Pioneering not Preservation
In a guest editorial for GC Magazine, Michael Fahey makes the case for why the modern general counsel should not shy away from risk – but rather embrace it to produce optimal outcomes for their business.
Learning how to embrace risk
Former General Counsel, Upside Travel Company
Have you ever done a Google search for quotes on lawyers? They. Are. Horrible. This quip is fairly typical:
‘It is a pleasant world we live in, sir, a very pleasant world. There are bad people in it, Mr Richard, but if there were no bad people, there would be no good lawyers.’
The villainous rapscallions described by the impressionable young author of the quote, one-time law student and law clerk Charles Dickens, advocated vigorously on behalf of their clients – if, and to the extent, doing so lined their own pockets. In large part, such self-serving skullduggery is dead – yet the spirit and perception of lawyers as a necessary evil lives on. This continuing perception may be a victim of our role and training: to advocate vigorously for our clients. Little regard is paid to the impact to the other side or the optimal outcome for the parties collectively, or indeed, for society.
In a corporate context, the general counsel should be instrumental in maximising the size of the pie, and not just securing a bigger piece of a smaller, static pie. A larger pie contains a potential solution to the enigma presented by fulfilling our duty to our client, while also benefiting society and our counterpart. Armed with a view of the big picture, as well as the risks and opportunities inherent in any decision or transaction, the general counsel can be a proactive thought leader and business partner, working towards achieving an optimal outcome for all stakeholders.
This should seem platitudinal. That said, we are all guilty of too frequently focusing on risk-elimination, instead of properly assessing and embracing risk – if doing so results in a net gain. We focus on winning each point, earning Pyrrhic victories, instead of viewing victory as a better net outcome for our client and gross outcome for all.
Great general counsel, in contrast, embrace risk and a risk-based approach to their practice. Multiple general counsel whom I interviewed identified this skill as critical to success for in-house attorneys, noting that external counsel is typically not armed with the strength or knowledge required to operate in this manner. A public company CEO recently told me that he wants not just advice, but a risk-based decision or recommendation from his general counsel. Defining and implementing a risk-based approach merits consideration.
The discipline of risk management has at its core the notion that optimal decisions include taking on risk. It is not about eliminating risk, but rather consistently, cohesively and comprehensively assessing and mitigating risk – and identifying opportunity or risks resulting in positive outcomes. It empowers smarter decision-making and optimising the size of the pie and results for our client.
Risk assessment requires measuring both the potential impact of a given outcome, as well as the likelihood of that outcome. Many lawyers excel at the former, while overstating the latter or ignoring it altogether. We have been trained to anticipate a multitude of impacts arising from any given action or decision. Once identified, lawyers set out to eliminate or mitigate those risks, no matter how remote the likelihood. Counsel frequently does a great job – perhaps even too great – of identifying a myriad of worst case, ‘what if’ scenarios, before setting out to draft an airtight contract or solution.
Consider your own experience – how many M&A and commercial deals get 90% of the way there with brief commercial conversations, then contract negotiations bog down the process? We may chalk this up to the initial meeting of the minds being too high level and failing to consider all of the risks. This may contain some degree of truth, but equally, there may be truth to adversely impacting our clients’ value by over-lawyering or failing to accede points that are trivial, in order to minimise risk. Pareto’s Principle – that 80% of the outcomes are derived from 20% of the causes – carries little relevance in a lawyer’s world, where ‘the devil is in the detail’. At its heart, Pareto’s Principle and Voltaire’s adage that ‘the perfect is the enemy of the good enough’, is about risk management, perfectly applied.
Paraphrasing a quip popularised by Benjamin Franklin, nothing is certain, but death and taxes. So let go of the need for certainty, embrace risk, and thrive as a modern general counsel.
- Think. Thoroughly consider and understand your company’s approach and comfort with business, financial, operational and other risk. With that understanding as your baseline, think about and determine your department’s comfort with the risks for which it is responsible.
- Learn. Brush up on risk management theory and practice. Your bar association, the Association of Corporate Counsel, in addition to various universities and institutions will all offer training on how to become better acquainted and more comfortable working with risk.
- Apply. Moving from a binary, black and white world to one that embraces the grey area takes practice. To start, think of a process containing low risk (low probability and low impact of an adverse outcome) that has been slandered by your colleagues as a ‘business prevention’ tool. The one that popped into your mind just now is the right one to start with. Consider eliminating or changing the process to be more productive and effective. When you are comfortable, weave your organisation’s and department’s attitude towards risk into a dynamic, formal framework.
- Focus. When conducting risk assessment, be sure to focus on addressing the likelihood of any given outcome and not just the size of the impact. Quantify these items whenever possible. Ensure you consider mitigating factors and alternative solutions that provide the other side what it needs while providing reasonable protection to your client.
- Teach. Instill the tools amongst your team. Tactfully help opposing counsel get to the optimal outcome by framing the discussion in terms of the likelihood and impact of a given risk, and an appropriate structure to benefit both parties.
- Collaborate. Your business colleagues collaborate with their counterparts. Too often, our paradigm is adversarial. Change the dynamic with ‘opposing’ counsel to one of collaboration. Frame the conversation in terms of the business goals and work together to achieve those. Confer about risks and risk management with your business colleagues and team, other in-house counsel and risk management professionals, at your own and other companies.
- Decide. To be a business partner, you need to make an informed recommendation or decision. This is not the same as going rogue. Ensure your leadership team is aware of material risk-based decisions you are comfortable with, including details of your risk assessment. Risk tolerance decisions require clear communication with, buy-in from, and the trust of your internal client.
Be sure to focus on addressing the likelihood of any given outcome and not just the size of the impact.
General counsel are uniquely placed within their respective companies to implement and execute on these principles. It needn’t necessarily start with wholesale change – rather, transformational practices can start with small actions. At our annual strategy session, my team and I implemented a strategy to embrace risk that we called ‘empowering the business’. Our focus was to get more deals and decisions completed more quickly in order to grow the top line, all while managing the bottom line. We realised that the legal department was spending an inordinate amount of time (and therefore, capital) negotiating non-disclosure agreements. The upshot was that our department’s investment was disproportionate to the risks presented. The business was frustrated with the process, which they viewed as obstructing the deal. The team and I discussed and identified a new process for NDAs, including:
- Giving the business access to our forms, so they could be signed quickly without legal department involvement.
- Adopting formal, liberal guidelines about what was acceptable in terms of changes to our forms or acceptable terms in our business partners’ forms, so reviews could be expedited.
- Training the business on the purpose of NDAs and these guidelines, so they could streamline the review process with their counterparts by intelligently discussing pressure points or items on which we could be flexible.
To date, I have never seen one of those agreements mentioned after signing, much less subject to a dispute or litigation. The decision to adopt more procedural and substantive risk expedited the contracting process while saving expense. Accruing these benefits over my 15 years as in-house counsel, the reward has significantly outweighed the risk.
Our team also adopted a formal risk assessment process, wherein we tracked a variety of legal and regulatory risks in a spreadsheet, with rows and columns identifying and quantifying the likelihood and impact of given risks. This management reporting tool allowed me to ensure we were allocating the right resources at the right time on the right issues, and was integrated with our larger risk management function. It also allowed me to easily, and visually, keep the CEO and Board appraised of legal risks.
Ultimately, one size will not fit all. You can tailor an approach to risk and risk management that conforms to your corporate strategy and risk appetite. The new era of general counsel are not necessary evils, as Dickens portrayed, but value-adding, risk-embracing business partners.