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Building an Outstanding Legal Team
Battle-Tested Strategies from a General Counsel
By Bjarne P. Tellman
Globe Law and Business LtdCopyright © 2017 Globe Law and Business Ltd
All rights reserved.
The changing context
The key is to embrace disruption and change early. Don't react to it decades later. You can't fight innovation. (Ryan Kavanaugh)
The general counsel's role has become one of the most complex, intense and challenging in the corporate world, because of changes that have occurred in the macroeconomic environment and in the legal profession itself. Today's general counsel must perform at a much higher level than before. What was once considered world class is now the baseline.
Before we embark (in Parts B–D) on how to build a world-class team to accelerate performance in today's multifarious and fast-moving environment, it is helpful to consider the changing landscape and the implications it has for the GC's role. We need to examine this change before we can consider how best to adapt.
Foremost among the macroeconomic factors that are shaking up the broader corporate and commercial landscape within which many GCs operate, are regulatory expansion, globalisation and risk convergence.
Government regulation has increased worldwide, especially between 2001 and 2016. Much of this global growth has occurred in response to the expansion of the US regulatory framework.
US Federal regulations grew from a total of 9,745 pages in 1950 to more than 178,277 pages in 2015. The 2010 Dodd-Frank Act alone encompasses a staggering 2,300 pages. Despite having published more than 22,000 pages of new regulatory content, by 2015 the agencies charged with Dodd-Frank rulemaking had had finalised less than two-thirds of the rules that Congress had tasked them with implementing.
While the growth in US regulations has been on the upswing for decades, much of the recent growth can be traced to four main factors: increased money laundering controls following the 11 September 2001 terrorist attacks on the United States; strengthened anti-fraud rules in the wake of the Enron collapse in 2001 and the 2008 global financial crisis; the increased use of sanctions as a foreign-policy tool; and the growth of anti-bribery and anti-corruption rules globally.
As the United States has passed rules in these areas, often with extraterritorial impact, other nations have followed suit. As global finance journalist Valentina Pasquali notes:
What began as a US-centric trend to increase regulatory reporting and related requirements ... has been taking hold in the rest of the world. This global surge has been driven in part by the US authorities' embracing of the notion of extraterritoriality [the application of US jurisdiction and regulations outside the borders of the United States] to mount enforcement actions against foreign entities, causing a rush of similar legislation to be passed in response.
The net result is a bewildering array of rules that companies must comply with in each jurisdiction. In some cases, these rules are inconsistent across – or sometimes even within – markets. In the international context, for example, the US Foreign Corrupt Practices Act permits companies to make facilitating payments (eg, payments made to government officials to perform or speed up the performance of an existing duty, such as delivery of mail), whereas the UK Bribery Act bans such payments.
US data privacy laws provide a further example of this inconsistency. The absence of a single, comprehensive, national data privacy law has left a patchwork of overlapping federal and state laws and regulations that sometimes dovetail and sometimes contradict each other. In addition, regulators leverage a plethora of agency and self-regulatory best-practice guidelines in the enforcement context, further complicating the GC's ability to provide clear guidance to her business partners.
Along with the growth in regulations, there has been a marked increase in enforcement, particularly in the antitrust and anti-bribery areas. In 2015, for instance, antitrust fines imposed by Chinese authorities increased by 280% between 2014 and 2015 to $1.12 billion, while in the United States the Department of Justice imposed a record $2.85 billion in antitrust fines in 2015 – more than twice its previous high and more than three times greater than it imposed in 2014.
The severity of penalties and sanctions in individual cases has also increased, as has the cost of managing them. It is no longer uncommon to see fines in the hundreds of millions of dollars, and sometimes even in billions of dollars, imposed on companies for violations of anti-bribery and antitrust laws.
This rise in regulation and regulatory complexity has not only raised the stakes for getting it wrong. It has also imposed a remarkable burden on legal teams, who are often understaffed and under-resourced, but are under pressure to pre-empt regulatory enforcement by putting in place robust and comprehensive compliance programmes.
That burden is particularly heavy in specialised industries, where there may be fewer experts in the law firm market with the requisite expertise to advise in narrow regulatory areas. In such cases, the best experts may already be in-house, making it hard for small players to navigate the rules.
Globalisation has significantly increased the difficulty of running a legal department, at both the organisational and individual levels. In previous decades much of what defined globalisation was made up of the global trade in goods. While that has levelled off in recent years, cross-border data flows have increased by a factor of 45 over the past decade and they are projected to grow by a further 900% by 2020. Data flows now make up the largest single value component in global trade flows, whereas 15 years ago they barely registered.
At the organisational level
At the organisational level, virtually every major legal matter now has cross-border ripple effects that must be considered. Whether dealing with a commercial arrangement, a regulatory investigation or a contract dispute, problems rarely remain in one jurisdiction.
Like a watch, there are many moving parts; manipulating one piece will inevitably impact the others. These moving parts are increasingly difficult to manage, particularly in an environment where enforcers and litigants are networked and globalised, and transactions are financed and negotiated worldwide.
High-profile antitrust/competition investigations are illustrative of some of these challenges. In 2006, for instance, the US Department of Justice and the European Commission launched coordinated, worldwide raids on 23 major air cargo carriers, alleging that they had conspired to fix international cargo rates and surcharges. Nineteen of the carriers pleaded guilty in the United States, resulting in fines of more than $1.7 billion, while the European Commission imposed fines of more than &8364;799 million on 11 of them. Regulators in other markets jumped in, conducting their own investigations that resulted in significant fines, while third-party private litigants filed damages actions against the airlines.
Steps taken in one jurisdiction in the competition law context need to be carefully considered for their potential impact elsewhere. For example, many jurisdictions provide lenient treatment for the price-fixing cartel participant who first comes forward to report the cartel. While regulators often promise that incriminating documents and other evidence provided in such an instance will be kept confidential, there is always the risk that the information might end up being used against the company by private litigants or regulators elsewhere. Determining the right course of action for the company requires the GC to consider the implications of such a step, often under severe time pressure, as other cartel participants may be racing to come forward first.
Cross-border acquisitions also present GCs with many moving parts to manage, ranging from political and cultural obstacles, to legal and regulatory barriers. Complying with US law can be especially difficult, given its long reach. Foreign targets may have conducted themselves in ways that violate US legislation, such as the US Foreign Corrupt Practices Act, or various export and sanctions laws. Sarbanes-Oxley, SEC rules and stock exchange requirements pose additional challenges in the transactional context, including those relating to director independence, internal controls and loans to officers and directors. Conflicting labour and employment laws, tax and accounting rules, and merger clearance standards are other examples of frequent sources of friction and complexity that can arise.
At the individual level
At the individual level, globalisation means that many GCs – and not just those who serve the largest multinationals – must now lead, unify and inspire diverse teams of people in very different parts of the world. Digital technologies are increasingly allowing businesses to globalise in a leaner, more efficient way, selectively hiring expertise in remote locations.
These trends have expanded the complexity of managing global operations from the legal perspective. Managing global teams and clients calls for a unique set of skills, including cultural intelligence, subtlety, diplomacy and a fine nose for when to 'go local' (and when not to). Gone are the days when the legal team and its clients were based in one or a handful of locations, sharing one or two sets of cultural norms. Diversity is in all respects a huge competitive advantage, but it introduces complications that need to be bridged.
'Pure' legal matters have become about as common as pink unicorns. Today, the legal, economic, reputational and political dimensions of risk are blending together. GCs must carefully weigh the non-legal implications of legally appropriate courses of action. For example, even if a company has a legal right not to self-report an environmental infraction, it must consider the potential reputational and political implications of exercising that right if the infraction were ever to be made public.
The speed and impact of reputational harm in an era of social media can be breathtaking. One need only consider the travails endured by Toyota during its sudden-acceleration crisis, BP during the Deepwater Horizon disaster, or Samsung following news of its incendiary Galaxy Note 7s, to feel the heat. News on Twitter travels more quickly than any legal response can follow, imposing real harm to a company's social and economic capital, irrespective of the merits of underlying legal positions.
This reality makes it more important than ever to solve problems holistically. There is a significant need to develop people with a broader overview.
Corporate legal departments are under increasing economic pressure. Like CEOs, with every passing year GCs must do more with less. This relentless focus on cost cutting has coincided with a rapid expansion in the range of topics in which the legal team is expected to involve itself.
Companies are facing increased market volatility, including industry disruption and tightening profits that increase the need for legal resources. As Martin Reeves of the Boston Consulting Group and his coauthors noted in a 2016 Harvard Business Review article:
Public companies have a one in three chance of being delisted in the next five years, whether because of bankruptcy, liquidation, M&A, or other causes. That's six times the delisting rate of companies 40 years ago. Although we may perceive corporations as enduring institutions, they now die, on average, at a younger age than their employees. And the rise in mortality applies regardless of size, age, or sector.
This volatility is coming at a time when corporate profits are in decline. McKinsey has reported that the global corporate-profit pool, currently valued at approximately 10% of global GDP, may shrink to less than 8% by 2025, undoing in the next decade nearly all of the corporate gains made relative to the world economy over the past three decades (see Figure 1).
This increased volatility and downward pressure on corporate profits is increasing pressure on companies to achieve sustainable growth by transforming themselves. KPMG reports that 93% of US-based multinationals are currently at some stage of undergoing or preparing for a business transformation.
The workload that this drive is imposing – and will continue to impose – on legal departments is outstripping capacity. A recent study by best-practice technology company CEB indicates that the growth in demand for in-house legal services is expected to outstrip capacity by between 10% and 30% by 2020 (see Figure 2).
To meet this increased demand for in-house legal services and remain sustainable, cost-cutting efforts must be sophisticated and nuanced. GCs need to shelve the financial machete that they used in the outside counsel consolidation process and learn to work with a scalpel, leveraging sophisticated procurement techniques that previously were only used by purchasing experts. They have had to become far savvier consumers, stratifying needs across different types of providers, crunching numbers to identify opportunities, rolling out technologies and tools, and tirelessly improving transparency and strategic partnership principles.
GCs have also had to become much more refined in how they communicate legal costs, risks and benefits to their business partners. In the same way that their business partners most frequently think in numbers, charts, trends and projections, so too increasingly must their lawyers if they are to hope to persuade them to give the legal department sufficient resources. This requires financial acumen, a deep understanding of the business, communication and persuasion skills, and political talent.
The twin revolutions
In addition to the above-noted macroeconomic trends and cost pressures, the legal profession itself is in the process of significant disruption caused by two revolutions taking place simultaneously: those termed the innovation revolution and the professional convergence revolution.
The innovation revolution
The legal profession, once a bastion of stasis and conservatism, will undergo more innovative disruption in the next 20 years than it has experienced in the preceding two centuries. As Professor Richard Susskind explains, over time "traditional lawyers will in large part be replaced by advanced systems, or by less costly workers supported by technology or standard processes, or by lay people armed with online self-help tools".
Some of that change has already arrived. Activities that were previously deemed to be solely in the province of outside counsel are becoming unbundled by legal start-ups. Starting in the early 2000s, new ways of providing document searches, contract management and legal advice have been disrupting the profession. The legal market has also become more transparent through services that instantly connect consumers and lawyers, facilitate legal bid comparisons and document reviews, and streamline legal project management and research, among many others. Indeed, Professor Susskind claims there are at least 13 disruptive technologies in law (see Figure 3).
Two big trends are driving the innovation revolution: unbundling services and technological disruption. Each is described further below.
Both of these trends will have profound implications for how lawyers work, what they work on, and how GCs source their needs. Most of these implications will be a net positive for in-house departments because they will enable them to apply a more effective approach to sourcing. In a world of alternative legal service providers and technology-enabled process improvement, outsourcing and analytics solutions, it is no longer appropriate to default to law firms alone.
The first is what might be termed 'the great unbundling'. Much of the work that used to be performed by law firms is shifting in-house. GCs have realised that it is both more affordable and more efficacious to bring expertise in-house and handle core risk areas proactively and pragmatically. Additionally, the traditional model – in which the law firm was a one-stop shop for all of a company's legal work not handled internally – has come undone, leaving law firms to compete over a much smaller volume of work that they are uniquely qualified to perform. At the same time, globalisation and technology are enabling in-house lawyers to break
down and disaggregate what remains into ever-smaller pieces, farming each part out to a competing array of increasingly efficient alternative providers. There are numerous examples – Susskind identified 13 back in 2013, and new ones are arising all the time. Some of the weightiest ones include the following:
* Offshoring has made deep inroads, particularly at the 'commodity' end of the spectrum. Teams of competent lawyers in India, South Africa and similar countries are doing a significant amount of the work that historically went to associates at law firms in the United States and Europe. While work conducted offshore used to be mainly at the basic end of the spectrum (primarily document reviews and document processing), it is increasingly moving up the scale to encompass higher-margin work such as contract negotiation and transaction support.
Excerpted from Building an Outstanding Legal Team by Bjarne P. Tellman. Copyright © 2017 Globe Law and Business Ltd. Excerpted by permission of Globe Law and Business Ltd.
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