The Inside Counsel Revolution

Speaker’s Corner From The Practice May/June 2016
The past, present, and future

The following is derived from Heineman’s newly published book, The Inside Councel Revolution: Resolving the Partner-Guardian Tension (Ankerwycke 2016), available now on Amazon.

Over the past 30-plus years, there has been an inside counsel revolution of increasing scope and power. General counsel and corporate law departments in top global companies have become far more sophisticated, capable, and influential, transforming both business and law in two important ways.

First, the general counsel (GC) role inside the corporation has significantly grown in importance. The GC has often replaced the senior partner in a law firm as the primary counselor for the CEO and board of directors. The GC role has broad scope—beyond law—that includes ethics, risk, governance, and citizenship. The GC is a core member of top management, participating in decisions and actions about not just risks but also opportunities, not just law but also business, not just public policy but also geopolitics. The GC often leads units outside the legal department, such as public affairs, taxes, and environment. The GC is now often seen by directors, CEOs, and business leaders as having importance and stature comparable to the chief financial officer 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. As a result, the expertise, quality, breadth, power, and compensation of the GC and inside counsel have increased dramatically.

The GC is a core member of top management, participating in decisions and actions about not just risks but also opportunities, not just law but also business, not just public policy but also geopolitics.

Second, the GC’s role 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. Because corporate law departments are increasingly staffed by outstanding specialists and generalists, inside lawyers have taken on the day-to-day management and strategic direction of major matters affecting the corporation—ranging from cross-border transactions to multi-front litigation to international enforcement investigations. The GC and inside lawyers have also strongly reasserted control over money spent on outside law firms, focusing on cost control from front-end budgeting and negotiated fees to back-end audits and cost disallowance, from preferred provider relationships to strategic partnerships, while also using new technology and innovative third-party vendors to reduce outside law firm spending. Finally, GC and inside lawyers are increasingly advocates, points of contact, or negotiators with important public and private parties in both developed and developing economies. On the critical risks and opportunities of business-in-society issues, boards and business leaders now delegate major responsibility—and key outside relationships—to the GC to help reach their commercial and citizenship objectives across the minefield of policy, law, enforcement, and public scrutiny.

In top global companies and beyond, the GC has thus risen in influence and status, becoming a core member of top corporate management and dramatically changing the relationship between inside and outside lawyers. In 2012, the Economist asserted, “The power of in-house lawyers has grown hugely in the past 10 years. The chief legal officer is now one of the mightiest figures in the C-suite.” A close observer of the legal profession recently wrote, “The future and fortunes of most of the major business practice firms and their lawyers are now in the hands of corporate counsel…The status gap between inside and outside lawyers has largely been reversed.” Professor David B. Wilkins has noted the continuous growth of “the power and prestige of in-house lawyers,” observing that “in-house legal departments in the United States now also rival large law firms as a destination of choice for talented lawyers” and concluding that “all of this has profoundly restructured traditional mobility patterns and prestige hierarchies within the U.S. legal profession.” (See “The In-House Counsel Movement: Metrics of Change“.)

Practical ideals

From my perspective, the inside counsel revolution is built on important ideas about what it means to be a great corporation and what it means to be a great lawyer:

First, the ultimate mission of corporations, especially global companies, should be the fusion of high performance with high integrity and sound risk management. High performance means strong sustained economic growth through provision of superior goods and services, which in turn provide durable benefits for shareholders and other stakeholders upon whom the company’s health depends. Such performance entails an essential balance between risk taking (the creativity and innovation so essential to commercial strength) and economic risk management (the financial, commercial, and operational disciplines so essential to the soundness and durability of business institutions). In my view, it means a corporation-specific optimization of the legitimate interests of key stakeholders—shareholders, creditors, employees, customers, suppliers, and communities—over the short, medium, and long term to create value for all.

Book cover image of "The Inside Counsel Revolution"

High integrity means robust adherence to the spirit and letter of formal rules, both legal and financial; voluntary adoption of binding global ethical standards that go beyond the mandatory rules; and employee commitment to core values of honesty, candor, fairness, trustworthiness, and reliability. High integrity involves understanding, and mitigating, other types of risk—beyond direct economic risk—that can cause a company catastrophic harm: legal, ethical, reputational, communications, public policy, and country/geopolitical. The core values of the company, as expressed through the core values of its employees, are essential to strong relationships inside and outside the company. These values, in turn, can exist only when the company adheres to the spirit and letter of the formal rules, adopts appropriate global ethical standards, and makes these precepts operational at all levels of the corporation.

For the lawyer-statesperson, the first question is: “Is it legal?” But the ultimate question is: “Is it right?”

High performance with high integrity and sound risk management not only mitigates risk but also achieves affirmative benefits in the company, the marketplace, and the broader global society. These benefits create value in a wide variety of ways: attracting, motivating, and retaining superb talent; increasing productivity; enhancing customer loyalty; mitigating or eliminating far more expensive risks; increasing brand value; allowing premium pricing; creating operational efficiencies; and, ultimately, enhancing reputation and creating trust among shareholders, creditors, employees, recruits, partners, customers, suppliers, regulators, communities, the media, and the general public. This trust is essential to sustaining the corporate power and freedom that drives the economy—trust that has dramatically eroded over the past quarter century due to stark corporate scandals and stunning business failures.

Second, the ideal of the modern GC is a lawyer-statesperson who is an outstanding technical expert, a wise counselor, and an accountable leader who has a major role assisting the corporation in achieving that fundamental goal of high performance with high integrity. For the lawyer-statesperson, the first question is: “Is it legal?” But the ultimate question is: “Is it right?”

As a lawyer-statesperson, the GC must engage in robust debate on major corporate initiatives of all shapes and sizes about what are the ends, and not just the means; 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 what is legal. With training and experience in policy, law, ethics, and process and with independent expertise, breadth, judgment, and practical wisdom, the archetypical GC 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-statesman (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, and for the right vision of business in society.

As a technical expert, the GC 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. GCs 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. And they must never, under business pressure, ignore the law or engage in a cost-benefit analysis about whether to follow it or to give law a noncredible, hypertechnical reading.

As wise counselor and leader, the GC as lawyer-statesperson must discharge four ethical responsibilities: to the corporation and its employees; to other stakeholders (shareholders, partners, creditors, customers, and suppliers); to the rule of law and the administration of justice; and to the establishment of social goods necessary to a just and productive society, which cannot be achieved through the market alone. Importantly, as counselor and leader, the GC must possess not just “core” legal competencies but also “complementary” competencies beyond law that include (but are hardly limited to) asking “what ought to be” questions; having broad knowledge of competitors, competition, and global markets; executing, not just deciding; leading and building organizations; having financial and technical literacy; and, ultimately, being a great generalist to define—and solve—multidimensional problems properly.

The fusion of the partner and guardian roles depends on the GC being integrated into the core activities of the corporation.

Finally, to function effectively as a lawyer-statesperson in a complex CEO-led corporate organization, the GC must assume a second aspirational role: a partner to the board and business leaders who is also a guardian of the corporation. Under appropriate conditions, being an effective partner on business and law establishes the trust and credibility that allows the GC to be an effective guardian. The fusion of the partner and guardian roles depends on the GC being integrated 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 the implementation of those decisions. Such involvement allows the GC both to help the business leaders achieve legitimate commercial goals and to give independent views on whether corporate action comports with appropriate standards relating to integrity, risk, and citizenship. 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, as many hold 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 lawyers’ fear of CEO retribution; problems of having only one client; and lawyers’ concerns about 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—GC 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 GC (and inside lawyers generally) is to go native as a “yes person” and be legally and ethically compromised, or to be a conservative, inveterate “naysayer” and 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 GC; an alliance with other top staff officers (finance, HR, compliance, and risk), who share the same partner-guardian tensions and performance-with-integrity objectives; and a close relationship with the board of directors, who should ask for private meetings with the GC and oversee the GC’s compensation and job status. Ultimately, however, the capacity to serve as a partner to business leaders and a 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 GC to be a lawyer-statesperson and partner-guardian, never afraid to speak out on what is “right” for the corporation.

Broad scope in the present

Whether acting as expert, counselor, or leader, the GC confronts the corporation’s essential problems—a task of enormous scope and difficulty today in a globalizing world of burgeoning commercial and geopolitical complexity. Participating in debates and execution of business strategies requires extra-legal knowledge of finance, technology, and products as applied in multiple, differentiated global markets. Assuring legal compliance and mitigating legal hazards requires understanding complex, multiplying, conflicting, and uncertain formal mandates, enforcement practices, and legal cultures in myriad regional, national, and subnational jurisdictions. Setting voluntary global ethical standards beyond what the law requires entails balancing prudential considerations (the interest of the corporation) and moral concerns (the rights of—and duties to—stakeholders) in very nuanced contexts across the whole range of corporate activity from technology and manufacturing to marketing and sales. Mitigating risk—beyond legal and ethical hazard—involves understanding the economic and noneconomic threats to the corporation, as well as setting up robust, cross-functional systems and processes to prevent, mitigate, and respond to those risks, especially those that present difficult country and geopolitical threats and that pose other catastrophic danger.

The GC is a key player in the core leadership task of creating the culture of high performance with high integrity.

Governance involves the proper distribution of power between shareholders, the board of directors, and business leaders; finding a right-sized role for a board that cannot manage the corporation but has an important oversight function; and dealing with the menagerie of shareholders who have myriad, often conflicting objectives, as evidenced by the contrast between activists and stewards. Defining the corporation’s citizenship includes crafting an approach to public policy that pays heed to substance, by addressing vital public issues and avoids self-interested crony capitalism, and to process, by dealing with the dysfunction in the political culture through restraint on money, fairness in facts, and balance in solutions and nonpartisanship in politics. Heading the global legal organization is the acid test of leadership, from hiring the best to finding equilibrium in delegation/management to sharing accountability with business leaders in both centralized and decentralized global businesses to integrating a diverse global department to acting ethically towards inside lawyers. Managing law firms and other third-party vendors demands a relentless focus on segmenting the corporation’s work from low-risk/commodity to high-risk/complex and finding the balance across many different legal functions between competition and strategic relationships—between inside and outside—that truly does more with less and persuades the CEO of the efficiency and effectiveness of the legal organization. Finally, the GC is a key player in the core leadership task of creating the culture of high performance with high integrity, which shapes all these issues because it is so vital to how employees think, feel, and behave.

The future: problems and possibilities

I believe that the inside counsel revolution will continue in the United States and around the world. But it must overcome certain obstacles.

First, is it possible for a GC to handle the broad scope of responsibilities I have described (even if in briefest terms) that go far beyond opining on what is law and leading the legal organization? The short answer is no. I certainly couldn’t do it. But the answer can’t be no, because every one of the issues I discussed truly are fundamental or foundational to the corporation and require the involvement—the initiative, drive, and vision—of the GC. So, to overcome this problem, the GC must hire the best, devise an appropriate system of delegation, make alliances with other corporate staff leaders on cross-cutting corporate issues, and selectively forge key outside relationships. Another personal obstacle for the GC is whether she has the vision and the skills to conceptualize and then execute on the broad role outlined here. To some extent, such vision and skills are a product of innate breadth of mind and actual breadth of experience. But, as discussed in detail in a coauthored paper on the roles and responsibilities of lawyers as professionals and citizens, there is also a need for education and training in law schools, law departments, and law firms to build a broad and strong foundation for those who would assume the GC position. This training should include explicating the role of expert, counselor, and leader; teaching complementary, not just core, competencies; and creating innovative cases that present a broad array of business-in-society problems.

The greatest problem for the future of the inside counsel revolution remains what it has been in the past: the attitudes of the CEO, top business leaders, and board of directors.

Second, in a highly competitive corporation, the costs of the legal function—and of the larger issues of culture, compliance, ethics, risk, governance, and citizenship—are always an issue for the CEO. In the face of these unceasing financial pressures, no task is more important for the GC than making a credible case to business leaders that cost creates value across the broad spectrum of issues. Showing that existing or additional expenditures will achieve efficiency and effectiveness can occur under five different themes:

  • The expenditure can lead to increased productivity and net reductions in current direct cost (e.g., through prevention that reduces lawsuits or customer complaints).
  • The expenditure can lead to net added direct financial value (e.g., license income through investment in IP).
  • The expenditure can lead to less tangible but still real future value that turns as much on judgment as on hard financials (e.g., ethical decisions, like sourcing standards that enhance reputation in the company, marketplace, and society).
  • The expenditure can avoid future costs arising from the risks of noncompliance with mandatory legal and financial rules or from other economic and noneconomic risks (e.g., reducing the costs of unlawful spills or discharges in the future).
  • The expenditure can flow from special processes to identify and address the potentially catastrophic events where the resulting costs would be vastly greater than the outlays to prevent and detect (e.g., addressing catastrophic risks from natural acts, terrorism, cyber, geopolitical shifts, and failures of the corporation’s own systems, processes, and products).

The GC must work with other staff and business leaders to distinguish between these types of expenditures and then make the case for them. In concert with her peers, she must know when a hard financial expression works and, on the other hand, when a complex of factors is implicated and judgment, rather than numeracy, is required.

Third, different views of lawyers in different legal cultures with different histories may retard the inside counsel movement in Europe, Asia, and the rest of the world (see “Going Global?: In-house legal departments in the emerging economies”). For example, even in Europe, GCs may still not report to the CEO, have only a narrow functionary role, and, depending on the jurisdiction, not have attorney-client privileges. Nonetheless, as discussed in the rest of this issue of The Practice, the increasing importance of business-in-society issues, direct relations with the CEO, and enhanced GC compensation are among the trends around the world pointing toward a stronger role for GCs inside the corporation and a shift of power from outside law firms to inside law departments, although the trend lines vary across global jurisdictions and are far from immutable.

Fourth, the greatest problem for the future of the inside counsel revolution remains what it has been in the past: the attitudes of the CEO, top business leaders, and board of directors. The broad role I urge for the GC in advancing the mission of high performance with high integrity will be possible only if the CEO, supported by the board of directors, wills both the lawyer-statesperson role in a matrix organization of shared power and the partner-guardian role that values, rather than resists, independent views. CEOs may simply not have the breadth of vision about the appropriate mission of the corporation—and about the appropriate role of the GC—when they assume the top spot. One solution is that business schools, like law schools, reorient their basic education to deal with broad business-in-society issues, which are so important in leading global enterprises in this era. More important, boards of directors must address this issue when selecting the CEO by redefining the corporation’s performance-with-integrity mission; focusing leadership development on a range of performance, integrity, and risk issues; and ensuring that the CEO succession/selection process yields candidates who, in fact, have the necessary experience, vision, and commitment. If the board fails in this task, and the CEO has to develop these traits on the job, then the GC may have an even more important role in aiding that process or find himself in “GC Hell” with a tone-deaf and narrow-minded boss.

Due to the external pressures on corporations that have been a major cause of the inside counsel revolution and are only going to increase, I believe the revolution will continue to gain board and CEO adherents in many companies. High performance with high integrity is not goo-goo theory but is the hard necessity now for many global corporations exposed to complex commercial challenges and a broad variety of business-in-society risks and opportunities. Sophisticated CEOs and boards know that successful performance depends on navigating effectively and fairly the myriad laws and regulations that limit business. They know that legal function itself can create significant value (e.g., in tax, trade, IP, M&A). They also know that highly talented, broadly experienced, analytically rigorous, and consistently innovative GC—and an outstanding law department—are essential to dealing in a systematic way with the core corporate issues of performance, compliance, ethics, risk, governance, citizenship, and organization.

Because these necessities, and the external pressures on corporations, are only going to increase, I believe that the rise of the GC as a symbol of the inside counsel revolution—and support for the concomitant roles of lawyer-statesperson and partner-guardian—will continue to gain board and CEO adherents, both in the United States and in the rest of the world.

Ben W. Heineman Jr. was GE’s senior vice president-general counsel from 1987 to 2003 and GE’s senior vice president for law and public affairs from 2004 until his retirement at the end of 2005. Since then he has been a senior fellow at Harvard Law School’s Center on the Legal Profession of Law and Program on Corporate Governance as well as a senior fellow at the Kennedy School’s Belfer Center and a lecturer at Yale Law School.