Caution Prevails As Corporate Counsel Eye Uncertain Future
by Steven Anderson
Corporate Legal Times — Volume 11, Number 121, December 2001
Like everyone else, corporate counsel watched in horror as the clear blue morning of Sept. 11 descended into a surreal, nightmarish scene. As individuals they worried for the safety of their friends and family. As professionals they considered the effects on their companies. And amid the numbing sequence of events, some received the worst of bad news.
"We lost some people," says Terry Adamson, executive vice president of law, business and governmental affairs, at the National Geographic Society in Washington, D.C. "The head of our travel office and the person who worked with our educational alliance with schoolteachers all over the country were escorting three D.C. teachers and three 11-year-old students to one of our sustained environmental projects in California and were on the Dulles flight. We feel responsibility and ties to eight people who were lost. There's been a lot of emotional involvement.
In some way, every company has been affected by the events of Sept. 11. From the businesses in and near the World Trade Center whose employees have are among the thousands killed, and whose offices lie in still-smoldering rubble; to far-removed companies that must nonetheless cope with the emotional, economic and logistical fallout of the attacks, none have been fully spared.
As the initial shock passes, corporate counsel are helping their companies adjust to the new business and legal challenges of a more frightening and less certain future.
GC's revisit emergency plans
One of the first responses of general counsel across the country was to revisit emergency preparedness plans for personnel and facilities.
"On Sept. 11, as I was watching--horrified--these events on television from Hoffman Estates, I realized that I didn't know at that moment in time where the chairman was, where the security guy was, where the HR guy was, and I probably should have known," says Anastasia Kelly, executive vice president and general counsel of Sears, Roebuck and Co. in Hoffman Estates, Ill.
"Even though it wasn't effecting us personally, we decided to sit down to make sure all of us know how to get in touch with the right people in the event of an emergency."
Like most companies, Sears did extensive emergency planning for Y2K. Those procedures are now becoming the back bone of new disaster plans.
"We've started to look at all of our business recovery systems," says Kelly. "We have backups for core systems for all of our businesses, and it's probably time to look at them again. A lot of work and thought went into it, so it's a matter of dusting it off and saying, 'It's not Y2K, it's a potential terrorist threat. What do we do?'"
"We're almost entirely mall-based for our retail stores. So we're meeting with our developers and the people who manage and run these malls to make sure they have all emergency preparedness plans in place and ones that we can, as major tenants, live with.
Adamson says crisis planning has been a top priority at National Geographic as well. The society's headquarters are just three blocks from the White House.
"We've done a pretty close shakedown of the business-interruption package as part of our audit committee review," he says. "The events indicated that everyone ought to have a plan for serious business interruption at a particular location. Say if something were to happen at our headquarters here in Washington, D.C., how do we continue to fulfil our business in a meaningful way? We've taken skeletal plans and given them a lot more flesh."
Aside from that, Adamson's department has thrown its effort into moderating the war's impact on National Geographic's various businesses.
"We have a travel component to our business, both a publication devoted to travel and a number of tours--expeditions, we call them--that we promote. That, of course, is jot going to be a very strong part of the business for a while. We've had to cancel a few already scheduled to go to various places that are not particularlyrecommended at the moment.
"From a business standpoint, there's an impact on anyone in the publishing business that is dependent on advertising. There was already a downturn in publishing as an industry, and there is a considerable amount of uncertainty."
As the results of slowed supply chains and lost productivity ripple outward, in-house counsel need to examine all active contracts, says Kelly.
"The law department, of course, is looking at how the events might have impacted whatever contracts we might have in place, particularly for events and things that aren't going to happen," she says.
Even companies that have not been hit financially yet are keeping a close eye on secondary market efforts.
"For our particular business there has not been any major effect, nor has there been any major effect with regard to our law department beyond the emotional situation," says Dennis P.R. Codon, general counsel of Unocal Corp. in El Segundo, Calif. "We wait and see."
"Obviously commodity prices are affected. It has a huge impact on us if our commodity prices drop dramatically. There's been some minor impact at this point, but not anything that's measurable. We'll have to react if and when it does take place. If we go into a huge recession--hopefully we won't, but if we do--there could be some impact, and we'll have to make adjustments."
In-house hiring affected
Although there's anything but concensus among recruiters, the employment market for corporate counsel has slowed.
Aaron Williams, president of Aaron Consulting Inc., a national attorney-recruiting based in St. Louis, had seven projects canceled within a week of Sept. 11. Most were senior in-house positions in industries immediately affected by the attacks.
"This is a nationwide catastrophe that may have a far-reaching impact on use of outside counsel versus growth of in-house counsel positions. Everybody right now is looking over their fiscal shoulder. Everybody is concerned."
Catherine R. Nathan, an executive search partner at TMP Worldwide Inc. in New York, is less bearish.
"I've had a lot of clients say they might put things on hold, but at the moment they're all going forward," she says. "I have not had one search canceled, and I just got a piece of new business."
Jon Lindsey, managing partner of the New York office of search firm Major, Hagen & Africa, falls somewhere in between. He says general counsel searches have proceeded, but everything else is anyone's guess.
"If companies need a general counsel, they need a general counsel. They don't put it off to save a little money," he says. "We've also seen some clients actually accelerate their hiring. They are under tremendous budget pressures and they know come January 1, they won't have the legal budget they had a year ago.
"We've had a couple searches put on hold. One financial services company said 'We're expecting big cutbacks, big layoffs, so we're not sure we can justify a hire right now.' But it's been surprisingly few. I actually expected more. It hasn't been half the searches. Maybe one out of five or one out of four."
If there's one bright side, he says, it's that this is a buyers market for law departments.
"It's a great time to hire because there's a much greater supply of talented people that there was a year ago."
Law firm effects
In the short term, law firms have been more affected by events than most of theirclients, says Joel F. Henning, senior vice president and general counsel at Hildebrandt International Inc. in Chicago.
"First of all, an awful lot of law firms lost up to 25 percent of productivity in September," he says. That comes at a tough time in a tough year. Although surprisingly, until September, a great number of firms were on target or exceeding target. But in September everyone suffered, and the closer you got to New York, the worse it was.
"Number two, collections have slowed down to a trickle. At a time of the year when law firms begin to really bear down on collections, they got a really bad start.
"Number three, there's a lot of apprehensiveness about what happens now. Everyone's being very cautious."
Smart firms that have not lost their cool realize that there is opportunity in crisis, says Henning. Those firms that weren't already suffering from the evaporation of business startup and IPO work, and are willing to invest in a risky and uncertain market, can buy good legal talent cheap.
"It's very important not to panic and cut back too far," he says. "In the last recession of the early 1990's, a lot of firms cut to the bone and into the bone on associates. When business came back--and business will come back--they had to turn work away because they couldn't staff up fast enough. So it's very important not to panic and cut back too far. Better for partners to take less money home in the short term."
Associate salaries are the crux of firms' financial woes. Ratcheted up just as the bottom dropped out of the tech markets, firms had tried fitfully for more than a year to pass the added expense to clients, an effort that will intensify now.
"Except for the handful of law firms that were at the center of the go-go IPO craze, there was no reason for law firms about the country to raise salaries the way they did. But they did, and they shot themselves in the foot," says Henning. "In my experience, typically associate salaries don't go down. But we can expect that they're not going up, and there's not going to be significant bonuses as there have been in the past.
Williams contends that a bold firm may do the unthinkable.
"I predict that as a result of 9-11 and the end of the IPO craze, there will be a law firm in this country that will have the guts to reverse the $120,000 starting salary," he says. "You don't need to pay that money anymore. There's zero justification for it. Everybody watches about 50 law firms to see what they do. It only takes one law firm to say '120 is stupid. We can attract the same quality people by going down to 110 or 105.' It just takes one firm to do that and the dominoes will fall."
As corporate counsel wait and watch, one thing is sure. The last nail has been driven into the coffin of the late boom economy. As it has so many time before, the tenor and proportions of law departments' relationships with outside counsel will be rewritten.
"Ultimately, and I hope this happens, as a result of these events we will go from a dot-com, frivolous mentality where money meant absolutely nothing, to one where simple concepts such as profitability matter again, where established corporations are better prospects than the short-term potential to get rich quick," says Williams. "Who knows, we might even get back to people wearing suits again."
Hennings cautions corporate counsel to resist the temptation to pressure firms.
"As far as rates are concerned, a lot of general counsel are interested in whether they can go back and renegotiate rates with firms at this time," he says. "Basically, these times are so uncertain, we think it would be unwise for general counsel to overreach."
That stated, he says firms must stretch for clients in trouble.
"I know there are airlines that have said to their law firms, 'Don't expect any payments in the year 2001. Do work for us, you'll get paid eventually, but not this year.' That's understandable in those industries that are hardest hit. And in those industries a good law firm will step up to the plate and help out a good client in a difficult time."
Strangely, financial crisis and excess capacity may finally convince notoriously stodgy law firms to embrace flex-time and other alternate work schedules to keep associates on staff while reducing compensation outlay.
"The most enlightened and best law firms will offer associates opportunities for reduced salaries and reduced hours, or other creative arrangements," says Henning. "But I don't expect that we'll see very much of that, just because law firms have not ever been very creative about developing associates."
Echoing the comments of corporate counsel, Nathan says the bottom line to survival and success amid uncertainty is preparedness.
"There's always an unforeseen event that pushes us into recession. This one happens to be a tragic unforeseen event. But in the 1970's it was the oil shock. In the 1990's it was the Gulf War. Now it's this. An unforeseen event usually does it. The question is, do you have a plan B? Most companies and law firms don't."