01 DEC 2005

WINNING LEGALLY
What if managers treated their lawyers as partners?
By: Deborah Blagg

Bagley: Legal literacy should be a priority for managers.

Photo by Stuart Rosner

In her new book, Winning Legally: How to Use the Law to Create Value, Marshal
Resources, and Manage Risk (HBS Press), Associate Professor Constance E. Bagley
contends that managers who delegate responsibility for legal issues to in-house or
outside counsel do so at their companies’ peril. To avoid the kinds of recent blunders
that have brought scandal and financial disaster to some of the country’s best-known
corporations, Bagley believes that general managers need to raise their level of legal
astuteness. “Winning Legally isn’t about turning managers into lawyers,” she
emphasizes. “Most managers already have a full plate. However, managers who
possess even a basic understanding of relevant legal issues can help their companies
become better not only at complying with the law, but also with harnessing its power to
achieve their business objectives.”

Before joining the HBS faculty in 2000, Bagley was a corporate securities partner in
Bingham McCutchen LLP and a faculty member at the Stanford Graduate School of
Business. She teaches the MBA elective Legal Aspects of Management and serves on
the faculty of The Entrepreneur’s Tool Kit executive education program. Her books
include The Entrepreneur’s Guide to Business Law, 2nd Edition (Thomson South-
Western, 2003).

What do managers need to do to become more legally astute?

Legal astuteness has three components: attitude, organization, and knowledge.

Managers first have to appreciate that legal matters are an integral and manageable part
of doing business. Organizationally, managers need to facilitate frequent, two-way
communication with legal counsel and provide them with enough business information
to elicit opinions that make sense in a broad, strategic context. In terms of knowledge,
managers need to become more legally literate so they can communicate effectively with
counsel. This includes understanding their fiduciary duties and the circumstances under
which companies are liable for the actions of their employees, as well as ways to use
intellectual property law to protect their knowledge assets. They also need to practice
what I call “strategic compliance management,” which is a proactive approach to
regulation that seeks to convert constraints into opportunities.

Since managers and lawyers approach problems with disparate mind-sets, can they find
a common language?

Top management needs to place a higher value on legal literacy. Training and incentives
are important. Potential problem areas can vary depending on industry and functional
role, but they are easily recognizable if managers learn where the legal lines are drawn.
Knowing when to ask for legal help and being able to process that help effectively are
teachable managerial skills.

Managers also need to understand the importance of keeping their lawyers in the loop,
not just on discrete legal queries but on an ongoing basis. Lawyers need to have enough
business savvy so they can actively participate in a dialogue. When an attorney is asked
to draft a contract, he or she should have enough knowledge about the broader business
context to speak up if the rationale behind the deal seems flawed. Similarly, if a lawyer
offers a legal opinion that is too narrowly defined, the manager needs to press him or her
on the broader implications of that opinion.

We can’t afford the separation of business and law. We need to harness the power of
both legal and business expertise to compete effectively in today’s global environment.

One of your key points is that managers need to view compliance with the law as only a
baseline. Could you elaborate?

In our society, most managers understand the importance of compliance, both because
businesses have a responsibility to be good corporate citizens and because society has
a way, through legislation and regulation, to penalize companies that cross the line.
Sarbanes-Oxley is a recent example of that.

But managers also need to view strategic compliance as a way to convert what appear
to be constraints into opportunities. This idea has been explored in a number of contexts
by some of my colleagues at the School. In the environmental arena, for example, Forest
Reinhardt has found that when companies see environmental regulation as an
opportunity to look critically at their production processes — not just to figure out the
minimum they can do to comply — they can make their operations more efficient and
less costly. By treating compliance as an investment, not an expense, legally astute
managers are more likely to discover innovative paths to change their products in ways
that not only ensure compliance but also provide greater value for customers.

But don’t you also urge companies to be proactive in changing laws?

Managers have the ability to change the law to further their business strategy. When
statutes or regulations stand in the way of strategic objectives, the most effective route
can be to push back in legitimate ways. For example, companies can influence rulings
by providing pertinent statistics or industry research to administrative agencies that might
not have the resources to gather such data on their own.

There have been instances where companies have had a huge impact on the laws that
govern them. In 1998, for instance, management and legal teams at Citicorp and
Travelers Insurance, with Alan Greenspan’s tacit approval, used previously unexploited
provisions in the Glass-Steagall and Bank Holding Company acts to push through a
merger that ultimately changed the regulatory environment for the entire U.S. financial
services industry.

You advise managers to be vigilant in matters that may lead to litigation. Isn’t litigation
best left to the experts?

My view is that every legal dispute is a business problem that requires a business
solution. I tell my students that if they end up in court, they’ve already lost. Every hour
spent in a windowless room being deposed is an hour the manager is not spending
executing the business plan. By becoming actively involved in the resolution of disputes,
managers can convert a zero-sum argument about who is right into a variable-sum
negotiation in which both sides trade lower-valued resources for higher-valued ones.
Sometimes the best course is simply to accept responsibility and apologize. Few
litigators go into a courtroom thinking they will lose — but examples abound of cases
where they were wrong.

When companies have an in-house general counsel, can’t managers assume that their
most important legal interests are already being well represented?

In-house counsel has a tremendous role to play, but it is a serious mistake for managers
to delegate to them the responsibility for managing the legal dimensions of business.
The law is often not clear-cut, and general managers, not lawyers, should be making the
tough calls.

— Deborah Blagg

Source: https://www.alumni.hbs.edu/stories/Pages/story-bulletin.aspx?num=2583