The dynamics of legal relationships
To coincide with the CLOC (Corporate Legal Operations Consortium) Institute’s inaugural EMEA conference, asb law and Elevate jointly hosted a dinner of GCs and Heads of Legal Operations on 23 January 2018.
During the dinner there was a structured discussion amongst our guests based around the following hypothesis:
Hypothesis: The legal industry is deeply unhappy because of the dysfunctional relationship between the three main actors: (i) the business, (ii) the in-house legal function and (iii) external providers.
The hypothesis was explored in two parts; firstly, the internal relationship between the business and the in-house function and, secondly, the relationship with external providers.
This note explores the themes that emerged during that discussion and some of the issues that were raised during the CLOC event itself.
(This paper is available as PDF download).
Part One: The internal relationship (where the desired outcome is the CEO as hero)
Questions that were considered under Part One included:
- What does a legally astute board need from its legal function?
- What does that mean in terms of the purpose of the legal function? It surely can’t simply be to deliver legal advice more cheaply than law firms.
- Do some of the recent corporate governance failures suggest that GCs are either (a) being kept out of the room or (b) susceptible to forces within the business that decrease their objectivity?
- How do you educate the business and persuade them to accept new ways of obtaining advice?
- How does the in-house function use the law and the legal system to sense and seize opportunities and thereby increase the value of the business?
- How do you see the in-house legal function changing over the next five years?
Various views were expressed including that, in some cases, a CEO does not know what to do with the GC and is happy if the legal function keeps a low profile.
Most attendees however took a different view, feeling that the board wants more than legal advice from its in-house legal function. It was widely felt that a GC should have a seat at the table and be empowered by the board to challenge the decision-making process as a co-owner of business risk.
When it came to exploring recent failures of corporate governance, it was felt quite strongly that, whilst the role of the GC is to help drive the business forward, this cannot be at all costs. There was a widespread view that a GC is in a unique and difficult position as he or she has an obligation to ensure that the legal and ethical considerations of a decision are properly considered. Several attendees expressed the view that if the business does decide to cross a legal or ethical line in pursuit of its objectives, then the GC has to be prepared to walk away from that business.
There was also a discussion about appropriate reporting lines, with some GCs reporting to the CEO and others to the CFO. The view was that it was preferable to report to the CEO to give the role of GC some teeth.
Becoming a partner in value creation
The concept of “legal astuteness” is helpfully explored in a paper by Constance E. Bagley published in May 2016 . Legal astuteness is a set of value-laden attitudes about the importance of law and ethical behaviour to the success of a business. The degrees of legal astuteness across various dimensions are set out in Table 1 in the paper, which provides a good introduction for anyone interested in this subject.
The debate over dinner reflected a general trend away from the GC being seen by the business as a “Necessary Evil” to becoming a “Partner in Value Creation and Risk Management.”
The unique and difficult aspect of the GC role is also explored in the paper, which states:
“Strategically astute lawyers never lose sight of the fact that they are members of a profession that has at its core an obligation to uphold the law.”
“There is a professional duty not to be complicit in a criminal act, so if you believe that the corporation is violating the law, you really have no choice but to resign (quoted in Lowe, 2012: 15)”
On reporting lines, Bagley and Roelling (2014) recommend that the CEO should share (discuss/consult) with the board (or committee) any decisions around the hiring, compensation or termination of the GC. The recommendation expresses that the GC should have direct access to the board and meet separately with the board (or a committee of the board) without the CEO or CFO present.
 The Value of a Legally Astute Top Management Team: A Dynamic Capabilities Approach.
Part Two: The external relationship (where the desired outcome is the GC as hero)
During his presentation at the CLOC conference, Richard Susskind suggested that in-house lawyers had tolerated old fashioned ways of working and they needed to be more demanding and discerning. Bruce MacEwen, in his book Tomorrowland, talks about a failure of collective action in Law Land. He defines a failure of collective action:
“as referring to a market that is trapped in a dynamic where everyone would be better off in the long run if everyone behaved differently, but also where it remains in each individual actor’s rational self-interest to keep acting in the same way unless and until everyone else changes.”
Questions that were considered at the dinner under Part Two included:
- Have law firm providers been too slow to react, thus preserving a model in which they make fat profits without much risk?
- Does this explain why alternative providers – with different models – are increasing their market share?
- A market is made up of buyers and sellers - have the buyers perhaps been complicit in preserving the model for too long?
- How do GCs want their external providers to behave?
- What do external providers need to do more off and do less off?
The first comment made at the dinner was that GCs want their external providers to collaborate and bring the best that the legal ecosystem has to offer.
Whilst some large law firms talk about collaboration, they then show their true colours by offering an integrated offering as an alternative solution. This is a rational approach, when viewed through the lens of the law firm’s interests which are to defend the leverage model, but it was not what the attendees at the dinner felt modern GCs are looking for.
GCs want board-ready advice that does not need translation and they welcome an “outside, looking in” view from their providers. “Tell me if I’m being an idiot” was how one attendee put it.
In-house lawyers are, of course, human beings and just like every other human being they have an underlying need for supportive relationships. What came through in the comments made over dinner was that in-house lawyers want to feel that their external providers will be there for them.
The difficulty the external law firm market faces is that the traditional model is built on a misalignment of interests. How, as a GC, do you know for sure that your external providers will not be acting in their own interests, as well as - or worse still, instead of – your interests? Asking external providers about their pricing and remuneration models is a pretty good place to start.
I had the pleasure of listening to Dr Bob Murray, MBA, PhD (Clinical Psychology) talk at a recent conference about how decisions are made and what humans buy. We only buy one of four things apparently: food/drink, shelter, reproductive services and support. His view is that the only thing that a professional services firm can therefore sell is relational support and that everything else is simply a means of meeting that need. Many lawyers have been brought up to focus on solving a problem, which Dr Bob Murray describes as “the presented need”.
The reason the legal market is unhappy may well be because, as a profession, we have become very good at solving “legal” problems as they are presented but we are much less effective at articulating and negotiating our own needs. The CEO and GC cannot hope to have a functional relationship unless they understand and can satisfy each other’s needs. The same, of course, holds true of the external relationship between the GC and the external lawyer.
At the CLOC Conference, several speakers from the in-house legal community talked about wanting outcomes but, when it came to discussing vendor management, the mantra was that it is all about overseeing the time inputs of external law firms. I had an interesting and rather heated exchange with two legal operations directors who had opposing views on the value (or otherwise) of requiring a law firm to present shadow bills for a defined scope of work at a fixed price. One felt passionately it was a complete waste of time; the other saw some value in obtaining the data for comparison purposes.
Maybe the collective failure in Law Land is that we are all engaged in an elaborate and expensive negotiation about the wrong thing?
We are always happy to talk about how legal service delivery can be improved - if you would like to discuss the issues in this briefing, please contact Lyndsey Ratcliffe, Head of Corporate Relations.
Published: 21 Feb 2018