Xerox CFO Kathryn Mikells and Xerox GC Don Liu
As recently as 10 years ago, it wasn't a likely scenario to have the general counsel sitting at the same table as the CEO and the company's C-level executives; if the GC did have a seat at the table, their presence was considered transitory. In the wake of the economic recession and an increasingly challenging compliance landscape, GCs are now critical members of the senior executive team.
Within that inner sanctum, one relationship in particular has developed into a critical force for businesses—that of the GC and the chief financial officer (CFO). How genially this duo works together can make or break a company's success. As an organization's senior legal adviser and the ranking decision maker on finances respectively, the GC and CFO need to be a dynamic team that not only mitigates risk, but does so in a way that allows businesses, such as Xerox Corporation, to thrive in this era of heightened accountability and stakeholder expectations.
Traditionally, the GC and CFO might have been viewed as rivals, with the GC looking after the company's best interests through the lenses of a legal expert, a costly challenge. But as the GC role has expanded in the past decade, so too have opinions on taking risks that are favorable toward meeting the company's long-term goals. Both roles span the full spectrum of an organization's activities as chief legal counsel, and CFOs are critical advisers to the CEO and to the governing boards.
“I am of the view that the smart CFOs and smart GCs should be able to agree on just about everything. They both don't want the company to get into financial trouble, and they both don't want them to get in legal trouble,” says Don Liu, general counsel and secretary of Xerox Corporation. “They should have a common interest; the reality is the CFO is responsible for financial planning and is responsible for pushing everyone to do their best. The CFO should create tension for every department; it should be natural tension.”
Liu came to Xerox in 2007 during a time when the company faced ongoing class action lawsuits. Xerox's financial restatement took place following a Securities and Exchange Commission (SEC) investigation and a number of shareholder lawsuits that were filed subsequently—the largest ever in SEC history, Liu says.
The potential magnitude of damages was $40 million, and the company was already several years into those lawsuits.
“They were very mature, very deep into the lawsuits. We wound up settling most of it with one lawsuit still remaining 14 years later. That was dismissed last year and is now on appeal,” adds Liu.
Xerox CFO Kathryn Mikells, who joined the company in 2013, came from the ADT Corporation where she held the same role. While Mikells and Liu are still in the early stages of their professional marriage, the two senior-level decision makers’ styles already appear to complement one another.
“I think GCs should be wearing the kind of hats that say ‘how can we be more creative in how we make our business objectives?’ and coming up with different constructs and different ways to mitigate risk to help the company move forward. For me, that's the way I engage with Don,” Mikells says.
The biggest areas the two work on together is mergers and acquisitions and coming to an agreement on risk management.“For acquisitions, we have to have confidence that they can create benefits for us,” Mikells explains. “We look to get alignment when we are doing big transactions with customers. Almost 100 percent of the time, it's not that we are going to take no risk, it's about how to mitigate the risk.”
For Mikells, her current position with Xerox is the first time in more than 20 years that she left one company for another, as she was merged or acquired out of a job a few times.
“Xerox is at a really interesting point in its history as a services-led company. We have made a lot of progress. That said, I don't think the company is all the way there, and there's more work to be done,” says Mikells. “Both of our organizations are really good at having our radar up for getting involved in issues; sometimes his organization will have their hands in it first. Sometimes it's mine. If you are not involved early in issues, you don't have much of a chance in negotiating them.”
Since regulatory compliance and disclosure has become such a critical focal point for large businesses, the relationship between GC and CFO is more important than ever.
“There's clearly more scrutiny and as a result heightened sensitivity. I think all public companies have put much more disciplined processes in place…The processes are to ensure that both organizations are at the table as we figure out what things are material, especially outside the normal filing disclosures. Where it gets tougher is between those regular filings, ensuring we flag issues that may require faster disclosure. That is something that would tend to get escalated between our organizations,” explains Mikells.
As for internal audit processes and compliance, Mikells says it's about processes with regard to overall fiduciary and ethical duties and being “buttoned up.”
“There is obviously a high level of scrutiny, and you have to be very buttoned up; conducting appropriate training, having appropriate policies in place and managing it from the tone at the top,” she says. “It doesn't fall solely on the legal department.”
Since Sarbanes-Oxley was enacted in 2002, the SEC, the board of directors, shareholders and other relevant entities are increasingly focused on the quality of a company's internal reporting, not just of financial information, but also of business deals and events affecting the financial, business, intellectual property and litigation risk profile of the company.
“Ever since Sarbox [Sarbanes-Oxley], the CFO must certify under criminal law that the company's numbers and the SEC filings are accurate; now the CEO and CFO must certify to the public that their disclosures are accurate. Therefore, there is more of a common interest between the GC and the CFO,” explains Liu. “The relationship between the GC and the CFO and his or her team is closer than ever. The SEC is also much more aggressive with disclosure and reporting requirements, including how lawsuits are disclosed to the public. It has forced an operational proximity between the CFO and the GC.”
The right combination
In their cross-functional roles as GC and CFO, it is also critical to have good board relations in order to meet business objectives.
“You want to have a good relationship with the board, which requires an excellent relationship with your CFO, which in turn impacts your relationship with the CEO, all due to overlap between the legal and the financial departments,” advises Liu. “If you want a smooth working management team, the CFO and the GC have to get along; they have to find a way to manage their differences.”
While Liu says he doesn't believe there is a natural tension between the GC and CFO, Mikells says there is a time and a place when such a situation can inevitably occur.
“There certainly can be tension. You can't be successful in any job, whether you’re the CFO or the GC, by having the reputation that you are going to be the person to say no. You can't eliminate risks; you just have to make sure you mitigate the appropriate risks. It's more about the people than the roles themselves and trying to get alignment around the same positive end and outcome you’re trying to achieve,” she says
Liu summarizes: “Every company I have worked for, I’ve been lucky to have the CFO as my closest ally. I don't understand how you could function any other way.”
As for the most important attributes that make for a happy GC-CFO union, Mikells says level-headedness and neutrality are paramount.
“You need an even-keeled person; you can't be someone who prematurely makes decisions. You need to gather all the facts and be impartial. These are not jobs about emotion or hurrying to get to the right answer,” she says. “You have to take adequate time and be thoughtful to try to get to the right conclusions.”
Liu advises general counsel and aspiring GCs to becoming comfortable with the company's finances, since that understanding impacts every area of the business.
“At most management meetings, we are talking about financial results. Unless you as the GC are comfortable with P&L items, you are going to miss the issues that are affecting the company. You should be close to the chief accountant, who can teach you the subtleties around the numbers that affect your company,” he says. “It's also important to understand the operations; the day-to-day operations that impact how your company makes money and how your company creates products and services for your customers.”