Risk managers, but also opportunity managers

The changing role of in-house lawyers in Germany

By Professor Mari Sako

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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 United States and Britain in the wake of the 2008 financial crisis are intriguing (M. Sako (2011) General Counsel with Power? http://eureka.sbs.ox.ac.uk/4560/1/General_Counsel_with_Power.pdf).

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’ (Gilson RJ, Mnookin RH. 1995. Symposium on business lawyers and value creation for clients. Oregon Law Review 75(1)). Risk control encompasses both upside risks (risk-taking) and downside risks (risk avoidance), but lawyers are trained and conditioned to focus on the latter (Kurer P. 2015. Legal and Compliance Risk. Oxford University Press). In-house lawyers are tasked with ensuring compliance with anti-trust, anti-corruption, and data-protection laws. Business partnering is primarily a role assumed by senior in-house lawyers who do not merely advise, but also participate in the company’s strategic decisions (Veasey EN, Guglielmo CTD. 2012. Indispensable Counsel: The Chief Legal Officer in the New Reality. Oxford University Press). Acting simultaneously as an independent lawyer and as a manager pursuing business opportunities requires skilled judgment.

Risk control on the rise

While all three roles are important, their level of importance has changed with time. Arguably, the most prominent shift in Germany has been the enhancement of the risk control role. It is widely known that during this decade, some German companies have suffered major compliance challenges due to bribery and anti-trust violations, including the emissions scandal. These compliance breaches heightened the strategic importance of risk control. Moreover, ‘mediatization’ (media attention) forces companies to deal with legal and non-legal (including reputational) risks as one.

For an individual company, this new kind of risk management might lead to the appointment of a new CEO, the CEO may restructure to make business units more visible to the corporate headquarter, and boards may spell out more explicitly which director is responsible for Legal & Compliance. Above all, the general counsel (GC) is on the front line in implementing a robust risk control and compliance system. In restructuring the legal function, the GC 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 insourcing?

The 2008 financial crisis had a major impact in the US and in Britain. At the time, soaring billable hours led major corporations to insource in order to cut legal spending. In my study, German companies’ legal department heads said they also preferred to insource legal work as much as possible. A common reason cited across countries for this preference is that in-house lawyers have a deeper knowledge of the company they work for than do external lawyers. In keeping with this commonality, the German preference for insourcing has less to do with the extremely high fees charged by law firms and more to do with German companies’ aforementioned pursuit of better risk control and greater transparency. Tighter legal budget control leads to better risk control.

Systematizing relationships with law firms

For reasons of capability (expertise) and capacity (resources), most companies rely to a varying extent on external lawyers. The German companies I studied were in the midst of systematizing their relationships with law firms by various means, including establishing panels with formal performance reviews, insisting on greater cost transparency through 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 United States or Britain, where law firms are consolidating to become full-service providers. Is this boutique phenomenon temporary, or is it sustainable? 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 says boutique law firms are part of the nimble and adaptable Mittelstand at the heart of Germany’s economy.

Business partnering

In the United States, the general counsel at major corporations have wielded significant power through business partnering, taking them 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 incentivized with stock options. Not surprisingly, GCs at major US companies would be content with saying: ‘I’m a business person who happens to be a lawyer; I’m 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 were themselves legally trained – a practice that has been fading (Neuscheler, T. 2018. Jeder fünfte DAX-Chef begann seine Karriere als Unternehmensberater [Every fifth DAX-CEO had a career start as management consultant], Frankfurter Allgemeine Zeitung, 7 June 2018. See here)). Against this backdrop, my study found a variety of attitudes and practices in the realm of business partnering. At one extreme, some GCs regarded themselves as fully part of the executive team and acted as business managers, entitled to have a say in myriad business matters they considered important for the company. At the other extreme, traditional attitudes persist, with GCs adopting the role of independent lawyers who only speak in executive meetings, primarily to address legal issues. Companies continue to hire lawyers as lawyers, not as managers.

Conclusion

In conclusion, it is clear that in-house lawyers are of increasing importance to German companies and are taking on multiple challenges: (a) managing legal and non-legal risks better, (b) improving service support by systematizing relationships with law firms, and (c) figuring out how best to be part of, or remain 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.’

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