Inside the in-house counsel revolution
Tuesday, April 25, 2017 @ 02:51 PM | By Ben Heineman
The inside counsel revolution — which began in the late 1970s and which has increased in scope and power ever since —- is inextricably bound up with the performance-with-integrity mission of the corporation. That revolution is based on enduring first principles the general counsel should follow — now and in the future — in quest of what is “right.”
Working with the CEO and other senior executives, the general counsel must forge an unbreakable bond between performance, integrity and risk on a set of core corporate issues: business strategy, culture, compliance, ethics, risk, governance, citizenship and organization. In so doing, the general counsel must help create the trust in the enterprise which is so vital to its sustainability and durability: trust among employees, shareholders, creditors, customers, suppliers, regulators, media, NGOs and communities.
To help the corporation achieve its high performance, high integrity and risk management mission, the general counsel must also resolve the most basic problem confronting inside lawyers: being partner to the board of directors, the CEO and business leaders but ultimately being guardian of the corporation.
This prescriptive vision is attainable because general counsel and inside law departments in top global corporations have become far more sophisticated, capable and influential, transforming both business and law in two important descriptive ways.
First, the role of the general counsel inside the corporation has been greatly enhanced:
• The general counsel has often replaced the senior partner in the outside law firm as a primary counsellor for the CEO and the board of directors with very broad scope beyond law that includes: ethics; reputation; governance; communications; public policy; enterprise risk; crisis management; and, ultimately, corporate citizenship.
• The general counsel is now often a core member of the top management team and participates in discussion and debate — not just about defence but also about offence, not just about risks but also about opportunities, not just about black and white lines which may not be crossed by also about different choices in areas of grey, not just about law and related matters, but also about corporate strategy on basic issues like capital allocation, competitive strategy, new products, emerging technologies and new geographies.
• The general counsel now often has a broad organizational and leadership role beyond the legal department — in such areas as tax, trade, environment, security, real estate, customer care, community relations and public affairs. She can have operating responsibilities over diverse units which require broad managerial skills and which, in many instances, make her the final decision-maker in a corporation.
• The general counsel is seen as having importance and stature comparable to the chief financial officer by directors, CEOs and business leaders because the health of the corporation requires that it navigate complex and fast-changing law, regulation, litigation, public policy, politics, media and interest group pressures across the globe.
• All these developments have combined to increase dramatically the expertise, quality, breadth and compensation of the general counsel and inside counsel, with a company’s lawyers now being hired from the highest reaches of government, from leading law firms, and from a growing pool of highly qualified inside counsel.
Second, the role of general counsel outside the corporation has also been greatly enhanced as there has been a related, dramatic shift in power from outside law firms to inside law departments over both matters and money:
• The general counsel and inside lawyers, rather than just throwing issues over the transom to law firms, have taken on day-to-day management and strategic direction of major matters affecting the corporation — ranging from cross-border transactions to multi-front litigation to international enforcement investigations to consequential public policy debates to building a culture of integrity. This is so because corporate legal departments are increasingly staffed by outstanding specialists in all the areas covered by private firms, including antitrust, litigation, tax, trade, mergers and acquisitions, labour and employment, intellectual property and environmental law. Moreover, outstanding general lawyers are now general counsel of major divisions within companies, not just general counsel of the whole company. These generalist and specialist inside lawyers — with skills and knowledge at least equal to their peers in law firms —lead mixed inside/outside teams in managing hard problems facing the corporation. The days of information “asymmetry” when outside lawyers knew much more than inside lawyers are, for the most part, long gone in major corporations, as sophisticated inside counsel today invariably know much more about business and know as much or more relevant law.
• The general counsel and inside lawyers have also strongly sought to reassert control over money — over the corporation’s expenditures on outside law firms. Inside lawyers have broken up monopolies or oligopolies that particular private firms had previously enjoyed with particular corporations. They have forced law firms to compete for business. They have focused on cost control through a variety of techniques, from front-end budgeting and negotiated fees to back-end audits and cost disallowance, from preferred provider relationships to “strategic partnerships.” They brought important work inside the corporation by increasing inside legal staff, thus reducing the fees paid to outside law firms as a percentage of the corporation’s total legal spend. They are increasingly using new technology and specialist vendors (e-discovery, specialized research, form drafting, contract lawyers) to reduce further the scope of traditional private law firms. As many leading general counsel are alums of major law firms, they can directly address the many techniques outside lawyers may improperly employ to puff up billing and revenues.
• Finally, general counsel and inside lawyers are increasingly advocates, points of contact or negotiators with important public and private parties outside the corporation in both developed and developing economies. Because governments affect markets in all nations —- along a spectrum from the state capitalism of former communist states to the variety of “mixed economies” in traditional “liberal” democracies — the “business in society” issues in these diverse global economies pose serious risk and significant opportunity. Boards and business leaders now delegate major responsibility to the general counsel to help the corporation reach its commercial objectives across a minefield of policy, law, regulation and public scrutiny. The general counsel and inside lawyers increasingly have direct relationships with key actors in both the public sector and the private sector on matters ranging from major legislation to major deals.
In short, general counsel have risen in power and status within the profession in the past 30-plus years, becoming core members of top corporate management and dramatically changing the relationship between inside and outside lawyers. Said The Economist in 2012: “… the power of in-house lawyers has grown hugely in the past 10 years. The chief legal officer (CLO) is now one of the mightiest figures in the C-suite.”
A close observer of the legal profession recently stated: “The future and fortunes of most of the major business practice firms and their lawyers are now in the hands of corporate counsel. ...The status gap between inside and outside lawyers has largely been reversed.”
A pre-eminent scholar of the legal profession has emphasized the continuous growth of “the power and prestige of in-house lawyers”; observing that “In-house legal departments in the United States now also rival large law firms as a destination of choice for talented lawyers”; and concluding that “[a]ll of this has profoundly restructured traditional mobility patterns and prestige hierarchies within the U.S. legal profession.” And the authors of a book on the evolution of general counsel have noted: “The story of the general counsel role over the past 50 years has been one of increasing prominence, power and prestige.”
The inside counsel revolution requires navigating ideas that are potentially in tension: the pressures for high performance and the imperatives of high integrity; the GC both as lawyer-statesman and as subordinate to the CEO; the general counsel as partner to business leaders and as guardian of the corporation; and the importance of risk-taking and the necessity of risk management. In addressing key issues — compliance, ethics, risk, governance, citizenship and organization — I believe that these potentially paradoxical ideas can co-exist and, indeed, can be complementary.
Ben Heineman is former GE general counsel and is a senior fellow at Harvard University’s schools of law and government. He is author of High Performance With High Integrity. This article is an excerpt from his new book, The Inside Counsel Revolution: Resolving the Partner-Guardian Tension, published by Ankerwycke Books, The American Bar Association. He will be a keynote speaker at Lawyering in the 21st Century: How to succeed through innovation, in Toronto on Monday, May 15. For more information about this event visit the conference website.
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