What keeps in-house lawyers awake at night? The answer to this question changes over time and varies across companies and countries. Summarized below are my findings on this topic from a study of in-house lawyers in Germany. Comparisons with an earlier study in the US and Britain in the wake of the 2008 financial crisis are intriguing.
What Do In-House Lawyers Do?
In-house lawyers wear multiple hats in their day-to-day work. They provide service support to their internal clients, control company-wide risks and act as business partners. The service support role is about facilitating business transactions, for instance, by drafting contracts, structuring M&A deals and advising on country-specific laws and regulations. Legal scholars, noting this role, refer to a business lawyer as a “transaction cost engineer.” Risk control has both upside (i.e., risk-taking) and downside (i.e., risk avoidance), but lawyers are trained and conditioned to focus on the latter. In-house lawyers are tasked to ensure legal compliance with respect to antitrust, anti-corruption and data protection. Business partnering is primarily for senior in-house lawyers who do not just advise but participate in the company’s strategic decisions. Acting simultaneously as independent lawyers and as managers pursuing business opportunities requires skilled judgment.
Risk Control on the Rise
While all three roles are important, their relative importance has changed over time. Arguably the most prominent shift in Germany is the enhanced risk control function. As is well-known, the 2010s saw some German companies suffer major compliance challenges due to bribery and antitrust violations and the emissions scandal. These compliance breaches heightened the strategic importance of risk control. Moreover, “mediatization” (media attention) necessitates dealing with legal and nonlegal (including reputational) risks together.
This article originally appeared in Germany’s “Business Law Magazine”.
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New CEOs may be appointed; they may restructure to make business units more visible to the corporate headquarters; and boards make more explicit which director is responsible for Legal & Compliance. Above all, the general counsel (GC) is on the front line to implement a robust risk control and compliance system. In restructuring the legal function, they must walk a tightrope between providing independent advice to business units and retaining intimacy with internal clients. This requires culture change, not just structural and procedural changes.
Why a Preference for In-Sourcing?
The 2008 financial crisis had a major impact in the US and Britain. Back then, soaring billable hours led major corporations to insource in order to cut legal spending. Legal department heads of German companies in my study said they also preferred to insource legal work as much as possible. A common reason across countries for this preference is that in-house lawyers have deeper knowledge of the company they work for than external lawyers do. However, the German preference for insourcing is due less to high fees law firms charge, and more due to the aforementioned concern for better risk control and greater transparency. Tighter legal budget control leads to better risk control.
For reasons of capability (expertise) and capacity (resources), most companies rely to a varying extent on external lawyers. German companies I studied were in the midst of systematizing their relationships with law firms by establishing panels with formal performance reviews, insisting on greater cost transparency by practicing alternative billing arrangements, and accessing boutique law firms. Boutiques are preferred for better focus, greater flexibility and lower fees.
Preference for boutique law firms is a very German phenomenon, not seen in the US or Britain, where law firms are consolidating to become full-service providers. Is this a temporary thing or a sustainable phenomenon? What does the future hold for boutique law firms in the face of competition from alternative legal service providers? The jury is still out, but an optimistic reading is that boutique law firms are part of the nimble and adaptable Mittelstand sector at the heart of Germany’s economy.
In the US, the GCs at major corporations have wielded significant power via business partnering, going beyond their “trusted adviser” role. As joint risk managers, US general counsel front-load legal inputs, not only to preempt disputes and anticipate likely government investigations, but also to endorse upside risk-taking in new market entry decisions or large M&A deals. Around 80% of GCs at Fortune 500 companies carry the managerial titles of executive vice president or senior vice president, and many are incentivized with stock options. Not surprisingly, GCs at major US companies would be content with stating, “I’m a businessperson who happens to be a lawyer, a business partner who brings legal background to business problems.”
German companies have followed a different historical path. We must remember that until recently, quite a few prominent CEOs themselves were legally trained, a practice that has been fading. Against this backdrop, my study found a variety of attitudes and practices toward business partnering. At one extreme, some GCs regarded themselves as fully part of the executive team and acted as business managers entitled to speak up on all types of business issues that they consider important for the company. At the other extreme, traditional attitudes persist, with GCs adopting the role of independent lawyers who speak in executive meetings primarily to address legal issues. Companies continue to hire lawyers as lawyers, not as managers.
It is clear that in-house lawyers are of increasing importance to German companies and are taking on the challenges of (i) managing legal and nonlegal risks better; (ii) improving service support by systematizing relationships with law firms; and (iii) figuring out how best to be part of, or apart from, top management teams. One GC stated the nature of his challenge succinctly: “We must be risk managers of course, but also opportunity managers.”