Not *strictly* legal: When and how to say no as a GC

Jordan Breslow a former  US Attorney, and then general counsel, now retired, has featured in one of Ben White’s excellent podcasts for Crafty Counsel. He introduces and links to it here.

The podcast is, in essence about when and how to say no as general counsel. And issue on which one usually hear’s either nothing or bland evasions. This example is different. Jordan’s CEO, Ben Horowitz, has said what kept him out of jail was good luck, an outstanding general counsel, and the right organizational design. Turns out Jordan thinks it also depended quite a bit on Ben.

The podcast is a fascinating account of how Jordan told the CEO not to do something. But it was not the picture of a saint standing up to a sinner. It was not a situation of clear illegality. It was a situation which, at bottom, he simply did not understand the logic of. It did not feel right.

The failure of the proposal to make sense was a clue to what subsequently proved, for other companies, to give rise to serious illegality. Economic pressures, market practices, and the advice of private practice law firms (there’s an intriguing if brief diversion into their impact on in-house culture), were the sorts of things militating against Jordan calling out something as wrong. He did it anyway.

The story relates to the granting of stock options to new employees, and in particular how to price them. A suggestion was made by a newcomer to the organization to say that the price of the stock option should be lowest the price that the stock was at during the previous 30 days rather than the day the employee joined. They had, she said, used the same practice at their previous organization (something she was later to do jail for). It wasn’t a hair-brained scheme in many ways; this was during a time when the stock price was “incredibly volatile”; fairly pricing options for employees coming aboard was tricky.

The CEO, Ben H , had asked Jordan B as GC whether he approved of that practice. And Jordan, happily for them now, said no. His reasons are instructive. It is not a clear-cut, obvious illegality that he is standing up against, but something much more subtle.

I did what I normally did in a situation when I’m asked any question. because nine times out of ten, I don’t know the answer. It’s particularly as general counsel …. the word General is really the key. You just cannot know the answer to all the things you’re asked on a daily basis. So first I did some reading and tried to figure out what the issue was. I talked to other people in the industry. I talked to our outside counsel, a sort of famous big law firm in Silicon Valley. Looked at all. And in my mind, it just didn’t make sense…

If we’re trying to say comply with the regulation that says, issue stock at its value on the date of grant. The date of grant can’t by definition, just magically, always be the lowest… the day that the price was lowest the previous month. That’s sort of seemed nonsensical to me.

Other people were doing it. The advice from outside law firms as well, there’s nothing strictly illegal about that and it’s, and I think that may well be correct technically. Although it’s not illegal, it imposes an accounting and disclosure obligation and the illegality can come from the fact that you failed to disclose and account for this practice.

But all in all it seemed like too good to be true to me and I said so to Ben [his CEO].

So I think the story turns to Ben and what kind of person he is and we can talk about that at some length because he’s quite an interesting person, but for Ben that was good enough. I told them I looked at it, it didn’t make sense to me. I didn’t think it was strictly legal and I didn’t want to mess with it. And so, for Ben his General Counsel said, let’s not do this, so let’s not….

And he went to our CFO and told him of his decision

When Ben White (as the Interviewer) emphasises how Jordan was advising against market practice and the economic interests of his fellow employees, Breslow says:

All true. And as I said, this temptation here and one of the themes running throughout this conversation is, you know, there’s always the temptation to do something that your gut tells you this maybe this isn’t right, but boy, if I could find a way to do this, I would maybe I would get a new stock grant. I might personally have benefited from adopting the practice. New employees would have benefited; perhaps the company would have benefited by …attracting the best and the brightest new employees because of our liberal stock option granting practice. So I’m… it wasn’t, I wasn’t cavalier about saying, let’s don’t do this. I was aware of the fact that there are many people who would be unhappy with my recommendation, but it didn’t at the end of the day, change the recommendation

He also pointed out what was being suggested was not unmotivated by valuable ideas:

But we work for a company where this price of the stock changed daily sometimes significantly so it can be rather unfair. Some people are they, you know, I started yesterday and I got $2 a share and you started today and its six dollars a share, you know, so I don’t think it was entirely sinister. But nevertheless, it’s just continued to just to not make sense to me and not just with something that wasn’t comfortable…

The result was his company was not caught up in the scandal, where others were. Tcolleague who had suggested the scheme to Breslow’s firm went to jail.

He puts his prescience down to sticking to his guns and speaking up for what he believed in. Interestingly he thinks he would not have lost a lot of sleep at the time had he gone the other way. But because his CEO, he said, was a great CEO, he would listen when Breslow said something was wrong. He wanted to do the right thing. His CEO said of this:

…you told me something, I didn’t want to hear that. I appreciated you telling it to me and at the end of the day leadership is about a search for the truth

I know, I know. He’s written a book about it.

The CEO also had thoughts about organizational design. He insisted the GC would always report to the CEO, not the CFO or another exec, so that another exec could not subvert the law by coming between him and the GC.

A second part of the design was a speech he regularly gave to the finance employees,

“that went like this. In this business, we may run into trouble. …We may even go bankrupt, but we will not go to jail. So somebody asked you to do something that you think might put you in jail, call me.”

Breslow says feels “fairly strongly” that reporting only indirectly to the CEO is self-evidently wrong. He’s there to be a check on the CFO in part. It’s a necessary tension. It’s worth hearing a bit of his explanation because th word fairly seems to have the same origins as the Canadian use of quite:

I also think I’ve worked in a number of public companies with a number of CFO’s and their strong-minded people, I find they don’t get to be CFO of a public company without having a fairly strong will. And they’re also tend to be creative people looking for ways to make the company a success. And so necessarily it’s helpful to have somebody who doesn’t report to them wade in on their perspectives, their suggestions, etc.  So to me that seems a bit self-evident.

…I think part of the general counsel’s role is to keep the CFO honest or the chief commercial officer. I would equally never report to the head of sales, or whatever revenue or however, they’re label it these days. And that would be my day-to-day most frequent conflict again, not casting aspersions on them or allowing them to cast on myself, but they have an objective and my goal is to keep them honest …to help them achieve their objective, but keep them honest….

One of my more recent clients said to me recently, Yeah, I know you Jordan, you keep people from acting on their own worst impulses and I appreciated him saying that but …we all have our …bad impulses and if the person who decides your bonus your compensation, your very livelihood is the person whose impulses you’re responsible for checking. It just seems untenable to me.

On the importance of the tone from the top, he recognised the cliche but also the centrality of it:

I think is indispensable. …Again the world’s full of temptations and when you’re running a business you’re trying to build something meaningful, but you’re also trying to make money, you know, the root of much evil so to speak. And if the pervasive view is, let’s do whatever we can get away with to maximize profits….It’s it’s to me, it’s just critical. Let’s do the. Let’s do the best we can… Let’s push the envelope where we can push it. Now, let’s be aggressive, let’s be creative, but let’s let’s have a clear boundary line. Let’s not do anything illegal. It’s not worth it.  It’s just money after all …I know, it’s a, it’s a phrase we hear bandied about a lot – tone at the top – but it’s critical…. I never felt unsafe and saying no to then or making a recommendation that they might not want to hear and that that again, I credit him more than myself there.

So tone helps build safety, and safety is clearly massively important. He could not have spoken up if he had not felt safe Remember here the illegality was not clear and present. It was opaque and indistinct, it was market practice, everyone wanted it, and it solved a problem for them too. He spoke up anyway. He didn;t need to wonder if he would back down. he was just listened to.

A lot of the safety came from his CEO. And Ben W probes Jordan B, “The General Counsel as a business partner. Some people may be struggling a little bit with that feeling that they are…. You talked before about …never feeling unsafe …and some listeners may be feeling unsafe. Do you have any advice or perspective to share with anyone who may be trying to, is struggling a little bit with, finding that balance…?” His answer reminded me a lot of Steven Vaughan, Cristina Godhino and my book, where we discussed independence not as a black and white concept but as a continuum. Let me be clear, this idea worries me, but it also makes obvious sense, and is here again in Jordan’s words:

…I absolutely ascribe to the view that the general counsel is a business partner and your job is not just to define laws and tell people where the boundaries are ….my first and foremost task is how do I make this a success? I want to dwell on that a little bit because there’s something in there that provides a  …a key to how to get listened to when you do say no. I think we’re all familiar with the ….the arc of an attorney’s comfort level, and saying yes, and saying no over the course of his or her career…

…We probably say no far more often than we should [he means, I think, particularly early on]. No is in some cases helpful but often not a helpful response. Can I do this? No. Well, technically correct but not helpful. What would be more helpful would be, Well you can’t do it that way, but let’s find a way to get done. What you want to do that involves less legal risk or risk of going to jail …Let’s find a way.

….most of the time when I’ve received compliments from peers colleagues, it’s because I helped say yes to something. In my mind, if you say yes 98% of the time and then you have to say no to something, it stands out, you have credibility. ….it’s important not to always say no, equally important not to always say yes. And you make, you make a lot of friends by saying yes. But again, I think that the tricky part is, say yes as often as you possibly can, as long as you’re still not sacrificing your ethics or legal guidelines, so that if you do have to say no, you’ve built some credibility

You can listen to the podcast here.