Living with Litigation: The way CEOs handle brushes with litigation will probably determine how successfully they manage their companies - Cover Story

Chief Executive, The, Dec, 2001 by Jeffrey Rothfeder

Executives at Microsoft have taken whole chapters from Bible's book. The target of U.S. antitrust prosecutors since 1998, the software company was slapped with a court ruling in 2000 that called for the breakup of the company into three separate units. Nearly a year later, Microsoft got much of this decision remanded on appeal. But even with the company in limbo, Microsoft's top executives, Bill Gates, chairman and chief software architect, and CEO Steve Ballmer, have, like Bible, kept the software maker on an extremely aggressive course, as if no litigation was threatening Microsoft at all.

In fact, this year Microsoft thumbed its nose at the government's case by releasing an upgraded version of Windows software called XP that more than ever bundles its operating system with its Internet browser. This is the very activity at the heart of the Justice Department's argument--that Microsoft abuses its monopoly power to keep other companies from offering competing products.

To keep key employees from leaving the company out of fear that Microsoft would be broken up, Ballmer issued new stock options during the last year priced low enough that even if the company's shares fell, workers would not be Out of the money. While its see-no-evil public approach has saved Microsoft from a crippling stock price drop and a wholesale brain drain, privately Gates and Ballmer have been spending an enormous amount of time to remove the yoke of litigation completely. The pair has devoted many hours reading the tons of documents involved in the case and working with their lawyers on a settlement that would leave the company intact while minimally changing its business practices.

The way Rodgers, Bible, Gates, and Ballmer respond to potentially destructive lawsuits shares one critical aspect: Each executive directly manages the company's counterattack. This may seem obvious, but chief executives often take the opposite approach, lawyers say.

Frequently, the first reaction of CEOs is to view a lawsuit as a waste of time because it distracts them from the crucial work of running the company and planning what are perceived as more essential strategies like marketing and research and development. So, instead of steering the handling and an swering of a lawsuit, they delegate it to other executives or turn it over to outside lawyers, who provide the CEOs with ad hoc reports and recommendations that they simply rubberstamp.

"This is a big mistake," says Dan Hedges, a partner at Porter & Hedges in Houston. "It's as if they're admitting that the outcome of the lawsuit won't affect their company in a large enough way for them to be involved with handling it. The reality is a CEO'S uniquely broad knowledge of the company's operations, its strengths, weaknesses, plans, and financial condition are exactly what's needed to determine how to proceed in defending against a lawsuit."

Corporate litigation experts recommend that chief executives whose companies have been sued schedule a regular meeting perhaps once a week, when the lawsuit is most demanding, such as during discovery or sensitive settlement talks. Experts suggest at other times CEOs meet once a month with lawyers to keep abreast of the status of the case and consider recommendations on how to proceed.