What keeps in-house lawyers awake at night? The answer to this question changes over time and varies across companies and countries. Summarised below are my findings on this topic from a study of in-house lawyers in Germany: Changing Role of General Counsel in Germany. Comparisons with my earlier study in the United States (US) and Britain. General Counsel with Power, in the wake of the 2008 financial crisis are intriguing.
A preference for insourcing
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. However, the German preference for insourcing is due less to extremely high fees law firms charge, and better risk control and greater transparency.
The balance of collaboration and competition
Most companies rely to a varying extent on external lawyers, for reasons of capability and capacity. The German companies studied were in process of systematising their relationships with law firms: establishing panels with formal performance reviews; insisting on greater cost transparency by practising alternative billing arrangements; and, accessing boutique law firms. Boutiques are preferred for better focus, greater flexibility, and lower fees. Of these practices, boutique law firms are a very German phenomenon—not seen in the US or Britain where law firms are consolidating to become full-service providers.
The multi-faceted role of in-house lawyers
In-house lawyers wear many hats in their day-to-day work, regardless of the use of external counsel. 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—such as 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 the upside of risk taking and the downside of 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 anti-trust, 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 judgement.
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 anti-trust violations and the emissions scandal. These compliance breaches heightened the strategic importance of risk control. Moreover, media attention necessitates dealing with legal and non-legal risks together—including reputational.
A new Chief Executive Officer (CEO) may be appointed; they may restructure to make business units more visible to the corporate headquarter; and, boards make more explicit which director is responsible for Legal and Compliance. Above all, the General Counsel (GC) is on the frontline 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.
Business partnering
In the US, the GCs at major corporations have wielded significant power through business partnering—going beyond their ‘trusted advisor’ role. As joint risk managers, US GCs 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 percent of GCs at Fortune 500 companies carry the managerial titles of Executive Vice President or Senior Vice President, and many are incentivised with stock options. Not surprisingly, GCs at major US companies would be content with stating: ‘I’m a business person who happens to be a lawyer, a business partner who brings legal background to business problems’.
German companies have followed a different historical path. 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 towards 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 in-house lawyers are of increasing importance to German companies. They are taking on the challenges of: managing legal and non-legal risks better; improving service support by systematizing relationships with law firms; and, 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’.
Download the full report ‘Changing Role of German Counsel’ here.
Professor Mari Sako focuses on the business of law, with a particular interest in the role of General Counsel and in-house lawyers as risk managers and business partners. Her fieldwork began in the UK and the US, and is now extended to Germany and Japan. She also researches about the globalisation of legal services markets and its impact on the legal profession.
She is a member of the advisory board of Thomson Reuters Legal Executive Institute, and worked with Thomson Reuters and Georgetown Law School on the survey of Alternative Legal Service Providers.
