle risk, but that they ran out of time in their meetings to effectively deal with it. So her company created a committee to elevate it to the senior managers’ focus. She said that risk is an everyday job, like safety, and for some companies, a risk committee is a good idea.
Bishop asked the panel what proposals most alarm them in terms of the company devoting money to the right things, instead of what the regulators want. Lynch said that for them, it’s more about business risk than compliance/legal risk. Stanley would agree, her concerns are what impacts their business models. Lynch said that they make a compliance and ethics leader part of the business functions, and have found this to be useful. He said that they have a network of these leaders across the company. Kerstetter then clarified his earlier point, saying that a lot of public companies with risk committees have done well, but that it was the mandating of committees that people are concerned about. Someone then had a question about Secretary Geitner’s policies. Stanley said that there have been a lot of discussions around executive compensation. She said that there is a need to balance the short and long term, and disclosure will drive that. Bishop added a final question, asking about the perception that the Obama election was a victory for trial lawyers. Stanley said that they love all lawyers at her company. Lynch agreed and said that BP has always had a fairly constant litigation portfolio, and doesn’t think that will change.