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COVID-19 and its consequences has pre-occupied business leaders throughout most of 2020. In addition, in-house legal teams across Europe are preparing for the end of the Brexit transition period. However, alongside these issues, three social forces have gathered momentum in a way that may bring positive change for businesses. There is an opportunity—and a need—for in-house legal teams to take a lead on these topics to help position their businesses for a sustainable future and protect their reputation.
A new report from Thomson Reuters, 2020 State of the European Corporate Legal Department draws on research from Acritas to look at trends trends in the European market that all corporate legal departments should pay attention to.
The MeToo movement was already underway well before 2020, propelling gender diversity further up the boardroom agenda. Black Lives Matter, catapulted into global consciousness by the tragic events in the United States (US) in the midst of COVID lockdowns, highlighted the racial injustices and inequalities suffered by many in wealthy Western societies. There was an almost universal commitment of support from the business community as leaders found their staff and customers questioning corporate attitudes and policies and demanding action.
Added to this is the Extinction Rebellion (XR) movement. The fight against climate change is well established and supported by many in the legal industry as well as many of the world’s multinationals—most of which have signed up to the UN Sustainable Development Goals. Sustainability has been on the boardroom agenda for a while, but XR activists challenge businesses’ commitment to serious change.
There is a question mark over the future of an economic model that strives for constant growth. It is perceived to maximise short term profits over sustainable value for all. According to the 2020 Edelman Trust Barometer, over half their respondents believe that “capitalism as it exists today does more harm than good in the world”. Ideas such as the Frugal Economy—based around B2B sharing of resources, micromanufacturing and regeneration of resources, land and communities—are likely to gather pace.
All of these concerns raise questions about the purpose of a business, and how it should be managed and governed.
As they battle against recession and cope with lockdown, hard-pressed in-house legal departments may feel such issues are too far away from their day-to-day functions. However, they can add real value to their organisations by considering these points of corporate social responsibility and addressing these long-term strategic issues. Not only does much of the responsibility lie with them, but they are also in a position to drive change.
Why this matters to the in-house team
What is the impact on the in-house team of all this? In the short term, more regulation is likely as existing laws are strengthened by politicians reacting to public pressure. Major investors, too, are now focusing on governance issues and Environment, Social and Corporate Governance reporting requirements are set to increase, involving cross functional work with finance, human resources (HR), and investor relations teams. Supply chain contracts will come under scrutiny—all involving day-to-day work for the in-house team, which they will need to deliver efficiently and effectively, providing practical and commercial solutions.
The team’s safeguarding role is also crucial here in respect of the organisation’s reputation. A company’s reputation is built by the behaviour and performance of its staff—and that in turn depends on the corporate culture. According to the United Kingdom’s (UKs) Financial Reporting Council (FRC), corporate culture is now a board responsibility.
At the heart of this is the question of governance. Strong governance underpins a healthy corporate culture, and in their governance role, General Counsel’s (GCs) can identify potential risks in their culture: is there too much emphasis on short term results? Are seemingly minor ethical transgressions tolerated regularly? Does the company push the limits of what regulations permit? Is there a lack of feedback from junior staff?
What steps can the GC’s team take?
There are various ways in-house teams can support their businesses on these issues.
GCs should look at their own team, and examine their own recruitment and development policies, to ensure that they follow—or lead—on best practice to encourage diversity and inclusion, and that they support the company’s sustainability initiatives. Given that many law firms have significant initiatives around social mobility, diversity, and inclusion, they may have resources and ideas that GCs can use.
Across the wider organisation, legal departments can lead on how to go beyond the letter of the law—mere compliance—and help future proof their organisation against additional regulations and stakeholder pressure.
Align incentives to behaviour
They can work with HR on remuneration policy, training programmes, and recruitment. Edelman’s research highlights the importance of ethical behaviour over competence in creating trust (and thus protecting the corporate reputation)—that is, being good to delivering profits is not enough. Some years ago a leading industrial support services firm distinguished between good profits and bad profits—the latter being profits generated at the expense of client satisfaction or community relations (measured by the Net Promoter Score). By weighting executive bonuses accordingly, they successfully encouraged good behaviours and reduced reputational, operational and financial risks.
Moreover, by liaising with marketing and corporate communications, making sure they have access to staff and customer satisfaction surveys, GCs can monitor adherence to corporate values as well as contractual obligations.
If they also have a company secretarial role, in-house teams can ensure these topics rank high on boardroom agendas. These are company-wide issues that should be championed at senior level. Almost all have legal or regulatory implications and GCs have an important role to play in helping identify gaps between values, brand promises and reality—and potential conflicts with present or future regulations.
Nor should they confine their work to internal collaboration: in a report published last year on sustainability in the food industry, global law firm Eversheds highlighted how GCs can engage with NGOs, industry bodies and government consultations to help shape future developments.
For some, this may feel uncomfortable. They may worry about too much transparency, about the distinctions between ‘soft’ and ‘hard’ law, and the potential conflict between good intentions and business practicalities. They may prefer to stay in the familiar world of legal certainties and regulatory compliance. For GCs who want to add value to their organisation, this could be a mistake.
A healthy corporate culture, satisfying all stakeholders, depends on following both the spirit as well as the letter of the law. Legislation provides a framework for corporate activity and managerial behaviour, but it is a company’s purpose, values and culture that will drive its reputation for ‘doing the right thing’. By their professional expertise and Board-level view of the culture, GCs are particularly well placed to make this work successfully.
As the UK FRC put it in its 2016 Culture Report, “Acceptable behaviour evolves over time, so culture has to be adjusted for the context and times in which the company is operating”. These social forces, backed by political pressure, have re-defined what is acceptable behaviour in the corporate world. They call for a change in culture, in behaviours and probably a review of investor and executive expectations. As companies plan for recovery from the immediate crisis of COVID-19, they would do well to consider how they adapt to this new world.
Download your copy of 2020 State of European Corporate Legal Department.