Managing Legal Risks Without a General Counsel

How the CFO of a growing company can serve as a partial legal steward.
Andy BrownsteinMarch 22, 2022
Managing Legal Risks Without a General Counsel
Photo: Getty Images

In a 2016 article for the Harvard Business Review, former General Electric general counsel Ben W. Heineman, Jr., wrote, “The CFO-GC alliance has always been important because the finance function and the legal function are truly the nervous system of the corporation — sending critical signals to all parts of the company about the accuracy of the financials and compliance with the law.”

Heineman makes a good point. But what’s a CFO to do if there is no general counsel to help handle legal matters?

Andy Brownstein

Small, growing private companies tend to hire a CFO before hiring a general counsel (GC) or developing any in-house legal capabilities. Instead, they rely on outside counsel to manage legal matters and wait until they reach a certain size and scale to build a legal department.

However, just because there’s no high-level executive to oversee legal issues doesn’t mean legal oversight isn’t needed. In the absence of a GC, that oversight often lands on the CFO’s desk.

In my corporate management experience, as a CFO and general counsel of a start-up that grew into a 50-employee business, and now in a second stint as a lawyer mainly serving private companies, I’ve had the opportunity to work with and for CFOs integrally involved in legal matters at their organizations. 

Even though they have little to no legal training or experience, CFOs have well-honed skills and instincts that allow them to competently manage legal issues. They’re smart, meticulous, and know how to manage outside professionals. Most importantly, they have the one skill common to good CFOs and good lawyers — they know how to assess risk.

How does a CFO get from having good instincts to competently managing legal issues? Here are some tips.

Learn Industry Legal Issues

 Most industries have unique state and federal legal and regulatory schemes. Every industry also has its own legal norms and practices reflected in, for example, commercial contract language. The CFO of an automotive supplier, software-as-a-service company, or health care system needs to know the nuances of standard industry contracts. By doing so they can understand the contract parties’ obligations and assess risks. 

Due to lawyers’ continuing education requirements, most states have training programs available on almost every legal issue imaginable, and the programs are not reserved for lawyers. A CFO can and should take advantage of such training. In addition, many law firms conduct seminars on issues relevant to business leaders, and they are generally happy to invite executives whether the company is a client or not.

Know Legal and Governance Requirements 

 With no GC in place, many legal and governance issues associated with entity management may fall to the CFO. Entity types include C corporations, S corporations, limited liability companies, and partnerships. Each imposes different obligations in tax, legal and regulatory compliance, governance, management, and company boards.

Having a form contract at the ready puts a company in a more advantageous negotiating position.

In addition to filing requirements with local, state, and federal agencies, state statutes impose obligations for shareholder communications, the conduct of board meetings, and record-keeping, among other things. If this area falls within a CFO’s domain, legal training is helpful. In some cases, other service providers, such as accountants and payroll companies, can provide information and training on legal issues that may not require an attorney.

Standardize Commercial Contracts

CFOs add value and reduce legal risks by investing in the developing the company’s own form contracts. While some contracts have to be bespoke, many businesses deal with the same agreements repeatedly. Developing a portfolio of form contracts that reflect the unique needs of a business requires an investment in outside legal counsel. But that investment is often quickly earned back — form contracts reduce ongoing legal fees associated with the negotiation, drafting, and reviewing of contracts.

In addition, having a form contract at the ready puts a company in a more advantageous negotiating position. Whichever party goes first — in this example, the party with a form contract — anchors the starting point of negotiations with their preferred terms. 

Identify and Monitor Risk Landmines

A CFO tasked with legal oversight needs to be familiar with and monitor contingent legal risks. Many of these landmines lurk in contracts within provisions labeled “limitations of liability,” “indemnification,” and “representations and warranties.” If there is no in-house counsel to lean on, a CFO should collaborate with outside counsel to prepare a checklist of these kinds of landmines. That will allow operational risks to be monitored and managed internally.

Collaborate With Other Company Leaders

CFOs need a clear understanding of corporate strategy and opportunities and challenges faced by the different departments. A CFO can help other executives spot issues, in areas such as human resources and information technology, that might have legal implications. To spot those issues, however, a CFO must consistently communicate and collaborate across departments.

Seek Advice from Professional Peers

While CFOs have to be careful not to share trade secrets or run afoul of antitrust laws, peers can be a great sounding board for difficult issues. They can also provide advice or direction on where to find answers. Trade groups, such as the CFO Leadership Council the Association for Financial Professionals, and others can also be resources for information, training, and direction. 

Recognize When It’s Time to Escalate

In some cases, a CFO can handle a trickly legal problem without consulting an outside lawyer. However, spotting those issues that require the involvement of a lawyer, both to protect the company and the CFO individually, is critically important. Areas that require outside counsel may include tax law, pension plans, and employment law, notably when an employee alleges discrimination or harassment.

A CFO cannot — and should not — try to oversee a company’s legal affairs the way an experienced general counsel would. However, with the proper training and access to resources, a CFO can establish systems, monitor and manage legal risks at a high level, and establish guidelines for when to call in outside counsel. 

Andy Brownstein is an attorney with GreeneHurlocker and a former CFO with over 25 years of experience counseling early-stage and mature companies in corporate, M&A, and real estate matters.