There is a new multi-part series on corporate structures, like limited liability companies and corporations.

Each article identifies the data and documents necessary to keep the entity type in compliance. The information is practical and to the point.

1. Corporate Structures
2. Limited Liability Companies
3. Corporations
4. C Corps
5. S Corps
6. Partnerships
7. Limited Partnerships
8. Limited Liability Partnerships

Leadership and Commitment (ISO 31000:2018 5.2)

It is almost a cliché now to say that the general counsel is also a risk manager. Whether as in-house corporate counsel or outside business lawyer, risk management is top of the agenda for most general counsel. What does it mean to say that the general counsel is a risk manager? The answer depends on the general counsel’s role. There are specific and concrete actions based on each distinct role.

Focus on the general counsel as:

1. Advisor to the Board of Directors or owners,
2. Member of the senior management team, and
3. Leader of the legal department.

The contributions to risk management in the company turn on which hat the general counsel is wearing.

General Counsel as Advisor to the Board of Directors or Owners

At the top of the organizational pyramid, the general counsel provides legal advice and often exerts a significant influence beyond strictly legal decisions. The first task for the general counsel in the board or ownership context is to illustrate the benefits of risk management as a discipline. It is important to communicate these benefits in financial or economic terms as much as possible. The benefits of risk management can and should be expressed in terms that resonate with the rest of the board and owners.

Risk management increases the value of the organization by improving the measurement of and response to uncertainty.

Once the board and/or owners (the “governing body” or “oversight group”) appreciate the value of risk management, the general counsel can help this oversight group understand the types of risk relevant to the organization.

Many risks are not worth the bother. For example, is it possible that foreign currency risk could affect the firm if the Japanese Yen suddenly rises in relation to the U.S. Dollar? Sure. But for a US company with no Japanese customers or suppliers foreign currency as a class of risk is not germane.

The objective at this stage is to identify the broad classes of risk that the risk management framework should cover. When a board understands the contours of risk appropriate to the organization, senior management can develop the framework in detail.

It is important for the board and the general counsel to connect the risk framework back to the organizational objectives. Here the board has a unique role to play. If the strategic plan calls for 10% organic growth, then risks related to that objective get priority. Even objectives like improved reputation can shape the risk framework.

Once the risk framework is developed and implemented, the board will begin to receive a consolidated report of enterprise risk. The discussion of those reports will inevitably trigger a review of the framework itself. This review is not a sign that the framework failed. It is part and parcel of the risk management process. The general counsel would do well to remind the board that continuous improvement is one of the benefits of the risk management process.

Finally, as advisor to the governing body, the general counsel will help draft a communication to senior management and stakeholders. Companies which are publicly traded or operate in regulated industries must communicate their risk management plan in compliance with governing law.

The general counsel serves as advisor to the governing body of the organization. As such, the general counsel should: communicate the value of risk management, shape the development of a risk management framework, ensure alignment to organizational objectives, and communicate the risk management plan to stakeholders.

General Counsel as a Member of the Senior Management Team

The general counsel is also a member of the senior management team. Of course, the general counsel serves as the chief legal officer of the company, but is also part of executive team making business decisions. The senior management team needs to accomplish four tasks to bring risk management to life.

First, they need to adapt and fill out the details of the risk management framework from the oversight group. Guidance from the oversight group might be detailed or sparse. The management team will need to complete the risk management framework.

Second, the executive team will need to communicate its adaptation of the risk management framework. Moreover, it should be apparent that the framework is embedded in the strategic plan and the operating parameters of each group represented on the management team. If risk management is an isolated document or process it will probably fail.

Third, one of the best ways to communicate seriousness about risk management is to allocate sufficient resources. Specificity wins the day. Resources include named roles, budget line items, and measured activities like training. Risk management resource allocation should happen within each functional area. This does not mean there is no room for an independent risk management function. It only means that risk management should be embedded in the organization.

Fourth, senior management needs to assign authority and responsibility "At the appropriate levels within the organization."^[1] There are certainly industries where a strong, independent risk management function makes sense like banking and insurance. Risk management as a discipline, however, is best practice within the core of the business as part of regular operations.

On the flip-side, if risk is assigned to everyone, then no one will manage risk. Senior management needs to consider the size, geography, and the nature of its business to find the "appropriate level.” The objective is to have people (not one person) throughout the organization who have primary responsibility for risk within the orbit of their job duties.

Senior management has some heavy lifting to implement risk. They need to:

1. Develop and adapt the risk management framework,
2. Communicate the framework to the organization,
3. Allocate sufficient resources to risk management, and
4. Assign authority and responsibility at the appropriate level.

General counsel can help senior management accomplish these objectives. General counsel should, however, also participate as a member of the team not just as an advisor. Legals risks are a class of risk that should be part of the framework.

Once these objectives are completed, senior managers will include risk reviews as part of their regular meetings. Risk will be common-sized and comparable across departments, divisions, and lines of business, including legal risks.

General Counsel as Legal Department Leader

With the enterprise risk framework in hand, the general counsel heads to the legal department to adapt the framework for legal risk. The legal department will use the adapted framework to manage legal risks.

How does legal risk management differ from the regular work the general counsel performs everyday? Like the rest of the organization, risk management allows lawyers to express the value of their work in terms accessible to the rest of the organization. It is a supplement to their legal analysis and work product; not a replacement.

The general counsel aims to measure and manage legal risk. Legal risk management allows the general counsel to common size contract, litigation, regulatory, and statutory risks. General counsel can use the company's risk management framework to perform legal risk assessments.

There is a more complete description of the steps for implementing a legal risk management framework in “6 Steps to Legal Risk Management."

With a standard approach for measuring legal risk, general counsel can produce a legal risk register. The legal risk register is the principal report to communicate legal risk to the rest of the organization.

Legal risk assessments and the legal risk register allow general counsel to give insight into the portfolio of risk. They also translate a lawyer's view of an issue into terms that a business colleague can understand, because each risk has a single risk rating which is transparent and grounded in the objectives and strategy of the entire organization.

General counsel are instrumental in the development and implementation of risk management, acting as the advisor to the board, member of the senior management team, or as head of the legal department. The general counsel works as risk manager at both a strategic and operational level.

If the general counsel is not a consistent face in the boardroom, and thereby limited in their ability to forge a credible relationship with the company’s board of directors, the directors should be alert to the absence and ask why.

Author: Veta T. Richardson is President
and Chief Executive Officer of the Association of Corporate Counsel (ACC)
Source: Ethisphere
Link: https://insights.ethisphere.com/wp-content/uploads/q1-2018-acc.pdf

...[S]ystems theory warns against always defining and measuring a corporate enterprise solely in terms of shareholder-centric goals and metrics, as this allows the goals of the shareholding subsystem to eclipse the goals of the corporate system as a whole. For the most part, states have managed to resist the pressure to change their laws to support shareholder value theory. However, it has stealthily crept into federal law, especially tax code rules that tie executive pay to objective performance metrics, and SEC rules that empower short-term investors and measure corporate performance by shareholder near-term returns. Activist investors have used the rhetoric of shareholder value as a cudgel to browbeat boards into selling assets, repurchasing shares, and cutting payroll and research and development to achieve short-term share price increases. Finally, shareholder value theory has been taught as gospel to a generation of policymakers and business leaders.

Author: Tamara Belinfanti and Lynn Stout
Source: UNIVERSITY of PENNSYLVANIA LAW REVIEW, VOL. 166, FEBRUARY 2018, NO. 3
Link: https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=9612&context=penn_law_review
Abstract:
Despite the dominant role corporations play in our economy, culture, and politics, the nature and purpose of corporations remain hotly contested. This conflict was brought to the fore in the recent Supreme Court opinions in Citizens United and Hobby Lobby. The prevailing narrative for the past quarter century has been that corporations “belong” to shareholders and should pursue “shareholder value,” but support for that approach, which has long been justified as essential for managerial accountability, is eroding. Its proponents have retreated to the position that corporations should seek “long-term” shareholder value. Yet, as this Article shows, when shareholder value is interpreted to mean “long-term” shareholder value, it no longer offers the sought-after managerial accountability.

What can? This Article argues that systems theory offers an answer. Systems theory is a well-developed design and performance measuring methodology routinely applied in fields such as engineering, biology, computer science, and environmental science. It provides an approach to understanding the nature and purpose of corporate entities that is not only consistent with elements of the many otherwise-conflicting visions of the corporation that have been developed, but also with important and otherwise difficult-to-explain features of corporate law and practice. It recognizes, and explains, the possibility and desirability of corporations pursuing multiple goals. It also offers proven methods for measuring and improving corporate performance— methods that highlight the critical role of corporate sustainability, and specific strategies to promote it. Finally, it cautions that, by ignoring the lessons of systems theory, shareholder value thinking may have encouraged regulatory and policy interventions into corporate governance that are not only ineffective, but destructive.

It is time to rethink contracts and document management. Understand the contract hierarchy to improve profitability, collaboration, and risk management. The contract hierarchy unifies the legal concept of a contract, document management, and business analysis.

What is the Contract Hierarchy?

The contract hierarchy starts with the business deal at the top, supported by documents (including the main agreement), with requirements at the base.

The contract hierarchy organizes the network of obligations between the parties.

Contract

A contract is not a document. A contract is a lot more than a document. A contract creates a legal relationship between two parties that, if all goes according to plan, endures over time. Parties reduce agreements to writing which conflates contracts and documents.

In most common law jurisdictions the requirements for a contract between two or more parties (individuals or legal entities) are:

• mutual agreement to be bound,
• express offer and acceptance,
• adequate consideration,
• capacity to contract, and
• legal subject matter.

Those criteria only determine whether there is an enforceable agreement when the parties sign the agreement.^[1] From the parties’ perspective, life with the contract is just starting.

The heart of the agreement is the “contract” for the people who actually operate under the terms of the contract. This notion that there is an overarching “deal” is a helpful way to think about contracts for contract management.

The contract is the deal in its most basic terms. It is the umbrella for all documents and requirements.

Documents

A contract contains documents. The first document is usually, but not always, the main agreement. Ancillary documents follow the main agreement. Common contract documents include:

• Agreements,
• Addenda,
• Amendments,
• Bills of Sale,
• Certificates of Insurance,
• Exhibits or Schedules, and
• Statements of Work (SOWs).

“Simple” contracts might include just one document: only the main agreement. It can be difficult to identify examples.

Consider the lowly Non-Disclosure Agreement (NDA). There are no ancillary documents for an NDA. However, the NDA is often an ancillary document for a larger contract. Companies do not sign NDAs for the fun of keeping another party’s information confidential. An NDA precedes discussions aimed at consummating a meaningful contract. So even the lowly NDA fits the contract hierarchy, not as a contract but as a document. But of course, you can manage an NDA as an independent contract if you want.

Here are examples of types of contracts and types of documents:

Requirements / Tags

From a management perspective not all terms in a document are created equal. Most people in the organization are not even casually interested in a force majeure clause. However, the provision that allows the other party to increase prices if sales fall below a certain level captures everyone’s attention.

Documents within the contract umbrella have provisions that matter to the organization. The consequential provisions will vary by company, industry, and contract context.

Requirements or obligations flow in two directions. For example, your organization might be obligated to provide quarterly reports from a joint marketing venture. The other party could be obligated to pay commissions from sales.

With contract management software you can capture those requirements. Some requirements have due dates. The due dates might be absolute, like February 2, 2020, or relative, like 20 days before contract expiration.

It is useful to track some provisions, even when they do not pose an immediate obligation. There are two examples that can crop up in one or more contract documents: indemnification and change of control.

An indemnification clause requires that one party compensate the other for certain losses. However, it does not impose an administrative burden on the business during the ordinary course of the business. Lawyers and risk managers want to identify documents with indemnification clauses, but contract managers probably do not need to track them in the same way.

Likewise, a change of control provision is worth knowing about when there is, well, a change in ownership of the other party, but probably not germane to the business of the contract day-in and day-out.

Contract management should flag the presence of these kinds of provisions so that they are readily identifiable when needed. Flagging these provisions also allows contract management to provide reports to legal and risk management, whereas full-text searching does not support reports.

The contract hierarchy places the deal at the top. This is the “contract record.” The contract consists of one or more documents and each document consists of one or more requirements (or “terms” or “provisions”) which should be tracked.

What are the Benefits of the Contract Hierarchy?

There are two important benefits to the contract hierarchy. First, using the contract hierarchy to organize contracts provides a platform for consistent collaboration.

Second, the contract hierarchy is a useful risk management tool.

Consistent collaboration

The contract hierarchy promotes collaboration across your organization in several ways. At the most practical level, there is a common organizational design so no one wastes time looking for contract information.

The hierarchy also frames discussions about contract or performance issues during the course of the contract. Your team can locate the source of the problem at the appropriate place in the hierarchy.

Better risk management

Calling out requirements and tags across documents and the entire contract portfolio allows insights otherwise not available. Those insights, however, need data collected consistently over time.

For example, to see which contracts require the counterparty to carry insurance, you need to add a requirement or tag to each contract. That data will allow you to understand your risk exposure across the entire contract portfolio.

How to Implement the Contract Hierarchy?

There are five steps to implement the contract hierarchy:

1. Standardize counterparties,
2. Identify contract records,
3. Group documents by contract record,
4. Set requirement types and tags, and
5. Build consistent reports.

These steps lay the groundwork for a contract management process that improves profitability for years to come.

Step 1. Standardize Counterparties (aka Vendors, Suppliers, Customers, Partners, etc.)

The first step to implement the contract hierarchy does not relate to contracts per se. Contracts are necessarily with other parties. Over time, organizations unintentionally create duplicate vendor, supplier, or customer records:

• Cole Maintenance Co., Inc.,
• Cole Maintenance Co.,
• Cole Maintenance, Inc.,
• Cole Maintenance Co. Inc. (no comma),
• Cole Maintenance Company, Inc.,
• and so on.

Full-text search is inadequate because the data is still distinct from a reporting perspective. So it is useful to consolidate and standardize on a single party name.

Standardizing counterparty names will allow us to link contracts with each counterparty over time so that the entire contract history is readily accessible.

Step 2. Identify Contract Records

The contract hierarchy approach requires that you ask how many deals your organization has. The less formal word “deal” focuses attention on the primary contract and away from the individual documents.

While it is not possible to provide a comprehensive list of every type of contract record, here is a diverse list of examples that will get developed in the next section:

• lease for a facility at 123 Main St.
• equipment purchase and maintenance for X9000
• professional services engagement for long-term consulting
• construction of a new facility
• patent license for a new product in development

Notice that these examples do not reference a specific document. Instead, they are short descriptions that are meaningful to the business people that work with these agreements.

There are common data elements across these examples, even though they are distinct. Each contract has a title, contract type, effective date, and expiration date. Some of these deals might have auto-renewal provisions as well.

Step 3. Group Documents by Contract Record

Now that you have established contract records, you can easily organize documents within each record.

The lease for the facility at 123 Main St. might contain the following documents: lease agreement, floor plan exhibit, certificate of insurance, utilities and triple net schedule, indemnification agreement, and maintenance services agreement.

The equipment purchase and maintenance agreement for the X9000 might have the following documents: equipment purchase agreement, supplies pricing to schedule, product warranty, and training services agreement.

A professional services agreement with multiple statements of work (SOWs) might be included in the professional services engagement for long-term consulting.

Construction deals often include many documents related to the contract. For example, there is the primary agreement for construction, an exhibit with plans and designs, change orders over the life of the construction project, performance bonds and/or certificates of insurance. And there are often many more documents.

Contracting with another party for a patent license will require the licensing agreement itself along with the patent as an exhibit. Such deals often include a separate nondisclosure or trade secrets agreement.

In each of these examples, there is a one-to-many relationship between the contract record and documents. In other words, there is an umbrella contract record that contains many documents. One of those documents is the principal agreement. The other documents are also important because they reflect the allocation of risk between the parties and clarify terms left open in the main agreement.

Each document also serves a unique purpose the course of the agreement. A document can have an expiration date that is independent of the underlying contract. If the professional services agreement covers three years of work, there might be a separate statement of work for each year. This gives business people the flexibility to alter the content of the services over the agreement which is normal. In this example each SOW expires after one year. The second and third SOW only start when the prior SOW ends. So there are four sets of effective and expiration dates: the contract, SOW 1, SOW 2, and SOW 3.

Contract management software must notify us not only of the contract expiration but also of each document expiration.

Step 4. Set Requirement Types and Tags

In the contract hierarchy context, a contract requirement is an obligation or a provision of the contract from one or more of the documents. In the patent license deal, for example, the licensee might be obligated to provide a quarterly sales report for purposes of calculating a fee based on revenue.

You also might want to tag contracts or documents based on the presence of certain terms. If you want to run a report on all contracts that have change of control provisions, then you need to tag each contract that has a change of control provision. A full-text search would not be adequate because the report requires structured data regardless of the wording of the provision. You are focused on the presence or absence of the legal term. Someone that might use slightly different terms with each search. The report is based on consistent Boolean (or Yes/No) data. Does this contract have a change of control provision? Yes or no.

Step 5. Build Consistent Reports

The contract hierarchy approach enables powerful and detailed analysis of the entire contract repository. You can now analyze contracts from many perspectives that are not accessible when contracts are simply filed as part of a document management system.

Example reports might include:

• show all professional services contracts expiring in the next six months,
• show all contracts with amendments,
• show all certificates of insurance expiring in the next 45 days, or
• show all contracts with indemnification classes.

The structured data behind the contract hierarchy make these kinds of reports possible for the first time.

Conclusion

Organizing and analyzing your contract portfolio in terms of the contract hierarchy can improve profitability, collaboration, and risk management for your organization. This technique promotes consistency across the organization, transforming contracts from a pile of documents into a collection of information about the organization’s obligations and opportunities.

Our results show that firms’ environmental scores and social scores receive higher valuation in countries with weaker institutions. Overall, our findings suggest that CSR creates value for firms by filling institutional voids in their home country.

Author(s): Swee-Sum Lam, Weina Zhang and Christopher Yuen Kwong Chien
Publucation: Firm Value: Theory and Empirical Evidence. Chapter 5.
Date: August 1, 2018
Source: https://cdn.intechopen.com/pdfs/60903.pdf
Abstract:
We conduct empirical analysis on the relation between firm value and corporate social responsibility (CSR) using 134,823 observations of 2542 firms across 44 countries from 2009 to 2014. We find that the firm value is positively related to the overall CSR score of the firm. At a more granular level, we find that good environmental score is positively related to the firm value and good social and governance scores are negatively related to the firm value. Since these firms operate in different institutional frameworks, we explore whether the institutional voids—the absence of institutions or intermediaries that are instrumental in supporting business operations in a country—may result in greater firm valuation for its CSR and vice versa. Our results show that firms’ environmental scores and social scores receive higher valuation in countries with weaker institutions. Overall, our findings suggest that CSR creates value for firms by filling institutional voids in their home country.

How to balance productivity and risk management for General Counsel

General counsel must find ways to both manage contract risk and increase contracting productivity on a limited budget. General counsel are often flooded with contract requests. Sales people, business managers, and executives mutter about lawyers being the “business interruption team” while the general counsel tries to balance competing objectives: fast contracts and careful risk management. No legal department wants to be the bottleneck for contracts.

Common contracting process mistakes in the legal department

How to increase legal department productivity without compromising legal risk management? The two most common answers are to buy expensive, complicated contract drafting/negotiation software or to surrender the production of “routine” contracts to the business people with an automated system. Both of these answers are wrong for most corporate counsel.

Contract drafting software does not change the essential nature of in house contract drafting. The primary benefit of these solutions is that they expose the drafting process to a wider group of colleagues. They also endeavor to provide an audit trail of who made what changes so that the legal team can track down whoever made unauthorized legal changes after the fact.

At the other end of the spectrum, legal teams concede the drafting process to highly automated systems. Business colleagues, such as sales people, enter some data about their deal, and the system spits out a completed document. Lawyers rationalize this concession to productivity over risk management by locking down the terms users can modify and the types of agreements they can access.

Unfortunately, the risk inherent in this approach is significant, because even small errors are replicated across a large pool of contracts. While one defect in a single contract might not be a material risk, in the aggregate the contract portfolio might have unacceptable risk. Moreover, any missing access control will allow a user to circumvent the careful controls put in place.

General counsel need a solution that materially improves productivity without compromising legal risk management. The optimal model in most cases is similar to the fourth principle of the lean process. General counsel need to “pull” contracts that a fully ready for their input. That same system should also help general counsel engage with their business colleagues more effectively during the entire contract lifecycle, not just during negotiation.

The contract request process

Step one is to have an effective system for business colleagues to submit contract requests. Email is completely inadequate. Email is unstructured, inconsistent, and uncontrollable. We need a system which standardizes contract requests from the field and routes them to the appropriate person.

The "appropriate person" is often not a member of the legal team. What general counsel need first and foremost is it to know that the contract request is for a real opportunity which the business has vetted. It is useful to insert a review step between the initial request and the work assigned to the legal department. This approval step ensures that the legal department does not waste time on deals that will not or should not see the light of day.

We can take this approval process a step further. In addition to requesting new contracts, our contract management system can support requests for supplemental or additional documents during the entire contract lifecycle. Simply adding this step can significantly improve both the quality and quantity of the legal department’s work.

Finally, general counsel can decide when to “publish" the contract when it is executed. This publishing decision after contract execution constitutes a formal handover from the general counsel’s office to the contract management team. Unlike an email, however, the legal department and the contract management group will share a single system which allows them to collaborate over the entire contract lifecycle. The handover is now data: trackable and reportable.

General counsel and contract management

Contract management is a distinct profession with a well understood body of knowledge. Contract management is not the practice of law. That said, contracts have a life of their own which requires monitoring and nurturing. In many organizations the legal department simply throws an executed contract over the wall into the contract management department. The legal department may hear about it again when it is time to renew, amend, or terminate the contract. This approach to contract management misses revenue opportunities and causes unexpected risk to materialize.

A shared contract management system that focuses on the contracts which are fully executed promotes collaboration between the general counsel and the management team. Effectively managing the contract portfolio together allows both general counsel and contract managers to make a measurable impact on revenue and contract risk management. No one will remember that you drafted the force majeure clause just so, but everyone will remember that you identified an opportunity to decrease prices during the term of the purchasing contract.

General counsel need to balance productivity and risk management

Lawyers are rarely trained to see themselves as part of a larger process or team. It is tempting to think that the way to improve productivity is to change the way we are drafting. Drafting is our craft. Drafting is our value to the organization. General counsel harness years of business and legal experience to anticipate the unexpected, turning that insight into language which protects the organization. Lawyers should not surrender the drafting process nor should they purchase software that maintains an illusion of faster drafting.

Instead general counsel should balance productivity and risk management with software that allows them to focus on what they do best. Ensure that only fully developed deals get into the legal queue and stay involved with the contract management lifecycle to prevent problems and seize opportunities.

Author: David Joulfaian
Audience:
Source: Social Science Research Network
Link: Full article
Abstract:
Households can reduce taxes by transferring taxable income generating assets from high income family members to those in lower tax brackets. Parents, for instance, may exploit di􏰁erences in the marginal tax rates that they face and those that apply to their children. But under progressive taxation, the marginal tax rates may converge upon transferring large sums from high to low income members as the income of the recipient is pushed into higher tax brackets, thereby limiting the tax arbitrage bene􏰂ts of intergenerational transfers. As an alternative, and under a more e􏰁ective form of income splitting, high income family members may create trusts for the bene􏰂t of other family members, and divide the transferred assets among a large number of trusts so as to subject the income from each trust to the lowest possible tax bracket. The Tax Reform Act of 1986 modi􏰂ed the treatment of trusts such that the maximum individual tax rate became applicable at very low levels of trust taxable income thereby erasing much of the bene􏰂ts of transferring income through this vehicle. This paper provides an overview of the tax treatment of income received by individuals and that of trusts, and provides evidence on how changes in di􏰁erential tax rates introduced in 1986 altered the use of trusts as means to splitting income and sheltering it from taxation.

Author: Marcia Narine Weldon
Full Title: Corporate Governance, Compliance, Social Responsibility, and Enterprise Risk Management in the Trump Pence Era
Audience: General counsel, compliance officers, risk managers
Source: TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW, 2018, vol. 19
Link: http://trace.tennessee.edu/cgi/viewcontent.cgi?article=1428&context=transactions
Abstract:

This Essay... outline[s] how general counsel, boards, compliance officers, and institutional investors should think about risk during an increasingly volatile administration.

General counsel, business lawyers, and corporate paralegals serve a vital role in corporate compliance. Without their diligence, the corporate veil would blow away in the wind. The exceptional growth in new legal entity formation and the increasing diversity of corporate forms challenges even the most organized corporate legal team. Legal entity management is a set of practices and tools that allow general counsel and corporate legal teams to preserve the corporate veil, manage risk, and deliver value.

Benefits of legal entity management

Legal entity management is a discipline aimed at three objectives.

Photo by Ken Treloar / Unsplash

1. Ensure compliance for each entity and jurisdiction.

Corporate compliance starts, but does not end, with registered agent services. Legal entity management promotes compliance by brining all corporate filings together in one place.

Legal entity management also allows us to track, for example:

• Securities filings
• Assumed business name registrations
• Foreign authorization registrations
• Special licenses or permit tracking
• Agreements and documents for maintaining tax status

Effective legal entity management treats every national and subnational or regional jurisdiction equally. A corporation incorporated in Delaware and operating in California may have subsidiaries in British Columbia, Canada, and Singapore.

General counsel, corporate lawyers, and paralegals should view all of the filings, licenses, and registrations from those jurisdictions in one place.

2. Manage legal entity risk

Legal entities reduce risk by isolating potential liabilities in discrete companies. This benefit assumes that the corporate veil remains intact. Legal entity management is a tool to manage the legal risk associated with the organization’s corporate form.

Legal entity management is a set of practices and tools to identify and manage corporate risk early when it is easier to handle.

3. Communicate the value of the corporate legal team.

To fend off budget pressure, legal teams need to demonstrate value, not just complain about their work load. Very few organizations are eager to spend more money to grow the legal department. Therefore, it is imperative that lawyers “Do more with less.”

Done right, legal entity management allows general counsel, business lawyers, and paralegals to share data and analysis with management to reveal both the risks and the benefits for legal risk management.

How to manage legal entities

To manage legal entities in an era of increasing complexity and responsiveness requires five steps: centralize all entities on corporate registry, track ownership details for each entity, manage officers and directors, store corporate documents with the entity details, and adapt to changing corporate forms and laws.

Complete corporate registry

The corporate registry must show all your entities in a single view, regardless of the type of legal entity or jurisdiction of incorporation. The registry should show the legal name, any trade name, next renewal date, entity type, and tax classification.

Track ownership

Legal entity management includes staying on top of who owns how much of each entity. Some ownership data is simple:

Company A owns 75% of Company C
Company B owns 25% of Company C

In the case of entities that have a detailed stock ledger (or the equivalent for partnerships and LLCs), entity management becomes more complicated. We need the full transaction history, an automated capitalization table (“Cap Table”), and org chart.

Manage officers and directors

Send notices to current directors about board meetings is routine work for corporate secretaries. Legal entity management requires active work with data about officers and directors.

For example, general counsel, business lawyers, and corporate paralegals need to quickly answer questions like: “Who was on the board between May 1, 2009, and August 15, 2010?” Effective legal entity management means the answer is a few clicks away without opening any files.

Corporate documents

It is also routine, to keep Articles of Incorporation, By Laws, and other organizational documents handy. Since legal entities are an important part of risk management, we need to track many other documents like Directors and Officers insurance (D&O) policies, Errors and Omissions (E&O) policies, regulatory filings, licenses and permits in our legal entity management software.

Adapt to changing laws

The laws changes. New regulations, updated requirements, and new filings proliferate, usually without relief from existing obligations. It is critical that the legal team respond to these changes quickly.

Legal entity management is also about people management. We need to assign tasks to colleagues in the business and in the legal group. We need to collaborate effectively to keep the organization in compliance.

Before our D&O policy is up for renewal we might want to have the risk department shop for a new policy forty-five days before the policy expires. We might want Human Resources to send the executive succession plan. We might need to alert outside counsel in one jurisdiction to take care of a new filing requirement. These are all tasks of legal entity management.

Conclusion

General counsel, business lawyers, and corporate paralegals can make a tremendously positive impact on the broader organization with effective legal entity management. However, to make an impact requires an expansive view of what it means to manage legal entities and to communicate proactively with our colleagues.

Author: Mari Sako
Source: Saïd Business School University of Oxford
Link: http://eureka.sbs.ox.ac.uk/6870/1/General Counsel in Germany July2018 for study participants.pdf
Abstract:

Size and shape of corporate legal departments

• In-house legal department structure reflects the corporate structure. Typical organizing principles are by legal specialisms, business lines, and geographies. A tension exists for the legal function between becoming too close to business and becoming isolated in a functional silo.
• Company-wide corporate restructuring is an occasion to restructure the legal department. Compliance challenges and efficiency drives have led to centralizing the legal function at the corporate headquarter, leading to better risk control and legal resource use.
• Most, but not all, companies face the ‘more for less’ challenge in delivering legal services. Except at young companies experiencing rapid growth, German companies face the ‘more for less’ challenge of increased workload without an equivalent growth in legal resources. They are meeting this challenge by seeing efficiency gains (e.g. via use of templates), and shifting low-risk non-strategic work to other departments.
• In-house legal departments prefer to insource as much as possible. Many respondents expressed a preference for doing as much legal work as possible in-house, in order to better control legal spending and risks.

Relationships with legal service providers

• Panels of law firms have been established at German and multinational corporations, to systematize relationships with law firms, and to achieve an optimal balance between competition and collaboration.
• Alternative billing arrangements are becoming prevalent in Germany. Respondents noted a wind of change in Germany recently with greater cost sensitivity, leading to harder discount negotiations and the use of alternative billing arrangements. Alternative billing arrangements included the use of fixed fees, capped fees, contingent fee payment, and retainer fee payment.
• Corporate legal departments are also accessing newer types of legal service providers including boutique law firms in Germany. Boutiques are preferred for better focus, greater flexibility, and lower fees.

Lawyers in top management teams

• In-house lawyers generally play three distinctive roles: service support, risk control, and business partnering. Balancing these roles is considered essential in ensuring that the company’s executives regard the legal function in good light.
• In Germany, the most important trigger for enhancing the power of in-house lawyers lies in companies’ need to pay greater attention to risk control in the 2010s. Consequently, the legal function, with or separately from the compliance function, has become more visible in corporate organizations.
• There persist a variety of expectations in relation to the other two roles of service support and business partnering. Some German companies have appointed a chief operating officer for the legal department to promote efficiency in service support, but others have not. Some German companies have a CEO and top managers who expect the general counsel to be business partners, while others do not.

Author: William C. Handorf
Source: Global Journal of Management and Business Research: C Finance, Volume 18 Issue 3 Version 1.0 Year 2018
Download: https://journalofbusiness.org/index.php/GJMBR/article/download/2519/2420
Abstract:

The role and responsibilities of a corporate board of directors changed dramatically since the failure of Penn Central in the US in 1970 and the release of the Cadbury Report in Britain in 1992. We study the board structure of large, systemically important US bank holding companies after the crisis of 2007/09 to determine if the number and composition of directors or the number and mix of committees provide value for shareholders and enhance credit ratings. The US retains a rules-based system of corporate governance whereby publicly-traded banks must comply with laws and operate with both an audit and an enterprise risk committee. There are no formal rules applicable to the number of directors, diversity or leadership of the board or formation of other committees.

Holding company boards composed of more independent or female directors achieve better credit ratings consistent with adopting more conservative financial policies. Bank holding companies forming more committees, especially a finance/capital committee, retain a better credit rating and trade with a higher price/book valuation. Committee specialization enhances performance. An executive committee comprising a small subset of the board’s leadership may create an atmosphere of “elitism.” Yet, holding companies with such committees were priced with higher price/book valuations given the time and commitment of a small group chaired by the CEO to craft and implement a coherent business plan structured to increase return on equity and support future earnings growth.

Gone are the days of corporate secretary duties performed in isolation. General counsel are under increasing pressure to deliver and demonstrate value to the organization. Legal entities proliferate. New tax laws and privacy regulations like the GDPR force a reassessment of legal structures.

Managing legal entities efficiently is critical for general counsel balancing legal, risk management, and leadership responsibilities. This paper provides a comprehensive review of entity management as a legal practice and entity management software as a tool from the perspective of the general counsel and in house legal team.

Common Information for All Entities

Entity management provides a consistent framework for general counsel to manage legal entities formed in any jurisdiction whether private or public, for-profit or not-for-profit, and in any industry. An entity management framework creates a consistent view of legal entities notwithstanding the variations.

Common information about legal entities might include:

• Legal name,
• Form of organization (such as Corporation, Limited Liability Company, etc.),
• Address (legal and/or principal place of business),
• Jurisdiction,
• Registered agent, and
• Date of incorporation.

Legal entities also have documents and records, compliance and filing requirements, owners and investors, and officers and directors.

Using a consistent approach to legal entity management makes in house legal teams efficient and effective. The corporate registry becomes simultaneously more powerful and easier to use.

Corporate Documents and Records

Objectives for Corporate Document and Record Management

Corporate document problems grow exponentially with the addition of even a handful of legal entities. The age of each entity, its jurisdictional footprint, and the types of documents all exert pressure on corporate legal document management.

For each document or record, we need to factor in four elements:

1. Time and duration. Does this document have an effective or start date? Does it have an expiration date?
2. Jurisdiction. Does the document relate to a particular jurisdiction, whether that is national or subnational?
3. Classification. What type of document is it? What is the right way to classify corporate legal documents?
4. Frequency. Is this a one-time document or is it one of many over the life of the legal entity?

These are often easy questions for a single document. The challenge is to design a system for managing all legal entity documents for the entire corporate family in a consistent, orderly way that improves corporate compliance and reduces risk.

There are four helpful examples: organizational documents, filings, meeting minutes, and agreements.

Organizational Documents

Organizational documents consist of all those documents that are necessary to create the legal entity in the jurisdiction which is the principle place of incorporation.

The corporate lawyer must immediately decide whether organizational documents include the bare minimum to complete the incorporation or the entire document package with agreements by and between the founders.

Effective entity management solutions allow you to classify organizational documents as broadly or narrowly as you want. For example, all initial documents could be placed in an “Organizational Documents” bucket while each individual document has a different document type.

Types of organizational documents might include:

• Articles of Incorporation,
• By-Laws,
• Ownership Agreement (covering shareholders, partners, or other equity holders),
• Resolutions, and
• Employment (option plans, employment agreements, etc.).

Notice that not all of these are strictly required to incorporate in many jurisdictions, and they might not be sufficient in some. The point is to differentiate between types of organizational documents.

One of the reasons to draw these distinctions is to help with expiration dates. Some ownership agreements and employment documents might have expiration dates; others do not. Entity management software must show organizational documents with expiration dates and automatically send notification about the impending expiration.

Filings

From inception to dissolution, entities must file with jurisdictions relevant to their operations. All those filings should be in one place. Each filing can have its own expiration and its own jurisdiction.

If a Limited Liability Company incorporates in Delaware and has its principle place of business in Texas and then expands to other states, it will likely need to register as a foreign corporation in those states.

The LLC might also maintain one or more trade names (Doing Business As or DBA name) in some of those jurisdictions. The filing requirements can also vary among jurisdictions further complicating the tracking, for example:
Jurisdiction A: Filing date 2/1/2018, Expiration date 2/1/2019 (1 year period).
Jurisdiction B: Filing date 3/15/2018, Expiration date 3/15/2020 (2 year period).
Jurisdiction C: Filing date 4/25/2018, Expiration date 4/25/2023 (5 year period).
These jurisdictional filings might be at the state or provincial level, or at the national level.

In addition, many organizations have special purpose filings based on their tax status, form of organization, or jurisdiction. Appointment of local directors might require a filing in some countries.

Filings proliferate quickly for general counsel. Legal entity management keeps filings organized, but more important notifies general counsel automatically of upcoming filing deadlines.

Meeting Minutes

Meeting minutes are another type of document that grows quickly. Imagine the implications of a few business structures and meeting frequency over five years:
Small or Medium Enterprise with 5 Operating Entities
5 committees and the board X 4 meetings X 5 entities X 5 years = 500 meeting minutes
One Board, No Committees per Board, but Active Boards
1 board X 8 meetings (regular and special) X 5 entities X 5 years = 200 meeting minutes
Private Equity or Holding Company Portfolio
1 board X 1 meeting (annual) X 200 entities X 5 years = 1,000 meeting minutes

Obviously, these examples are not representative of every or even any organization. The examples do demonstrate rapid growth in meeting minutes with increases along just one trajectory: boards and committees, number of meetings, number of entities, and number of years.

Meeting minutes have a date, but not an expiration date. Under most circumstances, meeting minutes do not relate to a jurisdiction, but they might in some cases. So entity management needs to separate meeting minutes from other corporate documents and track the right kind of data about the meeting minutes.

Key Agreements

Organizations form legal entities in large part to enter contracts and to manage risk from those contracts and related operations. Contract management goes beyond entity management. Still, some agreements are indispensable to the general counsel’s oversight of the legal entity.

For example, all ownership agreements, such as shareholder agreements for corporations, membership agreements for limited liability companies, or partnership agreements for general, limited, or limited liability partnerships, must be readily available to general counsel in the entity record.

Intellectual property ownership and license documents that are critical to the company should usually be part of the entity record as well.

Important entity documents might also include intracompany agreements for tax or other purposes.

Directors and officers insurance (D&O) and errors and omissions (E&O) can be grouped under this agreements umbrella, provided that the entity management scheme for documents has a separate type for “Insurance”.

The same tactic for distinguishing between flavors of organizational documents works for agreements too. Adding document types labelled insurance, ownership, and intellectual property, easily solves this document management problem posed by corporate agreements.

Why bother to store key agreements with the entity record in the first place? There are two answers. First, it makes the general counsel’s job simpler. All the data and documents for a single entity are always in the same place.

Second, corporate functions of the general counsel go beyond storage and filings. The general counsel is a risk management leader for the organization. Entity management is a critical legal risk management tool, because it notifies the legal team of important due dates and expiration dates automatically.

Compliance and Filing Requirements

Objectives of Corporate Compliance and Filing Requirements

A legal filing is both a document and an event. As a document, it has a name, a filing date, an expiration date, and a jurisdiction. That information is necessary for legal document management. However, filings are also more than mere documents.

Filings are events with deadlines. Late filing is, at best, a hassle; at worst, a trigger for fines and penalties. Filings are an artifact of effective corporate compliance by the general counsel’s office.

Legal filings and compliance tasks generally require action. Compliance is a set of prohibited, permitted, and required actions. Entity management provides a mechanism to record, assign, and track completion of compliance requirements.

General counsel can derive more insight from legal entity management by classifying requirements.

There are three examples to illustrate how entity management can facilitate compliance: annual reports and statements, regulatory filings, and government permits and licenses. It is certainly conceivable to devise a more gradual classification scheme to include requirement types, like tax obligations, reporting requirements, or even reference to specific statutory or regulatory provisions.

Annual Reports and Annual Statements

Annual reports (or annual statements) are the most basic legal entity requirement. Almost every national or subnational jurisdiction requires that a legal entity renew its incorporation status periodically. The renewal period is often annual, but it might be a longer duration.

The annual report pertains to a jurisdiction. Some entities might have to file more than one annual report depending on the jurisdictions in which they do business. Entity management needs to support assigning an annual report or renewal filing with a particular jurisdiction.

Regulatory Filings

Countries around the world impose compliance obligations on companies operating in certain industries. Healthcare firms must track provider licenses and file reimbursement and procedure information. Transportation companies must supply wage and hour data to compliance with restrictions on drivers, engineers, and pilots. Manufacturers and distributors confront environment reporting requirements regarding production and transportation of hazardous materials. Financial services firms must navigate banking, insurance, and securities rules. Just to name a few examples.

Compliance obligations which pertain to a legal entity can be monitored with entity management practices. There are two steps to using entity management to monitor regulatory filings.

Step 1. Classify Requirements by Type of Filing or Requirement

Entity management delivers value over the long term when it is designed correctly, which means identifying the types of regulatory filings necessary to track.

The classification can be as broad as “Federal Government Report,” or as narrow as “HSR 102 Premerger Notification.” Tailor classification to your needs.

Step 2. Add Requirements by Entity

Add necessary requirements for each entity. A requirement item for an entity should include a short descriptive name, the relevant jurisdiction, and the due date. Many regulatory filings recur on a periodic basis. In those situations, the recurring period and frequency should be part of the record. Notifications are reset with each recurring period.

Government Permits and Licenses

Real estate intensive organizations often have a significant number of permits and licenses tied to an entity if for no other reason than separate entities own specific properties.

Zoning, construction permits, and land use exceptions all require filings and typically follow up activity. All of that regulatory history can be part of the corporate legal record with the help of entity management.

These tools allow general counsel to deliver and demonstrate value to the rest of the organization while fulfilling risk management duties.

The examples here are only meant to illustrate the range of possibilities for weaving entity management into the compliance function for general counsel.

Ownership and Org Charts

Objectives for Ownership Tracking and Org Charts

Generating an org chart is a key function of entity management. The majority of corporate org charts are created by hand with presentation software or more technical drawing applications. There are several problems with hand created org charts:

1. They may be inaccurate the moment they are finalized. With one change to any ownership in the corporate family, the org chart is no longer accurate.

2. They are not validated. The very phenomenon that makes an image attractive prevents anyone from verifying that the image reflects the underlying legal data about ownership.

3. The focus is fixed. Org charts place an entity in focus to see all the parents and subsidiaries around that entity. If one company or person is the owner at the top of the chart, then that focus will reveal the entire org chart. However, when ownership at the top is diffuse, then the org chart looks different depending on which entity is in focus.

Legal org charts are also a rare opportunity for general counsel to communicate visually with business colleagues. They reveal gaps in the corporate registry. The visual density of org charts means that they communicate a lot of information quickly when done correctly.

To deliver the benefits of legal org charts without the drawbacks of hand created pictures requires starting with ownership relationships.

Manage Ownership Relationships

Entity management as a solution begins to sing when there are several entities. The first step to an org chart is to turn the equity relationships into data. The parent and subsidiary relationships will not materialize out of thin air.

The most reliable way to add ownership for entity management is to focus on one entity at time and then add that entity’s immediate parents and subsidiaries.

It is not necessary or even desirable to add parent and child several generations away. Attempting to add parents and subsidiaries several steps away leads to mistakes because it requires research and inferences. It is better to let entity management software automatically create the relationships several steps away.

Once a parent-subsidiary relationship exists in one direction it is visible when either entity is in focus.

Generate Org Charts

Org charts should be generated, not drawn. When entity management generates an org chart, the image is grounded in data, data about the equity relationships.

Org charts have vertical layers and horizontal spacing. Vertical layers communicate a hierarchy of ownership. Some entity management software will crawl the ownership data to generate the org chart both vertically and horizontally.

It is important that the org chart preserve the layers even when ownership skips a generation. In entity management, generation skipping is when an entity has a direct ownership interest in an entity several layers away.

Org charts center on an entity in focus and show the corporate family relevant to that entity.

Officers and Directors

Objectives for Officer and Director Management

Keeping up with officers and directors, especially with many entities under management, is a hassle and a legal risk. A functioning management structure, even if small, helps preserve the risk management benefits of the corporate veil.

However, people change roles, move to new offices, leave and join the company. Some organizations impose terms of service on board members. Legal entities might also have management and advisory boards.

Entity management software solves this problem with efficient tracking and reporting of officers and directors.

Multiple Roles and Multiple Entities

General counsel struggling to keep track of officers and directors are usually working with a pool of individuals from the ownership group and the management team. Individuals from those two groups serve on multiple boards and often in multiple roles. The CEO, for example, might be both an officer and a director.

It is easy for the individual serving on boards to lose track of what boards they are on. Entity management allows the general counsel to produce a report of all officer and director roles for any and all individuals in the corporate family.

With entity management it is also a trivial matter to assign officers and directors to new entities or to change the board make up because the relevant pool of candidates is already in the system.

Even when a new individual joins the company, add that person once and the officer or director is available for assignment to any other entity.

Terms of Service

Tracking terms of service for officers and directors is useful under two circumstances. First, the organizational documents or the enabling laws require finite terms of service for directors. Non-profit boards, for example, often impose defined terms of service on board members which might be subject to election or reappointment.

Second, even if there is no obligation to set term limits for officers or directors, recording each person’s start and end date allows general counsel to analyze who was on the board and who was on the management team during a period of time.

Entity management software allows an easy look back to determine who was involved for a decision or during a fiscal year.

Jurisdictions

Jurisdictions are at the core of legal entity management for general counsel. Most general counsel do not have the luxury of worrying only about one jurisdiction. They must consider the costs and consequences of legal relationships that span the globe and cross state boundaries.

Objectives for Jurisdictions

Business is both global and local. Multi-jurisdictional operations are no longer just the purview of large corporations. Entity management requires a comprehensive inventory of all the jurisdictions with which an entity has a legal relationship.

Tailored List of Jurisdictions

Based on a survey of 101 countries, the Organization for Economic and Cooperation Development (OECD) estimates that there are 522,000 subnational jurisdictions regulating at least some activity within their boundaries.

The general counsel’s list of jurisdictions does not need to exceed half a million. Instead, each organization needs to develop a tailored list of national and subnational jurisdictions. That list will certainly change, but just having a list opens powerful reporting and compliance management.

Crosses Entities, Documents, and Requirements

Jurisdictions cut across the main entity record, corporate documents and records, and requirements:

• The place of incorporation anchors the entity record,
• Filings and related documents pertain directly to a jurisdiction, and
• Compliance requirements and obligations pertain to the regulatory regime created by a national or subnational jurisdiction.
  With a tailored list of jurisdictions, general counsel can easily associate the entity record, any document, and requirements with a specific jurisdiction. Reporting and analysis becomes a simple matter with a common list of jurisdictions.

General counsel can access all requirements by jurisdiction regardless of the entity record.

Reports

Objectives for Legal Entity Reporting

Reports are an important benefit of entity management software. They provide a consistent and valuable communication device outside the legal team. Often senior management does not have the time or the inclination to wade through a long legal memo about compliance requirements for a particular business unit.

Entity management software transforms those text requirements into data which is easier for management to consume and use. Reports empower general counsel to demonstrate their contribution to the broader organization.

Entity Reports

There are many types of reports about legal entities. A report might be as simple as: “Show me all the entities incorporated in California.”

An entity report might be more complicated: “Show me all the entities with pass through tax status, which were incorporated in California prior to 2016.

Document Reports

Reports about documents are under appreciated because there is often a focus on the entity. However, looking at documents across the corporate registry can be illuminating.

General counsel might ask: “What D&O insurance policies are expiring in the next 9 months?” Entity management software opens up the possibility to answer this question in less than 2 minutes.

Annual Reports and Requirements

Compliance and filing requirements for the entire corporate family are accessible with reports. It is not necessary to open the file on each entity, make note of the filing requirements, and then move to the next entity.

Entity management software allows the general counsel to produce a list of all legal entity requirements in one place and tailored to a particular purpose.

Collaboration

Concurrent with the expansion of general counsel duties to include advisor and risk management for the board and senior management emerges a need for better collaboration within the legal team and between the legal team and the rest of the organization.

Collaboration Objectives

Collaboration takes many forms. It might be as simple as sharing details about a legal entity with a new executive. Legal counsel and corporate paralegals collaborate to complete a raft of filings on time. Outside legal counsel adds filings and documents for a new jurisdiction.

Regardless of the form of collaboration, there are two pillars which support safe collaboration for general counsel: technical security and access controls.

Security

Data and documents stored in entity management software should be encrypted at rest and in transit. What does it mean to be encrypted “at rest” and “in transit”?

Encrypted at Rest

Encrypted at rest means that the data stored in a database or filesystem is stored as a hash and not in the clear so that if someone obtains a copy of the database or files, the contents would be a random sequence of letters, numbers, and symbols.

When data is encrypted it is exceedingly difficult to decrypt. Automated backups and redundant systems should also be encrypted.

Encryption in Transit

Encryption in transit means that the connection between the browser and the server is secure. When entity data is transmitted over Secure Socket Layer (SSL) it is encrypted in transit. The easiest way to confirm an SSL transmission is the first part of the URL (https://). The ’s’ in ‘https’ is the clue that the connection is encrypted.

When data is encrypted in transit, then anyone who intercepts the data will only see letters, numbers and symbols.

Access controls

Access controls provide a way to limit the users who can access entity records. A flexible access control system allows general counsel to share legal entity data while still protecting sensitive information.

General counsel might, for example, grant access to outside counsel to view only the legal entities incorporated in one or two jurisdictions.

Customization

Notwithstanding common duties and objectives for general counsel, each organization has a different business strategy and sphere of operations. Entity management software needs to accommodate the particular needs of each organization.

Objectives of Customization

Customization of core entity management features must satisfy three criteria:

1. Is customization included in the standard version at no additional cost?
2. Is customization easy to implement without an IT project?
3. Is customization flexible enough?

Answering yes, yes, and yes, provides a cost effective yet powerful solution for general counsel.

Core Customization Requirements

There are several areas that need customization for every corporate family:

• Forms of organization (legal entity types),
• Document types and document categories,
• Jurisdictions, and
• Requirements and compliance obligations types.

Easy Customization

Ease of customization is best managed by navigating to an administrative area in entity management software and then adding, editing, or deleting a form of organization, document type, jurisdiction, or requirement type.

Flexible Customization

There are two straightforward ways to make entity management software more flexible: tags and custom fields.

Tags are semi-structured data elements which allow general counsel to create a tailored list of additional data, such as tax status or business units.

Custom fields are the ability to add data collection elements when users create a new entity or modify an existing entity.

These two techniques make entity management software adaptable to any organization.

Conclusion

Entity management software can empower the general counsel and the entire legal team to deepen the relationship with the business while managing risk and improving compliance.

General counsel must find ways to both manage contract risk and increase contracting productivity on a limited budget. General counsel are often flooded with contract requests. Sales people, business managers, and executives mutter about lawyers being the “business interruption team” while the general counsel tries to balance their competing objectives: fast contracts and careful risk management. No legal department wants to be the bottleneck for contracts.

Common contracting process mistakes in the legal department

How to increase legal department productivity without compromising legal risk management? The two most common answers are to buy expensive, complicated contract drafting/negotiation software or to surrender the production of “routine” contracts to the business people with an automated system. Both of these answers are wrong for most corporate counsel.

Contract drafting software does not change the essential nature of in house contract drafting. The primary benefit of these solutions is that they expose the drafting process to a wider group of colleagues. They also endeavor to provide an audit trail of who made what changes so that the legal team can track down whoever made unauthorized legal changes after the fact.

At the other end of the spectrum, legal teams concede the drafting process to highly automated systems. Business colleagues, such as sales people, enter some data about their deal, and the system spits out a completed document. Lawyers rationalize this concession to productivity over risk management by locking down the terms users can modify and the types of agreements they can access.

Unfortunately, the risk inherent in this approach is significant, because even small errors are replicated across a large pool of contracts. While one defect in a single contract might not be a material risk, in the aggregate the contract portfolio might have unacceptable risk. Moreover, any missing access control will allow a user to circumvent the careful controls put in place.

General counsel need a solution that materially improves productivity without compromising legal risk management. The optimal model in most cases is similar to the fourth principle of the lean process. General counsel need to “pull” contracts that are fully ready for their input. That same system should also help general counsel engage with their business colleagues more effectively during the entire contract lifecycle, not just during negotiation.

The contract request process

Step one is to have an effective system for business colleagues to submit contract requests. Email is completely inadequate. Email is unstructured, inconsistent, and uncontrollable. We need a system which standardizes contract requests from the field and routes them to the appropriate person.
The "appropriate person" is often not a member of the legal team. What general counsel need first and foremost is to know that the contract request is for a real opportunity which the business has vetted. It is useful to insert a review step between the initial request and the work assigned to the legal department. This approval step ensures that the legal department does not waste time on deals that will not or should not see the light of day.

We can take this approval process a step further. In addition to requesting new contracts, our contract management system can support requests for supplemental or additional documents during the entire contract lifecycle. Simply adding this step can significantly improve both the quality and quantity of the legal department’s work.

Finally, general counsel can decide when to “publish" the contract when it is executed. This publishing decision after contract execution constitutes a formal handover from the general counsel’s office to the contract management team. Unlike an email, however, the legal department and the contract management group will share a single system which allows them to collaborate over the entire contract lifecycle. The handover is now data: trackable and reportable.

General counsel and contract management

Contract management is a distinct profession with a well understood body of knowledge. Contract management is not the practice of law. That said, contracts have a life of their own which requires monitoring and nurturing. In many organizations the legal department simply throws an executed contract over the wall into the contract management department. The legal department may hear about it again when it is time to renew, amend, or terminate the contract. This approach to contract management misses revenue opportunities and causes unexpected risk to materialize.

Photo by Cytonn Photography / Unsplash

A shared contract management system that focuses on the contracts which are fully executed promotes collaboration between the general counsel and the management team. Effectively managing the contract portfolio together allows both general counsel and contract managers to make a measurable impact on revenue and contract risk management. No one will remember that you drafted the force majeure clause just so, but everyone will remember that you identified an opportunity to decrease prices during the term of the purchasing contract.

General counsel need to balance productivity and risk management

Lawyers are rarely trained to see themselves as part of a larger process or team. It is tempting to think that the way to improve productivity is to change the way we are drafting. Drafting is our craft. Drafting is our value to the organization. General counsel harness years of business and legal experience to anticipate the unexpected, turning that insight into language which protects the organization. Lawyers should not surrender the drafting process nor should they purchase software that maintains an illusion of faster drafting.

Instead general counsel should balance productivity and risk management with software that allows them to focus on what they do best. Ensure that only fully developed deals get into the legal queue and stay involved with the contract management lifecycle to prevent problems and seize opportunities.