Saturday, 29 January 2011

If your GC reports to the CFO, your company doesn't understand what Legal does

After my provocative blog about British lawyers, some of you were probably thinking of Clement Atlee's immortal comment that "a period of silence on your part would be welcome". However, after reading an interesting post from @BrettTechLawyer, in his guest appearance on @LegalBizzle's blog (here), I'm being lured out of my silence a little earlier than intended.

It certainly isn't my intention to question the value and the role of in-house counsel. On the contrary, I believe that in-house counsel are a crucial part of better decision making in companies. My contention is that many companies under use or misuse lawyers, both in-house and out-house. Rather than cast this as an in-house -v- out-house debate, it's more interesting to explore why that is and what we can do to change it.


For all lawyers, the most important fact, which they often poorly grasp, is that finance is the language of senior management. So, if you're an in-houser and you aren't fluent in finance, you aren't going to be promoted into the C-suite. If you don't know or care what your company's cost of capital is, whether and how it is driving margin accretion, how it hedges currency exposure, or what the IRR is on an investment case etc, you aren't going to be influential. In-house lawyers who are serious about becoming leaders in their business need to push themselves to become more financially literate and to understand in real depth how and where their company is making money.


When it comes to out-housers, in answer to the question posed by 
@TadOstrowski, I agree with @BrettTechLawyer.  A spell in-house makes a huge difference to an out-houser's understanding of how businesses actually work. On the other hand, I don't subscribe to the view that out-housers need to devote a great deal of energy to understanding my company's business all that deeply. The in-house team can do that far better than they ever will. Both in-housers and out-housers can give their views on the law and how to apply it. But the privileged insight that out-housers can provide, which the in-house team cannot, is what's happening across many companies, across an entire sector and in other sectors. One partner at Big Firm LLP once said to me (in the context of a former role) "I think your business is being commoditized". He went on to explain how he'd seen this a decade previously in a related sector. That's helpful and it's the kind of value the big accountancy and management consultancy firms routinely add.

Having identified finance as the language of senior management, it's important to go on to say that this shouldn't entitle the CFO / FD to a hegemonic position at the most senior executive level, although this remains the case in many companies, particularly in the UK, where the situation
might even be worsening. In many cases, all sorts of core functions are forced to report through the CFO, rather than to be present in person. If that's allowed to happen, the company's viewpoint will become one-dimensional and ultimately the business will be less successful. One key reason is that finance, or money, is boring but important. It isn't memorable or motivational.

People still remember President Kennedy's famous speech in May 1961, when he announced that "this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to the earth". Which the Americans duly did, in an enormous national effort which spawned a huge wave of innovation and a great deal of prosperity. What people don't remember is that President Kennedy went on in the same speech to itemize, rather boringly, how much money he'd allocated to the project. Presumably he'd been consulting with the Secretary of the Treasury, but who remembers his/her name now? 


Nobody gets out of bed in the morning thinking "I must get into the office and drive up the earnings per share". Which is, incidentally, why the endless debate about PEP at law firms is so desiccating. No young lawyer in a law firm is really motivated by whether the equity partners are taking home £800k rather than £700k this year. Who cares, other than the people pocketing the money?


Legal, like HR, in-house and out-house, is a critical part of "decision support" in companies. Jack Welch, the legendary former CEO of GE, observed that it's very odd that HR, unlike Finance, often doesn't get a seat at the executive table. He makes the point that, if you owned a baseball team, you'd spend more time with the team coach than the team accountant. Actually, you'd probably spend time with both. The same goes for Legal. A leadership team that properly understands what Legal adds, is more robust, effective and capable than one that doesn't.

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Maybe you find this convincing, maybe not. Either way, I admit I haven't addressed the question "So, what does Legal do exactly?" Next time, that's the topic.

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