L'appel au dialogue de Daniel Desjardins

“Daniel Desjardins
Senior Vice President and General Counsel
Bombardier Inc.

International Bar Association
Vancouver – October 5, 2010

The Need for a New Dialogue_

As general counsel and in-house counsel, we face in our daily job many challenges and the demands on the in-house legal department will not diminish. The landscape has changed with globalization, more complex transactions, risk and crisis management, claim management, compliance and cross-borders issues. All of this is happening in the context of a continuous drive to improve efficiency and cost control, not to say cost reduction.

In this challenging landscape, I believe that in-house counsel can have and should have a key role in shaping a proper course of action for the corporations they serve.

How can we become more efficient? How can we reduce costs while maintaining a high quality of legal advice and services? How can we support the corporations we represent in this new dialogue with very different stakeholders?

At Bombardier, our legal department is facing many of the same
challenges and struggling with many of the same issues as other legal departments.

Of necessity, I have spent time thinking about these issues.

And so today, I would like to share some of my thoughts about the
future in the hope that these ideas will spur dialogue and discussion.

It is my hope that my thoughts may be of assistance in the evolution of what it means to be a corporate counsel today, of how we can best serve our organizations, and how we can work more efficiently and effectively with our external counsel.

First allow me to say a few words about Bombardier and our business as a manufacturer of planes and trains. Bombardier Aerospace is a world leader in the design and manufacture of aircraft and innovative aviation products. We are the third largest manufacturer of commercial aircraft after Boeing and Airbus, and the world’s leading manufacturer of business aircraft.

Bombardier Transportation is the world’s largest rolling stock OEM
and offers a wide range of passenger rail vehicles, transit systems, locomotives and rail control solutions.

We have manufacturing facilities in 25 countries and have ongoing
projects and service centers in 80 countries around the world.

Our corporate office is based in Montreal and we are listed on the
Toronto Stock Exchange. We have close to 63,000 employees. Our
revenues reached US $20B for the fiscal year ended on January 31,
2010.

And it is worth noting that 95% of our revenues were generated outside of Canada.

As you can see, we are a truly global corporation. The legal department is composed of 135 lawyers located in 17 jurisdictions, all dedicated to support our business units.

Over the years, as the company grew its global footprint, work that was outsourced to external firms was brought in-house.

Today, our legal department is a solid one and I believe that no law firm can match our ability to negotiate purchase agreements of planes and trains all around the world.

This brings me to one of the key issues for any general counsel : how does your legal department add value?

First and foremost, I believe that ALL legal departments – regardless of their size – can add substantial value to their organizations by being pro-active.

In fact, I will put this even more strongly.

To my way of thinking, a legal department that is merely passive or reactive, meaning that is not pro-active, that is not looking forward at how scenarios may play out, that does not anticipate what risks and opportunities lay ahead, is not serving the interests of its company and is not adding value in the places where it could.

Now, let me step back for a moment.

I realize that not everyone in our organizations will always be pleased with a pro-active approach on the part of its legal department.

And, in some organizations, where the legal department has traditionally operated by being responsive, it might mean some
adjustments.

But in time, I believe that the business units, as they come to realize the added value of a pro-active approach on the part of the legal department, will appreciate its pro-activity and welcome its initiatives.

To me, being pro-active means that the legal department must:

• Seek out a broader understanding of its company and its activities, both as they exist today and as they may exist in the
future;

• Seek a broader understanding of the legal environment in which
the company operates, again both as it exists now and as it may
exist in the future.

• Consider “what if” situations, anticipating possible changes in the company and its activities, together with possible changes in the legal environment, and

• Always look out for opportunities to add value.

In other words, as Wayne Gretzky (one of the great Canadian hockey players) said: “I skate where the puck is going to be, not where it’s been”.

I strongly believe that any legal department needs to:

• Have a solid understanding of the company’s business and
its strategy.

• Foster a culture where risk assessment by lawyers and willingness to take risks by business units are not seen as
conflicting. Rather, they are seen as complementary parts of
a well-informed exercise to create value for the company.

• Meet on a regular basis with the leaders of the business
units to brainstorm and to think strategically about the
future risks and opportunities of their business units.

These actions constitute a starting point and should be adapted for each legal department since there is no one-size fits all.
Each company has its own inner workings and culture.

So far, the steps I have outlined are those to be taken internally by the legal department.

But I would like to point out that a pro-active legal department must also be pro-active in its dealing with its external counsel.

And so,

• A pro-active legal department must consider that the old model of external legal counsel hired to handle a specific problem has been replaced by a much more collaborative relationship.

But before I address the relationship with external law firms, allow me to say a few words about the model of a legal department.

Earlier in this speech I referred to the fact that each company has its own inner workings.

And, I would add, its own business model.

The legal department, to be truly successful in serving its internal clients, must “follow” its company’s business model.

Only by being more aligned within our business, can we bring about
added value.

The increased insourcing of legal work, the growing number of
regulations and more attention to risk management, have expanded our role as in-house counsel.

As a result, we have also become more integrated into the day-to-day operations of our corporations.

That’s why I believe that a key challenge for ANY legal department is in building a department that “fits” the business it is intended to serve.

Whether your company is large or small, in order to provide the most value, your legal department needs to match the operation and the footprint of your organization.

The first question that a general counsel must consider is the following:

How do you structure your legal department to ensure that it not only communicates well, but also, is truly integrated into the overall goals and operations of the company?

And, secondly:

Which legal department model — centralized or decentralized — fits
the business model of your organization?

Obviously, with a centralized legal department, co-ordination between its members and with its internal clients may be less challenging.

The legal team is in the same footprint, often on the same floor, and can consult with each other easily. It can be as simple as knocking on the next door. And, internal clients are within the same building or within easy geographic access.

With the decentralized model, the legal team can be spread among
multiple jurisdictions.

The challenge, therefore, lies in creating strong processes as to how legal services are delivered within your company.

Looking ahead as business becomes more globalized, I think we’ll see more companies moving to the decentralized model.

At Bombardier, I have, along with my team, sometimes struggled with our decentralized model, but over the years, we were able to fine tune our internal governance.

Now with close to 13 years under my belt, I have come to appreciate the flexibility and agility we have as a legal
department in helping our company to execute projects in 80 countries around the world.

I believe that by following a few golden rules you can make a
decentralized legal department work efficiently.

• First and foremost, in-house counsel should be physically located as close as possible to the business unit(s) they serve.

Creating decentralized centres of expertise can provide the most value in terms of day-to-day operations.

• The entire legal department, to be most effective, needs to
function as one unit although the proximity factor is not there to
sustain it. There needs to be a co-ordinated approach and
uniformity to similar issues.

• Thirdly, you must create a culture where the desire to provide the best legal services is always at the forefront and where the
leadership and creativity of lawyers are encouraged.

• And finally, you must foster within the legal team a deep
commitment to the corporation as a whole and its success, beyond
those of the business unit it supports.

The challenge for the General Counsel or Chief Legal Officer is to keep communication open and keep a proper governance in place while not slowing down delivery of the legal services, even though the department is geographically widespread.

Another golden rule concerns the reporting line. Whether your law
department is centralized or decentralized, in a business model where some in-house lawyers report to the head of the business units, there must always be a dual reporting line.

Meaning that in every case where some in-house lawyers report to the head of the business unit, they must also report to a senior lawyer and ultimately to the GC or CLO.

That’s because as an integrated function, you need to act as one legal team within your company.

I believe that this dual reporting structure is a must. Where there is a conflict on strategy, it is up to the head of the business unit and the GC or CLO to communicate with each other in order to find a solution.

Then there’s the issue of retaining outside counsel.

One of our rules at Bombardier is that external counsel can only be retained by a member of the legal department, as opposed to the
business unit going directly to outside counsel.

This is necessary to preserve the integrity and control of legal services.

The legal department alone must determine:

When will outside legal counsel be appointed?

Which outside counsel will be retained?

What will be the scope of the work?

The relationship needs to be between in-house counsel and the external law firms and no where else.

NEW DIALOGUE WITH EXTERNAL LAW FIRMS

So far, my comments were aimed at the relationships of the legal
department within its own organization.

Now, I would like to turn to the relationship between corporate counsel and their external law firms.

I am certain that you will agree with me when I say that the last two years have been a reality check.

Today, we cannot escape the discussion surrounding the cost of legal services and the relationship between law firms and their clients.

The old model of law firm billing at an hourly rate which keeps increasing year after year, does not work anymore.

We cannot escape the need for a new dialogue.

Today, globalization is the new reality.

And, globalization is fundamentally changing the legal landscape.
More and more, companies are doing business not only in their home
jurisdiction, but in many other countries as well.

As a result, some of the legal spend associated with these activities is moving away from the home jurisdiction to new jurisdictions.

As globalization intensifies, a number of large law firms are expanding, or at least assessing the viability of international expansion, to provide global services to their national clients.

Expanding their global footprint will mean increased investment and higher costs which these law firms will need to manage.

At the same time that large law firms are expanding their global
footprint, some legal departments are now sending a larger portion of the more stable, routine work to high quality second tier law firms.

And when I say second tier law firms, I am not being dismissive.

On the contrary, the quality of work and services provided by these law firms is first rate.

At Bombardier, for example, we have made some arrangements with
high quality second tier law firms in Canada, the U.S. and Europe, for routine work, which should allow us to save over US $10M over the next 3 years.

Today, the pressure on legal departments to reduce costs has become part of their daily file but at the same time there is a growing disconnect between legal departments and their external counsel.

As illustration, consider the results of the survey of Inside ''Counsel Magazine'' published in August 2010.

According to the survey, responses from in-house counsel show that:

• 51% don’t think law firms recognize their budget
constraints

• 64% say law firms do not actively seek ways to
reduce cost

Over 64% …..that’s significant …

• 90% say economic conditions are increasing pressure
to spend less on outside counsel but only 37% agree
that law firms are open to alternative fee arrangements

This is all happening at a time that corporate counsel are looking to their law firms to come up with innovative ways to address these concerns.

In fact, the survey shows that …………….

• 82% of the respondents seek creative solutions from
their outside counsel.

Now, I don’t want to sound as if there has not been progress in
redefining the corporate counsel – law firm relationship.
Some law firms are getting the message.

They are addressing the issues.

For example, let me quote Bryan Hughes, Chief Executive of Eversheds.

In the 2010 Eversheds Report, Mr. Hughes doesn’t shy away from
addressing either the current situation or the need for change.

As he says:

“There is no question that the worst recession for 80 years
has had a major impact on the legal sector.General Counsel are under pressure to deliver more for less. In turn, they are demanding reduced costs and greater value from their legal advisers. Quite rightly they want accountability when it comes to how their budgets are being spent and more imagination when it comes to fee structures. For law firms this has meant facing up to challenge and change. Whilst some are holding fast, hoping that the boom times will return soon, the smarter ones are adapting for the longer term.”

Some law firms are truly serious in the effort to face the issue head on.

Some are investing in new tools such as legal project management and law firms like McCarthy Tétrault in Canada are in this way forging ahead with innovative solutions to reduce costs.

Others like CMS Cameron McKenna announced in August of this year
that it had launched a new alternative billing initiative.

In the firm’s special report entitled “The future of fees: your route map to value”, Richard Price, a senior partner, writes:

“For the past 30 years, I have been involved in pitching to
clients and pricing work. What is becoming increasingly clear
to me is that it’s not about any one solution or idea in relation
to fees . . .”

After looking at various alternatives in relation to fees, he
then concluded however that “the position of the “innovative” firm, capable of delivering attractive, wellmanaged,
thought-through fee arrangements for highquality/value work remains vacant”.

Let me repeat ……“remains vacant……”

Quite a candid statement from Mr. Price.

This, I believe, goes to the heart of the issue, which is the “business model” of law firms.

In my view, in order for law firms, both large and small, to be
competitive, they need to move to a true “business” model.

I am talking about a model that truly empowers their managing
partner, who, armed with a CEO-style mandate, can really bring about the long-term necessary changes that are required. This means major changes in culture, efficiency, and client servicing and delivery.

I’m thinking about the kind of necessary changes that were undertaken ten or fifteen years ago by the “big four” accounting firms.

They recognized that if you want to have global customers, who, for example, need audit and accounting services in multiple jurisdictions, then you have to change your firm’s structure.

These accounting firms changed their model and moved away from
relying on hourly rate.

They tackled their challenges by adjusting their mindset to think as “businesses,” with strategic planning and a global
footprint, while making sure they served their clients well in each of their home markets.

At the same time, they worked to try to provide efficient services at a lower cost.

This new business model will mean significant changes for law firms in all sorts of ways. For example, the ratio of partners to associate is about 1 to 8 in the accounting firms while only 1 to 1.4 in the law firms in Canada. Also, new metrics will be needed. Metrics will need to focus on profit centre and team work for example and will need to move away from the net income per partner.

To me, the relationship with a firm and its managing partner is key in a new dialogue.

Law firms must change and face up to their customers’
expectations and perceptions.

As in-house counsel, we need to help drive these changes.

We need to talk with our law firms about their culture, their business model, our expectations and how they can evolve to meet the needs of legal departments.

As in-house counsel, we need to be forceful in our discussions with external counsel but we also need to remember that this is not a war.

Rather, this is a new way of working together, a positive new dimension to a relationship that must evolve.

If we do not help to drive the necessary changes, these changes will not come as quickly or will not be as profound as they need to be.

We cannot expect to see a real improvement in efficiency and in cost reduction without trust. In our dialogue with law firms and their managing partners, we must be transparent, we must be clear about our expectations, our concerns and the improvement that we also need to bring in our own management of the legal work when it is outsourced.

We must be part of the culture that brings about this change.

DIALOGUE WITH STAKEHOLDERS

Just as there is need for new dialogue between law firms and corporate counsel, we also have to pay attention to the need for new dialogue between corporations and their stakeholders.
Today, stakeholders come in many forms and shapes with very different and diverse agendas.

Be it shareholders, NGOs, customers, suppliers, employees, government or public authorities, when they talk to us, we have to remind ourselves that they all have their own agendas and goals in their relationship with our corporation.

Today, there are greater demands and expectations on a corporation as a corporate citizen…this can relate to environmental, social or governance issues…...the list is long.

There are calls for greater transparency.

In this changing landscape, how does the general counsel and his team navigate to provide valuable advice to the corporation?

The new shareholder model challenges the existing model of corporate governance and the fiduciary duty of boards of directors.

The “say on pay” debate is a good example of this changing landscape.

So what is this new dialogue supposed to be?

How should this new dialogue with stakeholders be structured?

With whom should this dialogue take place?

And in light of this new shareholder model, you may ask yourself:
What’s next? Will it be say on budget? Say on strategy? Say on environment?

It has been said that today some corporations with a widely dispersed shareholder base are now essentially ownerless.

In contrast, if you go back in time, companies had owners.

I’m referring to the individual, who, - most of the time - constituted the majority of the investors.

Many of these investors held their shares for decades. In this old
shareholder model, many of the shareholders were there basically for life.

They could relate to the company.

And because they had a long-term stake in the company, they cared about its growth and its future.

As a result, they took a long-term view in regard to its activities.

Now, in contrast, what are the shareholders looking for today?

For one, they are asking for quicker returns. It is said that the average holding period in US public companies was around 7 years in the 70’s as opposed to 7 months today.

Just the other day, I was reading an article in the Financial Times where one high frequency trading firm was boasting that its average holding period for US equity was 11 seconds.

In many respects, these investors are very different from those of the past.

Now, in addition to the individual shareholders, we have institutional investors, day traders and hedge funds. How they vote is often decided by proxy advisors.

And others, while they maintain their economic interest, have given their vote to the third party holding the shares in the interim through the lending of securities.

So a consultative vote like say on pay or on any other matter does raise fundamental governance questions.

It is changing, through the back door, the corporate rules of governance established more than a century ago whereby shareholders vote for the board of directors, appoint the auditors of the company and had the right to sell their shares.

So one can question the meaning of “shareholder’s democracy”. In
other words, what does shareholder democracy mean when an investor
can be a shareholder for only a minute, a week or a month?

These are the questions that need to be asked. That need to be
discussed.

Some have suggested that shareholders need to hold their shares for a certain amount of time – say a year or two - before they have the right to vote as shareholders.

Does this make sense? Maybe, maybe not, but again, I think that these issues need to be debated.

Now, I want to be clear I am not saying that shareholders today don’t care about the future of the company in which they invest.

They do.

But what is different today is that many of them do not have a long-term stake in the company.

And they have different interests and different agendas than those
individual shareholders of yesterday I talked about a few moments ago.

As I have mentioned earlier in my remarks …..in regard to
globalization, in the evolving relationship between corporate counsel and their companies, in the altering relationship between corporate counsel and external counsel ……. once again we find ourselves in a changing landscape.

It is still evolving ….. and we are all trying to find our way and, in my view, we need to step back.

I think it is time for regulators to step into the discussion.
Regulators in Canada and in other parts of the world.

Because the issues are the same. These are global issues.

It’s time for regulators to open a dialogue …....yes, there’s that word again - “dialogue”……….. between the corporate world and the proponent of this new shareholder model.

Let me be clear.

If we must change some basic tenets of corporate law, let’s make sure it is done with care so that consequences of said changes are fully understood.

CONCLUSION

In conclusion, we live in a challenging world where the complexity of transactions and the pressure for quick execution will not go away.

The need for a strong and solid legal department is a must more than ever before. For us, in many ways, these are exciting times.

There are many opportunities for pro-active legal departments to create true added value for their corporations. What I am saying today is that legal departments need to act as a powerful force in shaping necessary dialogue and resulting policy. So, in short, let’s be players, not bystanders.”