Interview with Chris Santomassimo, Esq.
Interviewer: Andrew Zezas, SIOR
Following is the transcript of a CFO Studio video between Andrew Zezas, CEO of New Jersey based Real Estate Strategies Corporation and Chris Santomassimo, Esq. Visit www.CFOstudio.com to read about this interview and to watch the entire video interview.
Mid-Cap CFOs and Legal Risks
Zezas: Hi, this Andrew Zezas, your host at CFO Studio. I have the pleasure of sitting here today with Chris Santomassimo. Mr. Santomassimo is a partner at Nicoll Davis & Spinella and is also general counsel at AGFA Corporation. Chris is here to talk to us today about risk and mid-cap companies. Chris, it’s nice to have you here on CFO Studio.
Santomassimo: Thanks Andy, it’s great to be here.
Zezas: Chris, we’ve had some very dynamic conversations about risk, about mid-cap companies, and about creative approaches to mitigating that risk. Why are mid-cap companies experiencing so much risk these days?
Santomassimo: You know Andy, what you find at a mid-cap company that does not already have its own legal department or general counsel is that quite often, the responsibility for dealing with legal issues and legal risk will be pushed down to the finance function, to the CFO. So, the CFO is somebody who manages the finances of the company and is faced with not only managing the legal issues, but also trying to understand when to bring in legal assistance and when not to. Quite often, especially in a company that is looking to manage its expenses or has downward pressure on expenses, maybe the decision is made too late very often. A CFO or a finance executive may unfortunately bring in legal assistance too late, only in the case of a crisis. And, that happens primarily because of the traditional nature of how legal expenses are billed. It’s a significant expense, but it’s billed on an hourly basis. So, when you’re constantly going to an outside firm, a CFO may feel as if a clock runs every time he picks up the phone, and as a result, may not bring in legal assistance quickly enough.
Zezas: So, a mid-cap company doesn’t typically have their own inside general counsel. Most mid-cap companies probably don’t have a need for a full-time general counsel.
Santomassimo: In many cases, that’s right.
Zezas: And, you’re saying typically the alternative to inside is the traditional legal model where it’s on an hourly basis. I can appreciate how a CFO, thinks “should I or shouldn’t I pick up the phone” because the clock starts ticking. Then, how does a finance executive, who by the way, is not a legal expert- but you’re right it defaults to him- how does a finance executive know when to bring in legal counsel?
Santomassimo: You know, unfortunately, we find many mid-cap companies, when they’re buying legal services in this way, bringing them in too late only in the event of a crisis. So, what you don’t have is somebody who sits at your executive table, understands the business issues that you face on a daily basis, counsels you through day-to-day issues, and helps you manage risk that way. They’re only brought in when there’s a piece of litigation or investigation or when there’s something that absolutely demands legal services.
Zezas: So, you’re saying most mid-cap companies are viewing the legal counsel, those that don’t have internal general counsel, they’re viewing the legal counsel as a fixer to a problem after the problem occurs, as compared to someone who can see it coming?
Santomassimo: Exactly. I think a good general counsel who’s sitting at the executive table is able to foresee issues, should be able to anticipate the risk, and fix them while the issue is still smoldering.
Zezas: Damage control in advance.
Santomassimo: Exactly right. You know, we’re also surprised to find out that very many companies, when they’re doing contracts, they do contracts for everything from buying services to buying goods and dealing with their customers. Quite often it’s only business people who look at the business terms in the contract. They chalk up everything else to what they might call legalese. And, they run the risk that there are terms in the contract that just don’t fit the business model, or they put the company at risk. Quite often, those issues don’t really erupt until they’re out of control and you’re in a crisis.
Zezas: So, what you’re telling me is that they’re reviewing contracts, they’re looking at business, finance, and operational terms. They’re addressing those. They’re not addressing legal terms very often and they’re just chalking it up and worrying about it later?
Zezas: So, what happens in a case like that?
Santomassimo: The contracts don’t get reviewed. Now, a good general counsel would never let that happen. A general counsel sitting in the company would have a process in place, would look at these contracts whether they’re small, large, or otherwise, and fix the risk before they get signed.
Zezas: In a perfect world every company has a general counsel. But, we established a moment ago, that most mid-cap companies either don’t have a need for the hours- the full-time hours- of a general counsel, or as an austerity measure, they decide that they don’t want to pay for a full-time counsel. What’s the alternative?
Santomassimo: Well the alternative, of course, that many companies use is that they go outside to law firms, and they do it on an hourly basis. We find that mid-cap companies just simply cannot afford that model, and part of the reason is that it’s not only just expensive on its face, but it’s really not an effective way to go outside. I think an executive is less likely to seek the advice that he wants, and just maybe make a decision from the hip, when they have to worry about the clock running all the time.
Zezas: OK, I see that. And I think I see that in a lot of companies that we know. You’ve talked to me about an alternative to inside general counsel, and an alternative to the traditional hourly billing. And I believe you call that “outside general counsel”?
Zezas: How does that work?
Santomassimo: The “outside general counsel” model essentially gives a company a general counsel. It gives that company a lawyer who is dedicated to their business that sits with them, counsels them through issues. But in a sense, if you don’t need a full-time general counsel you’re able to share the cost with other companies – you use them on a part time basis, use them on an as-needed basis. The benefits are these: I myself, for example, am a sitting general counsel. I understand what it is to be a general counsel. And, I think it’s fair to say that there are some distinctions between being an experienced GC working for a company as opposed to just an attorney who just represents companies on the outside. I think I’m better able to understand those issues and the pressures that the business people see. So you get that benefit, but you also get a fixed fee. It’s an “all you can use” service, for a fixed monthly fee that’s based on the risk that you’re facing and the type of usage that you would like to have as a company.
Zezas: Alright, that makes sense. So, in a mid-cap company the finance exec gets the benefit of having a general counsel almost as if he was full-time, at a lower cost, on an as needed basis. So, this is not an hourly approach though?
Santomassimo: No, we develop a price that makes sense based on the type of risks – the type of business the company faces, and the type of uses they’re likely to see. What’s nice about it is we establish a fixed fee, which means if you call us for ten hours a month, it’s the same as if you call us twelve or fifteen hours a month. In that way, we share some of the risk of the usage with that client. We operate just like an employed general counsel would. The benefit we give them is the predictability of the expenses every month, we also give them a team approach. You know, many companies who decide to hire a general counsel might be disappointed when they find out that the GC is not an expert in all of the areas. So, they’re not able to suck in all of the work that was formally sent out outside. What we’re able to provide, in a sense, is a whole team approach. We have different people at the firm who not only have my experience, but also have experience in other areas that complement me. So, we’re able to provide a team approach to a problem that quite often is not solvable with one hire.
Zezas: So, the benefit of an experienced GC, not just an attorney, is that this is not a legal staffing model you’re talking about, this is an honest to goodness general counsel, someone who understands the interplay between risk, the law, business, finance, and maybe a host of other disciplines…also has the ability to draw other services in at a lower cost than what a normal general counsel would cost, at a lower cost than an hourly [hire], and not the insignificance of a legal staffing model. That’s an excellent approach!
Santomassimo: Right! We essentially provide all the benefits of having an inside general counsel, or a team of lawyers in-house. And, I think we distinguish ourselves from a staffing model, because we control and manage all of the legal work. It’s not as if you hire an attorney to bring in on a temporary basis who’s got to report to the finance executive. That’s essentially doing what you’ve done already with a little bit of extra legal mind in-house. We’re actually going to give you that general counsel solution. We’re going to give you somebody who’ll be your general counsel, and have the same services that the staffing model would provide.
Zezas: That’s excellent! Chris, we’ve got about a minute left. If you had to leave our viewers with one thought, a hot item of 2011 in a nutshell, what would you suggest that they focus on? What would finance executives be best to focus on in 2011?
Santomassimo: You know the issue that we speak to a lot with our clients about these days is ethics and compliance, or corporate compliance. Many companies don’t realize that if they’re selling to the federal government or they’re doing various things with the federal government like being a Medicaid, Medicare provider, there are specific regulations that would require them to have in place an ethics and compliance program, which is a program that helps them ensure that they’re going to operate in an ethical way and follow the law. And, it also insulates them from the effects of criminal behavior by individual employees of the company.
Zezas: And, through the outside general counsel approach you can put in place an ethics and compliance program?
Santomassimo: Yeah, we’ve done it for other companies – we’ve done it a number of times for other companies. And, we find that it not only solves a gap in their risk mitigation strategy, but it also provides them with a bit of an insulation from the effect of a criminal prosecution, which in some cases, may put companies out of business or sideline them for a long time.
Zezas: I would imagine so. Chris, the outside general counsel model sounds superb for mid-cap companies. I want to thank you for being here at CFO Studio, and I enjoyed this and I think we’re going to invite you back for some more.
Santomassimo: Thank you, Andy. I appreciate it.
Zezas: Nice having you here. This is Andrew Zezas, with Chris Santomassimo.
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