Business Turned on its Side

Publication | 01.19.16

Disruption and innovation can create rapid business growth—but they can also ignite crises, litigation, and regulatory quagmires that can turn your company sideways. Staying upright—and succeeding—in today’s global economy requires a fresh look at the relationship between businesses and their lawyers.

“Move fast and break things. Unless you are breaking stuff, you are not moving fast enough.”

—Mark Zuckerberg, co-founder, chairman, and chief executive, Facebook

Is a new partnership needed between companies and their legal counsel? In an age of innovation and disruption, executives are working around the clock to devise bold strategies that can propel rapid business gains in a slow-growth economic environment. But the fast-paced drive for change, and the rise of a digital media that exposes every misstep to intense public scrutiny, give adversaries the ability to marshal their forces quickly and effectively—and much more harshly. For lawyers, it means higher stakes and more pressure than ever.

The core of the new dynamic is that legal risk has changed. The problems lawyers must anticipate and mitigate are not as linear, or predictable, as they once were. At the same time, corporate risk profiles now go far beyond new regulations out of Washington or the threat of a civil suit. The rise of Big Data, the reputation economy, and the seemingly unending new avenues of attack that might ambush a company all make for uncertain terrain. It can produce the kind of risk-averse, slow-response lawyering that doesn’t get past “no,” at a time when executives are looking for rapid answers and the kinds of practical solutions they need to conduct business. The resulting disconnect can mean that counsel are not positioned to help their clients navigate challenges at a time when clients need them the most.

“When it comes to new business strategies, the standard has changed. It’s not just enough to produce profits. Nor is it enough to achieve technical compliance with a statute. The strategy also must be able to withstand potential attacks from competitors, plaintiffs’ attorneys, regulators, and the public,” says Kent Gardiner, chair of Crowell & Moring’s Litigation & Trial Department. “Business is moving too quickly for the traditional model of lawyering to keep up. We need a new model of partnership between business and legal. The question of how we design it is critical.”

The need to redesign the legal and business relationship is seen in the lessons learned by both newly launched and well-established companies. Thanks to the Internet, Big Data, and a raft of new digital-based businesses, a company with a few employees and a break-out idea can attract huge numbers of customers, and disrupt entire industries, within a matter of months. Established players must react—and react fast—if they are to survive. There’s less time than ever to project out the potential legal risks of a business decision before pulling the trigger, says Gardiner.

Meanwhile, companies are enduring greater scrutiny than ever. Investors, regulators, and the public are demanding ever-greater levels of transparency. Thanks to tools like e-discovery and social media—not to mention a rise in malicious hacking—regulators are getting that transparency whether executives like it or not. In an era that gives primacy to a company’s brand and “voice”—not just to its product or service—stakeholders are holding companies to a higher standard. And when a company is found lacking, its adversaries can quickly rally their constituents and inflict damage. Add in a rapid and continuous news cycle, and companies that make errors are often being propelled into a global spotlight before they’re able to fashion a response.

At the same time, established players in realms such as financial services and auto manufacturing are facing a different challenge. They’re grappling with misbehaving employees who, by deceit or incompetence, have saddled their businesses with outsized litigation problems. In some cases, employees’ bad actions are rooted in a corporate culture that emphasizes the importance of winning at all costs. And in these cases, the public is left to wonder where the lawyers were all along.

In many industries, pioneering companies are simultaneously capturing market share even as they are drawing protests, investigations, lawsuits, and even custom-made laws and regulations. “These developments are often the biggest threat to their future growth—as much, or even more, than competition,” Gardiner says. “And yet none of these challenges can be anticipated or handled well within the traditional scope of a counsel relationship. The world is moving too fast.”

STARTING WITH OUTSIDE COUNSEL

“Outside counsel need to change,” Gardiner says. “Lawyers can be their own worst enemy because they think their clients want to avoid all risk. General counsel constantly lament to us that their outside counsel are great at submitting 20-page legal memos identifying every possible legal downside to a business initiative, seeming to limit the company to the option of closing its doors. These clients want to know something fundamentally different: how to construct a legal strategy that advances their business objectives. It’s a completely different analysis.”

Companies increasingly are recoiling at this reactionary advice from their outside counsel, meaning that such counsel are actually not consulted when they should be. “Traditionally, lawyering has been very binary and conservative,” says Robert Cusumano, a Crowell & Moring Insurance/Reinsurance Group partner and former general counsel for the international insurance enterprise ACE, Ltd. “Too often, a lawyer has felt that the main part of his or her job was to say no, or to over-warn people about every fantastical risk that could arise. So lawyers have contributed to the reputation they have in some organizations of being obstructionist.”

That conservative approach is rooted in traditional legal training as well as in business leaders’ traditional expectations. But binary advice won’t do in today’s more complex, transparent, and innovation-dependent business environment.

One way that counsel can begin countering their conservative reputation is by acknowledging that all business entails risk. Cusumano says lawyers must replace “the red light/green light approach” with advice that looks at business decisions along a spectrum of risk and reward.

More broadly, lawyers must also overcome a reputation for myopia—thinking that their particular assignment (a specific piece of litigation or transactional work) is the only thing that matters. Such outside counsel miss the forest for the trees because they don’t recognize that their assignment is simply one small piece of a broader, vital business strategy. And lawyers who focus only on their discrete task may end up suggesting a course of action that causes the company to win a legal battle but lose the war for support in the public opinion arena, in the legislature, and eventually, in the marketplace.

To illustrate, assume you are counsel to what’s come to be called a “unicorn”—for example, a high-profile company that allows people to rent rooms in their homes. The company gets some unwanted publicity when tenants start behaving badly. “You could create documents in which the renter is 100 percent responsible, the company has no responsibility, and the homeowner is renting out the room purely at his or her own risk,” says Michael Kahn, senior counsel in Crowell & Moring’s Commercial Litigation Group, who was recently named to the State Bar of California’s “Trial Lawyer Hall of Fame.” “Many people would sign on for the service anyway. But when the inevitable occurred, if the company took this position out loud, it would not play well.”

Instead, business leaders are increasingly seeking lawyers who can act as strategic partners, assessing risk but also presenting options and even devising strategies that can help the company retain and build its competitive advantage. “Lawyers who earn that reputation as strategic thinkers will earn their place in the executive suite,” says Gardiner. “Those lawyers have the ability to think strategically, and they’ve also invested the time to delve deep into the particulars of the business.”

For Kahn, thinking strategically requires going beyond strictly legal approaches if it can help the client achieve its business goals. For example, he’s helped clients seeking to avoid litigation by devising new systems for oversight and external and internal public relations campaigns. He once advised a client dealing with a problematic business partner not to file litigation (even though he was likely to prevail) but instead to pay the business partner to terminate the relationship voluntarily.

For outside counsel, strategic lawyering may require a change in the traditional ways of doing business. “Outside counsel needs to start looking beyond the traditional business model based on piecework and billable hours and instead focus on building lasting relationships with clients,” Gardiner says. “And that requires spending a lot of non-billable hours educating themselves about the company, its business, and its business environment.” As the relationship deepens, an outside lawyer might even be “seconded” to the company. By working on-site for months at a time, lawyers gain special insights into the business while also acting in a training role.

“Outside counsel have to be willing to invest in their clients and learn without charge, on the firm’s nickel,” Gardiner says. “When they do this, they can approach clients to advise on where the business is going. They have ideas to contribute at the outset, and they’re not asking to be brought on to be educated. They’ve undertaken the effort to be educated themselves.”

With the partnership between firm and client in place, fees can move away from the billable hour and toward long-term, relationship-based, risk-sharing engagements that reward results and efficiency instead of just time served.

“Once lawyers acquire deep, cross-industry knowledge in a legal or policy area,” Gardiner says, “they can proactively identify new risks and opportunities and flag them for executives.” For example, Gardiner and his colleagues who understand both the railroad and airline industries recently spotted an antitrust risk that had first affected railroads spreading to the airline industry. They were able to proactively inform their airline client of substantial unanticipated risks.

WHAT CAN COMPANIES DO?

It’s a tough world out there for sure, with companies caught between aggressive demands for growth, a sophisticated plaintiffs’ bar, a continuous media cycle, and the increasing scope of regulators. Then there’s the recent uptick in mergers and acquisitions, which is putting even more challenges on the in-house counsel’s plate.

The changing business environment necessitates a new partnership between companies and their legal counsel, one in which lawyers are more deeply and constructively engaged in corporate decisions.

“Companies need to find the right lawyers, and then they need to trust them and include them,” says Gardiner. “The most extreme form of a partnership is when the outside counsel and in-house counsel work directly with the board. It is the most sensitive place with the most acutely personal relationships, and the only way to get there is by developing trust.”

Companies that don’t yet see their lawyers as strategic partners often marginalize them, engaging in what Cusumano calls “closet lawyering.” In this model, the general counsel typically reports to the chief operating officer and is consulted only when a non-lawyer executive decides there is a legal issue. “This approach has proven not just dangerous but deadly,” Cusumano says. “That executive may not recognize a legal issue when it comes across his or her desk.”

Instead, lawyers should be more deeply embedded in the deliberation process. Depending on the business, companies may want to have a lawyer included in all meetings of the board and its committees, as well as embedded within key operating units, Cusumano says. The perspective of counsel can be valuable for executives in every business function—HR, sales, marketing, finance, product development, and more.

Yet many executives do not understand that the old ways of doing business cannot stand in a new era of increased transparency and scrutiny. “Executives are charging ahead without a full understanding of the risks they face—of the legal, regulatory, or reputational concerns they must confront,” says Cusumano. “Either they didn’t consult counsel, or counsel isn’t thinking strategically.”

While it’s not feasible for counsel to become involved in every business decision, says Kahn, there are triggers that can help an executive know when to raise a flag. When deciding whether to get counsel involved, he notes, executives should ask: Is the idea new? Is it untested? Is it viable? Could it leave certain parties—especially suppliers and competitors—aggrieved?

When a key business strategy is identified, Gardiner recommends doing a “pressure test.” Executives and counsel work through a scenario, “war game” style, in which the strategy results in a legal dispute and ultimately, a trial. “How would we prepare a CEO to act as a witness? How would you prepare the company and the evidentiary record for all that may occur? How do we educate regulators that we’ve acted responsibly? You want to make sure that you’ve arrived at a decision in a way that a jury would understand. It needs to pass the fairness test, not just the compliance test, because a jury’s approach would be much more emotional. It is a useful proxy for the court of public opinion. The media, customers, and even shareholders will not just be asking if the strategy is legal, but if it’s fair.”

When testing strategies, make sure you consider the possibility of success as well as failure, Kahn asserts. “Failure creates liabilities and consequences, but success can also create enormous legal problems. It will draw competitors, investigators, public complaints, and ultimately, antitrust concerns. If you structure your endeavor in ways that anticipate those challenges, you will be more successful when the inevitable challenges occur.”

COUNSEL AS COMPASS

When businesses venture into uncharted territory, lawyers can act as an invaluable compass. “I think lawyers are a bridge from somewhat closed corporate capitalism to the world outside,” Cusumano says. “They are a bridge to juries, to judges, to regulators, and to the concerned public. Beyond their knowledge of the law, lawyers are trained to sort out conflicting interests and to understand what the other side is saying. “And frankly, many executives don’t have that level of empathy; they are too busy competing and too much an advocate for their own side.”

A lawyer’s capacity to see how any given statement will affect multiple audiences has become more valuable in today’s digitized world, says Gardiner. That’s because documents like emails and meeting minutes that once were considered private are so easily tweeted to the world—or exposed through e-discovery. “The digitized world is much more of a fishbowl in terms of the decision-making process. The formulation and evolution of ideas will be carefully and skeptically scrutinized.

“Executives don’t always understand that when they’re communicating with one constituency, such as stock analysts, their comments are also available to the public, regulators, plaintiff lawyers, and others,” Gardiner continues. “The risk of collateral damage from an ill-considered statement is substantial.”

Even more damaging than an ill-considered statement is an irresponsible or insular culture. Such a culture has always been dangerous, but it’s even more so today, when the public is much more likely to discover it sooner. Companies that trust and include their lawyers are less likely to develop such a culture and to suffer the sort of scandals that have rocked automakers, financial firms, and others in recent years.

“The culture in some corporations can become resistant to criticism and imprudent about risk,” says Cusumano. “Sometimes, employees may not even perceive the risks that are emerging all around them. Or, if something is not flatly, obviously illegal, people will press ahead with it. You need to have an internally transparent process about risk, one that is open to people who independently tell you about risk factors, or it is almost inevitable that those risks will become realities.”

Companies should consider implementing practices that create the right incentives for executives to consult with counsel at key junctures in the decision-making process, Cusumano says. More crucially, companies need “an internal organization, an apparatus, and a culture that welcomes critique. If you don’t have that, then you have the illusion of lawyer participation, but in reality you’re not being told what’s being done. You’re not at the real meetings where things are being decided.”

Today’s businesses are grappling with new tools and new platforms that are creating a host of new risks and opportunities. Lawyers who don’t keep up will find themselves falling out of those key meetings where big decisions are being made. They’ll need in-depth knowledge to identify and mitigate not only existing risk, but also emerging risks and opportunities as the legal, business, and regulatory environments evolve.

“Some law departments fear they will lose their objectivity if they adopt the businessperson’s perspective,” Gardiner says. “But there’s no reason why good lawyers can’t combine an in-depth knowledge of the business and its strategic goals with independence and the ability to speak truth to power.

“Ultimately, counsel should see themselves as more than just calibrators of existing legal risk,” he adds. “They are also partners in the protection and monetization of the company’s core assets and strategies. So much of the economy is new and untested, and regulations are not written. The best legal departments use internal and external resources to predict where the legal and regulatory environment is going and to think about how to shape it.”

Checklist: Embedding legal strategy in business strategy

To prevent both unnecessary external blowups and internal crises, general counsel should consider these moves, according to Cusumano:

Have clearly delineated times where business strategies must be presented to lawyers.
Ensure a lawyer is present at all board and executive committee meetings (or at a similar level for smaller companies), and the lawyer is confident in “speaking truth to power.”
Make sure every lawyer reports to (and has compensation set by) the legal department, not local business leaders.
All lawyers should be able to discuss business strategy and present options that go beyond legal maneuvers.
Any lawyer asked a question that presents an ethical ambiguity should share the case with the entire legal department and allow for debate to help ensure that the right advice is given.

DREAM ... RISK ... SUCCEED

Innovation is vital to business survival and growth—bringing with it the potential for both action and risk. As a result, it’s changing the ways lawyers serve clients. Consider these quotes from key thought leaders:

“Innovation almost always is not successful the first time out.” —Clayton Christensen, professor, Harvard Business School

“People who don’t take risks generally make about two big mistakes a year. People who do take risks generally make about two big mistakes a year.” —Peter Drucker, management consultant, educator, author

“Risk more than others think is safe. Dream more than others think is practical.” —Howard Schultz, chief executive, Starbucks