The Inside Counsel Revolution

Ben W. Heineman, Jr. is a former GE senior vice president for law and public affairs and a senior fellow at Harvard University’s schools of law and government. This post is based on an article that first appeared in Corporate Counsel magazine and is an excerpt from Mr. Heineman’s new book, The Inside Counsel Revolution: Resolving the Partner-Guardian Tension.

The practical ideal of the modern general counsel is a lawyer-statesperson who is an outstanding technical expert, a wise counselor and an effective leader, and who has a major role assisting the corporation achieve the fundamental goal of global capitalism: the fusion of high performance with high integrity and sound risk management. For the lawyer-statesperson, the first question is: “Is it legal?” But the ultimate question is: “Is it right?”

This vision of the general counsel has been a critical element of the inside counsel revolution that began in the late 1970s and that has increased in scope and power ever since. Working with the CEO and other senior executives, the GC must forge an unbreakable bond between performance, integrity and risk on a set of foundational corporate issues: business strategy, culture, compliance, ethics, risk, governance, citizenship and organization. In so doing, the GC must help create the trust in the enterprise that is so vital to its sustainability and durability: trust among employees, shareholders, creditors, customers, partners, suppliers, regulators, media, NGOs and the public. To carry out this challenging role, the GC must 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 outstanding 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 significantly grown in importance.

  • The general counsel has now often replaced the senior partner in the outside law firm as the primary counselor for the CEO and the board of directors.
  • The general counsel job has a very broad scope­ beyond law—that includes: business initiatives, ethics, values, 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 risks but also about opportunities; not just about law but also about business; not just about public policy but also about geopolitics.
  • The general counsel now often has a broad leadership role and final decision-making authority beyond the legal department, heading such areas as tax, trade, environment, security, real estate, customer care, community relations and public affairs.
  • The general counsel is now often seen as having importance and stature comparable to that of 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 now often combined to increase dramatically the expertise, quality, breadth, power and compensation of the general counsel and inside counsel, with GCs now being hired from the highest reaches of government, from leading law firms and a from growing pool of highly talented inside counsel.

Second, the role of general counsel outside the corporation has also significantly grown in importance, with 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 multifront 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 and by superb generalists who are general counsel of major divisions, not just 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 GC and inside lawyers have also strongly reasserted control over money spent 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 from front-end budgeting and negotiated fees to back-end audits and cost disallowance, from preferred provider relationships to “strategic partnerships.” They have brought important work inside the corporation by increasing corporate legal staff. Increasingly, they are using new technology and specialist vendors (e-discovery, specialized research, form drafting, contract lawyers) to reduce further the scope of traditional private law firms.
  •  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 and key outside relationships—to the general counsel to help the corporation reach its commercial and citizenship objectives across a minefield of policy, law, regulation and public scrutiny.

As briefly noted above, two related aspirational roles are the key to my vision of the general counsel—and to the inside counsel revolution: the GC as lawyer-states—a person and the GC as partner-guardian.

In helping to fuse high performance with high integrity, the general counsel as lawyer-statesperson must engage in robust debate on major corporate initiatives of all shapes and sizes about what are the “ends” of that action, not just about “the means” for carrying it out; about “purpose,” not just “process;” about consequences, not just acts; about what is “right” as seen through the lenses of performance, integrity and risk, not just about what is “legal.” With training and experience in policy, law, ethics and process and with independent expertise, breadth, judgment and practical wisdom, the archetypical general counsel is well positioned to introduce a dose of “constructive challenge” to such discussions, not as the conscience of the corporation, but as an important voice of conscience in a matrix of shared power under the CEO. I use the old-fashioned term “lawyer-statesperson” because I want to connote the GC’s search, in a practical, real-world setting, for the right action of a corporation embedded in a broader community, for the right vision of business in society.

To discharge this foundational responsibility, the general counsel as lawyer-statesperson must function, often simultaneously, in the three fundamental roles of a great lawyer: as technical expert, wise counselor and accountable leader.

As technical expert, inside lawyers must address the daunting challenge of determining “what is the law” that the global corporation must follow in multiple jurisdictions, with varying enforcement practices, conflicting formal mandates and legal ambiguity. The inside lawyers must not only exercise sound judgment in determining within a reasonable range of discretion what “law” the corporation will follow; they must also address strong pressures for corruption at the core of capitalism (e.g., bending the rules to make the numbers) and play a major role in deploying the systems, processes and resources necessary to ensure adherence to formal legal (and financial) rules.

In their role as technical experts, general counsel and inside lawyers should call out and reject certain courses of action underlying numerous corporate scandals.

  • It is wholly inappropriate to ignore the law and hope the corporation can get away with it, sometimes through bribes.
  • It is wholly inappropriate to be Holmes’ “bad man” and decide whether to follow the law based on a cost-benefit calculation: Do the benefits of disobedience outweigh the costs of being caught?
  • It is wholly inappropriate to look solely at the “face of the documents” and render a hypertechnical judgment on legality that not only is outside the range of reasonable discretion but also fails to ask hard questions about what is the real purpose of the legal arrangements and what are likely, or even possible, consequences.

General counsel must accept the binding force of existing law—and not supinely follow improper business pressure—even though that law may be unwise or politically motivated. Leaving a country or seeking to change the law are acceptable courses of action in the face of a “bad” law. Ignoring it, weighing costs and benefits of noncompliance or interpreting away its impact through noncredible hyper­ technicalities are not.

In the lawyer-statesperson’s other two roles—wise counselor and accountable leader—the general counsel needs capabilities far beyond legal expertise.

The general counsel must help the corporation decide what actions to take voluntarily beyond what the mandated, formal rules (legal and financial) require. These issues of “organizational ethics” or “corporate global standards” occur in four broad areas.

  • Responsibilities to the corporation itself, including its employees who are high-priority stakeholders.
  • Responsibilities to the people and organizations outside the corporation that it serves or affects—all other corporate stakeholders, from shareholders and creditors to customers and suppliers.
  • Responsibilities to the legal system and rule of law that are the foundation of sound political economy and healthy constitutional democracy, including such issues as access to justice and an independent judiciary.
  • Responsibilities to secure other broad public goods and enhance sound private ordering in order to create a safe, fair and just society in which individuals and institutions can thrive over the long term.

Answers to these issues may turn on “prudential” grounds—what is in the corporation’s enlightened self-interest. Or, they may be some combination of prudential considerations and fundamental moral concepts about the rights of—or duties to—others, such as loyalty or transparency or fiduciary duty or respect for individual dignity. Setting voluntary standards requires judgment; each decision turns on different contexts and multiple factors.

The GC as lawyer-statesperson must possess not just “core” legal competencies, but “complementary” competencies that are essential to multidimensional counseling and leadership. The general counsel and inside lawyers must, for example, be skilled in asking “what ought to be” questions; in articulating systematic and constructive options that expose and explore the value tensions inherent in most decisions; in having financial, scientific and technological literacy; in assessing risk, but not being paralyzed by its existence; in knowing how to implement effectively rules, policies and decisions; in understanding the hurly-burly world of politics, media and power outside the corporation and being able to navigate with principle and purpose in those domains; in leading and building organizations; in having understanding, intuition, perspective and respect relating to different cultures around the globe; in, ultimately, having the quintessential quality of the great generalist to envision and understand the multiple dimensions of issues and the ability to comprehensively integrate those dimensions in decision-making.

To function effectively as a lawyer-statesperson in a complex CEO-led corporate organization, the general counsel must assume a second aspirational role: partner to the board and business leaders and guardian of the corporation. Under appropriate conditions, being an effective partner on business and law establishes the trust and credibility that allows the general counsel to be an effective guardian. The fusion of the partner and guardian roles turns on GC integration into the core activities of the corporation. This means being at major corporate decision meetings (strategy, budget, deals, new products, new geographies, etc.) and being deeply involved in implementation of those decisions.

Such involvement provides an opportunity for the GC both to help the business leaders achieve legitimate commercial goals and to give independent views on whether corporate action comports with standards relating to integrity, risk and citizenship. This guardian role can involve slowing decisions down until facts are gathered and analysis completed—and, on occasion, it can involve saying no to improper actions. It requires character, stature, independence and courage so that the GC does not just passively salute and obey when business leaders suggest actions.

But resolving the partner-guardian tension faces obstacles that critics often cite when expressing doubts about whether GCs can possess the independence to be true guardians. These obstacles include: negative business attitudes about lawyers; business leaders’ lack of understanding about law and policy; a leader’s overbearing personality; group pressures to conform; inside lawyer fear of CEO retribution; problems of having only one client; and lawyer concern about their compensation (either withdrawal of unvested benefits or lack of future increases). In many recent scandals—from accounting fraud to improper options backdating to global bribery to the credit crisis—general counsel and inside lawyers, in their eagerness to be partners, have failed as guardians. They did not act with independence and courage; they failed to ask broad, probing questions about dubious actions; they failed to say “slow down” or “stop.”

I do not believe that the choice for general counsel (and inside lawyers generally) is to go native as a “yes person” for business leaders, and be legally and ethically compromised, or to be a conservative, inveterate “naysayer,” ultimately excluded from core corporate decisions and activity. The obstacles to the partner-guardian fusion can be overcome by many factors: the character, reputation and independence of the general counsel; an alliance with other top staff officers (finance, HR, compliance and risk) who should share the performance with integrity objectives and who face the same partner-guardian tensions; and a close relationship with the board of directors, which should ask for private meetings with the GC and should oversee the GC’s compensation and job status. Ultimately, however, the capacity to serve as partner to business leaders and guardian of the corporation turns on the CEO. The CEO, like the board of directors, must have the vision of high performance with high integrity and sound risk management and must affirmatively want a general counsel to be a lawyer-statesperson and partner-guardian, never afraid to speak out on what is “right” for the corporation.

I am optimistic that these board and CEO attitudes can—and will—exist. This is so not because of some nice theory, but because of hard necessity. The inside counsel revolution occurred in part as a reaction to the excesses and acquisitiveness of outside law firms. But the key driver was the dramatic increase in global commercial complexity and in related “business in society” issues that sophisticated inside lawyers can handle with speed and skill. Astute CEOs and boards know that successful performance depends importantly on navigating effectively and fairly myriad laws, regulations and geopolitical risk­ and addressing myriad, critical NCO, media and public voices which limit business. They know that legal function itself can create significant value: in, e.g., taxes, trade, environment, IP, M&A, commercial law and public policy. They know that highly talented, broadly experienced, analytically rigorous and consistently innovative general counsel—and an outstanding law department—are needed to deal in a systematic and rigorous way with the core issues of business strategy, culture, compliance, ethics, risk, governance and citizenship.

Because these necessities, and the external pressures on corporations, are only going to increase, I believe that the inside counsel revolution—and support for the concomitant roles of lawyer-statesperson and partner-guardian—will continue to gain board and CEO adherents in global companies, both in in the U.S. and in the rest of the world.

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The book is available for purchase here.

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