Leadership | Summer 2016
I want to give you an overview of my theory about the inside counsel revolution. It is clear it has happened in the US. It is happening to a degree in Europe and in Asia. General counsel have become much more sophisticated, capable and influential, transforming law and business in two ways. Inside the company, the GC has become the primary counsellor to the chief executive and board, replacing the law firm senior partner. He or she leads corporate units beyond the law.
The role has become comparable in importance to the chief financial officer (CFO) due to the increased global complexity and the rising importance of ‘business in society’ issues. There has been a dramatic change in the skill, the experience, the breadth and the compensation of the GC.
The second part of the revolution is the shift of power from outside to inside. Inside lawyers now control strategy and make the decisions about where the substantive legal or legal-political, or legal-business issue will go. They try to control the money.
GCs also now often have a public role outside the company, as an advocate and negotiator and representative of the company. This all began in the mid-1980s and has increased in velocity ever since.
Four framework ideas
I am going to talk about four framework ideas that are critical to this revolution, and what it means to be a great corporation and a great lawyer. The first is the mission of the global corporation. This is usually a lot of baloney but I believe there are three critical concepts to consider. The first is high performance. High performance provides durable benefits to the shareholders but also the other stakeholders.
Performance has to be infused with integrity. Integrity means robust adherence to the spirit and letter of the rules, which are primarily legal but are also financial. It means voluntary adoption of global ethical standards that bind the company.
The third point is employee commitment to the core values of honesty, candour, fairness, reliability and trustworthiness. Fusing high performance with high integrity and sound risk management creates the trust that is the essential part of any corporation’s sustainability.
2. The GC as lawyer statesman
A second framework idea is the notion of GC as lawyer statesman. The lawyer statesman asks the first question: ‘Is it legal?’, but also: ‘Is it right?’ It involves broad scope and being a professional but also a citizen, because the problems you deal with go far beyond the law.
There are three qualities of the lawyer statesman: they are the outstanding expert, wise counsellor and an accountable leader. For GCs, being a statesman involves the power of your ideas and your personality in at least asking: ‘Is it the right thing to do?’
There are basic ethical responsibilities that we have to keep in mind. We owe ethical responsibilities to our own institution, to the employees and to the enlightened self interest of the corporation. We owe it to the clients and the stakeholders. We owe it to the rule of law.
Being a lawyer statesman involves having complementary competencies. We ought to be able to generate robust options and balance recommendations. We ought to be able to assess a variety of risks and not be afraid of risk. We need to understand how to make rules realities, how to implement. We need to build organisations: the vision, the values, the systems and the people.
We live in a democratic society, and we have to learn how to deal with the politics of the policies that we care about, even though, at least in the country that I come from, the politics are terribly dysfunctional.
We need global brains and cultural sensitivity. We need a variety of communication skills in the brave new world of the net. We need to have the breadth of mind so that we can help the chief executives and the board to find problems properly, because if you do not find problems, you will never solve them.
The lawyer statesman is active, not passive. We cannot just salute Enron, WorldCom and Siemens, etc. We must say we are going to obey the law or we are going to leave the country or try to change it. We can never ignore the law and try to get away with it or conduct a cost/benefit analysis to see if non-compliance is OK on an economic view. We cannot be hyper-technical and not credible, as was the case in Enron where the lawyers blessed things with the most strained interpretations.
Analysis before advocacy
We must do analysis before advocacy. Let me give two examples in my experience. Early in my career, there was a huge fraud case involving payment by the US to Israel, and Israel in turn procured US military equipment: in our case, engines of F-16 fighter planes. We coughed up our cookies. We said: ‘We did wrong. We are going to pay the price.’ We had to take a serious fine.
The lawyers failed in the financial services mess because they never asked what would happen if things went wrong.
The contrast has to do with diamonds. We were charged by the US with a criminal price-fixing violation in [our] industrial diamonds business. We concluded they did not have a claim and took them to trial. For a big company to go to trial in a criminal antitrust case was unusual. We won a directed verdict before we had to put on our case.
We had two very contrasting cases: one where we had to admit we had done bad things, and the other we decided to fight. That required independence of mind to advocate completely different courses. The statesman role involves instant questioning about what is right.
3. The partner/guardian tension
What are the obstacles? First of all, there are the negative attitudes about lawyers, the ‘only a cost centre’ rhetoric. There are the cultural pressures on lawyers to conform. You are inside a community. You can be swayed by that culture. When do you disagree with the chief executive? When do you stay your hand?
Then there is the lack of GC/inside lawyer breadth. I am a huge critic of legal education. It is way too narrow. We need to do a much better job in increasing lawyer breadth and vision.
Then there is fear. Fear of being fired, fear of losing benefits, fear of loss of reputation. Then there is the argument that having stock options or restrictive stock or other kinds of financial incentive plans will undermine the independence of the lawyers.
You have to have broad understanding of all the business aspects of your corporation: the products, the technology and the geographies. You have to be present in all the meetings. You have to participate in all planning and decision meetings as well as the general things like strategy and budget, and help shape the discussion.
You create real value of tens, millions and even billions of dollars through tax, trade, IP, employment, M&A, antitrust, etc. You have a central role, in building integrity issues into the business systems, and you help design a proper level of checks and balances. You are a partner in all dimensions of the corporation and that helps you to become a guardian in all dimensions.
The third framework idea is resolving the partner/guardian tension, which is the biggest problem we all face. The dilemma is to avoid being an inveterate naysayer and excluded or an inveterate yea-sayer and indicted. We have all heard about lawyers as Dr Nos, but there are just as many lawyers who are basically Dr Yeses, and get their companies and themselves in all sorts of trouble.
You can miss the numbers and survive, but if you miss on integrity it is one strike and you are out. You have to fire people if that happens. There is no balancing test.
There are lots of critics that say that GCs cannot be independent guardians, and they cite a lot of the scandals, and they are right because the GC and the inside lawyers performed badly. But GCs are also critical to corporate citizenship. You have to be a good partner to be a good guardian. You cannot be isolated, but you have to always remember: you are the guardian.
Overcoming the obstacles
The most important factor in overcoming these obstacles is the character of the GC. You have to have courage. You do not fight every battle. You can disagree without being disagreeable, and you have to engender trust. You should have a reputation outside the company that creates its own independence. I am going to issue a famous US vulgarity, [you need to have] ‘fuck you’ money, where basically you have enough stature that you can tell the chief executive that you are out of there.
You have to be able to articulate the partner/guardian vision to the chief executive, and persuade him it is the right way to go. Then you have to have a great legal organisation where, all the way down lawyers understand this is a role they have to play too. You have to encourage them to come to you directly if there is any serious problem.
You have to have an alliance with the staff functions, especially finance and HR, but increasingly risk and compliance. They can be sycophants and courtiers, so it is a very tricky business, but ideally you have very strong relationships so that you can all be partner/guardians.
Another way to overcome the obstacles is with the board. The board must share the vision of high performance, high integrity, lawyer statesman, partner/guardian, and the GC must be part of the board culture. Boards have been so embarrassed by the scandals that increasingly a lot of them get this point. I do not think that GCs should be on the boards of their companies. It does not happen in the US but you should be part of the board culture. Most of us are secretaries. That role put me at every board meeting and every committee meeting.
The board should approve the hiring and firing of the GC and the CFO. Even though it is a chief executive appointment, the board ought to interview the last candidates so that they are comfortable with that person. If the chief executive chooses to fire the GC, the board ought to know about it ahead of time and find out what is going on.
The GC reports regularly on key issues to the board. They need to have private meetings with the board and the committees, the audit, risk and public responsibilities committees, at least twice a year. Just that fact that you have [private meetings with the board] can cause problems with the chief executive, but if the board demands it, then it will happen.
The chief executive dynamic
You are stuck with the chief executive. The partner/guardian fusion is so critical to us doing our job well, and depends on the chief executive. There are all sorts of flashpoints. We know that the chief executive can make your life hell: exclude, denigrate and limit the scope of what you do.
I worked for one of the toughest chief executives in America. It was a huge company: 320,000 employees, 100 companies with 13 different businesses across every business sector in the world economy. I was able to get a certain number of things done but only because I was perceived as having the respect of the chief executive.
You can do due diligence [before taking a GC role]. When people are interviewing for jobs, they do not want to ask tough questions. But once you have been offered you have a window where you can, before accepting, do some due diligence. It can tell you some important things. It may tell you not to take the job.
Once in the role, you must be prepared to resign and lose dollars. If there is a good board and a good chief executive, there can be tension and you can work through it. If there is a good board and a bad chief executive, either the chief executive or the GC leaves. If you have a bad board and a bad chief executive, you have just got to go. You have to look in the mirror and say: ‘My integrity is more important than this job or this money.’
Is this pie in the sky? It will happen because of hard necessity.
Sophisticated chief executives and boards understand the importance of sophisticated GCs and inside lawyers in dealing with corporate issues. It is influenced heavily by legislation, regulation, enforcement and litigation.
The GC is increasingly seen by both boards and business leaders as a vital member of the team addressing the fundamentals facing the company. It will happen but this is the hardest part of the inside counsel revolution in terms of attitudes of the board and the chief executive.
4. Integrity culture
The last framework idea [is] to have an integrity culture. It is defined as the shared principles: the values, the policies and the shared practices that influence how people feel and behave from the top to the bottom across the globe. There has to be a uniform culture on ethics and values and law. Lou Gerstner, chief executive of IBM, said this: ‘Culture is not just one aspect of the game; it is the game.’ The problem is that there are tremendous pressures at the core of capitalism, and we should not get gooey-eyed about the virtues of capitalism. There are real pressures for corruption internally.
For all of us who deal around the world, there is corruption, weak rule of law, conflicts of interest; it is one of the trickiest problems we face.
Willingness to act
How do we create an integrity culture across the company? The leaders have to live it. One of the most important things that was ever said when I was at GE was said by two executives to the top leaders of the company: ‘There was no cutting of corners for business reasons.’ You can miss the numbers and survive, but if you miss on integrity [it is] one strike and you are out. You have to fire people if that happens. There is no balancing test. If you are a great business leader for 30 years but you cross the line on a major integrity issue, you are gone. That happened. It is a really important thing that happened when we fired people who were well regarded and had good careers, but they did something wrong.
Obviously, there has to be pay for performance with integrity and sound risk management. All those things can be measured and rewarded and there are now new and important compensation recovery policies.
Giving employees a voice
Education and training is critical. I assume everybody in this room has got some whistle-blower hotline system. There has to be a duty to report so that employees are fired if they do not report. Then there are other mechanisms for giving employees a voice. We had a review we started on the plant floor in one of our Asia-Pacific facilities. We would ask employees not about individuals but what was wrong with the business. We did that every year in a way that they could have confidence, and that flowed all the way up to the top. Was it perfect? No, but it worked pretty well.
The Enron case is known for a whistle-blower named Sherron Watkins who went to see Ken Lay. By then the goose was dead. The problem with Enron is not Sherron Watkins; it was that they did not have systems long before her to identify terrible problems.
Let me get to ethics. The critical thing about ethics is there needs to be a very robust process. The chief executive must run an ethical review once or twice a year, often staffed by the CFO, the GC, [and] maybe the chief compliance officer, where you identify the issues at the top level.
Then you do triage and decide which ones are the most important. These are things beyond what the law requires. What kind of ethical sourcing should we have? There are a whole variety of issues. Having a yearly process that is very robust is the most important thing to make sure that a set of issues is constantly in front of the top business leaders.
There is no one system from which you derive all corporate action in each situation. Sourcing is one thing. Environmental standards are another. All the standards you have disclosed to consumers beyond what the laws require depend on a lot of different prudential, moral and contextual factors.
Risk has become an enormously important subject for all of us. It is all economic and non-economic problems from political upheaval to natural disasters to terrorism and to company dysfunction. The modelling in a financial services business is different than the risk of running nuclear power plants in Japan.
Then you have to make sure you are asking framework questions, identifying the issues and then determining their importance: what type, what is the likelihood, what is the scope, what is the impact, and prioritising because you cannot do everything. The most difficult are the catastrophic risks where they can blow the company apart. Look at the Gulf with BP. They did not read a pressure test in a pipe coming up from the ocean floor, and it has cost them $60bn.
Principle number one is hire the best. That means convincing your business leader that it is worth spending a lot of money.
One of the things that might be of use to you is called the red team/blue team dynamic, which is a military technique where you have people in the red team deciding how they are going to handle this risk but then you have a completely separate blue team that takes that proposal apart so that there is a robust debate. That requires a lot of resources, but on things that pose a catastrophic risk to the company it may be worth doing.
All of us need to have specialised knowledge in addition to our legal knowledge. The lawyers, in my judgement, failed in the financial services mess because they never asked what would happen if things did not go right and what the consequences would be. They needed to understand the financial models and they did not. All of us to have a much deeper expertise in a lot of different disciplines.
Hiring the best
Let me end by talking about the legal organisation and law firms. Here are some of the core precepts that I tried to follow in running a global legal department. We had 13 different divisions with everything from NBC to aircraft engines. When I left we had 1,300 lawyers covering 120 countries.
Principle number one is hire the best. That means competing with law firms for talent and convincing your business leader that it is worth spending a lot of money to get a great tax lawyer or a great M&A lawyer. Hire the best. You can do it.
You have to figure out how to delegate. If I had any success in people management, it is because I left them alone. I would talk once a year about their priorities. I would say: ‘These two issues are company issues. I am going to be involved in them. Everything else is yours. You just report to me at the half-year point and at the end of the year.’ Being clear about delegation is critical to keeping great people.
There has to be a system of accountability between legal and business. The shibboleth I followed was that both hire and either can fire. Whether you have a decentralised system or a centralised system where all the lawyers work for the GC they have to be embedded in the business. They have to know the culture of the business, the business unit, the P&L centre, but also have loyalty to the GC. That system of accountability is critically important.
There has to be global innovation, whether it is by region, country, business or specialty. Trying to create one legal organisation with one mission and one culture where you can use all the talents and knowledge inside the organisation is critically important. I always thought one of my ethical duties to the inside lawyers [was] to give them fair evaluations about how they were doing and what their career possibilities were or were not. We do a terrible job for young lawyers. Companies do a terrible job. The law firms do a terrible job. We have to address that. We have to educate about the law of lawyering.
There must be diversity. We need to do pro bono work and we need to worry about letting people have a life. The breadth they get in other activities gives them a sense of perspective that comes back in their jobs. I deeply believe that.
Cost creating value
You have to make the case that the cost of your activity in the law department creates value. You must do this in a systematic and sophisticated way, whether it is increasing productivity and reducing cost to the company, avoiding important risk or addressing catastrophic problems. You can come up with themes as opposed to just line items in the budget. Involve the finance function to help do this.
The legal organisation
Lastly, how do we deal with the legal organisation? Let me give you some key thoughts. The most important point is segmentation of work. It is a tough job but a simple concept: you separate low-complexity and low-risk work from high-complexity and high-risk work. Who we hire will depend where it is on the segmentation ladder. We want to understand how the cost in each segment creates value and what the right margins are. If you are dealing with a high risk and complex matter, you may not care what the lawyers charge if they are terrific. With a commodity matter you may care a great deal and want to drive margins down. You want to analyse all the provider options. You can bring work inside. There are non-firm lawyers for routine and peaking work. There are lots of different choices.
There is this terrible productive disconnect. Law firms are trying to ramp up profits. They want the exact opposite of what we want: more with less. What do we do? We do competition in the segments. And we do cost control, whether it is at the front end through budgeting and fixed fees or at the back end through audits. I am saddened. We are repeating the same arguments we have had with law firms for 20 years. Money is still the cancer in many of the relationships. Their business model is not driven to serve the customer; it is to increase profits. There has to be a better way.
With this revolution, one thing I am sure you are thinking is: ‘How can I possibly do all this?’ You cannot. I could not. You can have the vision but you have to hire great people and delegate. You need to make alliances with the other staff and have the right alliances with outside experts. The second obstacle is a lack of vision. It is not just GCs; it is the business leaders. You have to show that legal cost creates value and you have to have the right relationship. These are the core issues that you have to deal with if this revolution is going to work.
The inside counsel revolution is going global. With the changing world and the importance of dealing with commercial complexity, and running that against the huge growth in business in society issues that demand for the partner/guardian and the lawyer statesman, the inside revolution is going to be driven by necessity not theory. Thank you for listening.
Ben Heineman is the former general counsel of GE. This article is an edited version of the closing speech at this year’s Enterprise GC, a joint forum from Legal Business, The In-House Lawyer, GC magazine and The Legal 500.
Heineman’s new book, The Inside Counsel Revolution, is available now.