Lex Mundi’s Eric Staal addresses the legal and regulatory pitfalls on the radar for general counsel as they support business adaptation strategies for the post-pandemic terrain and discusses how corporate legal teams are responding to the demand for agility and resilience.
The arrival of COVID-19 vaccines may signal the beginning of the end of the economic crisis, but it does not present us with a return to business as usual. Now begins the real post-pandemic fallout that for many months has loomed over the global landscape.
As the pandemic spread in early 2020, there was a period of shockwave during which legal teams scrambled to wrestle with business continuity. They supported the shift to remote working, interrogated contractual provisions and navigated governmental measures including unprecedented furlough and subsidy schemes. By mid-Spring, we entered a period of “extended life support” for businesses, as large-scale collateral damage was deferred by governments, allowing lenders and debtors to live on borrowed time. Many companies put this period to good use by rethinking value chains and planning for the next economic normal. With vaccines coming online, the hard work of carrying out corporate transformations is getting underway as government protections recede. Companies are shifting operating platforms, reallocating assets and liabilities in the corporate portfolio and building new capacities to compete in new markets and sectors.
According to participants in Lex Mundi’s annual General Counsel Summit, these corporate transformations are taking place in a regulatory and risk environment that has fragmented in three critical ways, giving rise to new pitfalls and forcing legal departments to become more agile. More than an ephemeral disruption, the pandemic has catalyzed a fragmentation reaction in terms of global economic frameworks, regulation and compliance and the international competition for technology leadership.
Pitfalls of Fragmentation
By contrast to the 2008-2009 financial crisis and other credit cycle recessions, this pandemic hit four years into steady headwinds against globalization. It would be easy to reduce these headwinds as Brexit and Trump phenomena that could be overcome with a change in political leadership in those two countries, but that would ignore elections from Brazil to India, the evolving security situation in East Asia and the shift of regulation around the world with respect to foreign investment rules, economic sanctions and import and export restrictions.
In place of aspirations to manage trade relations on a global basis through the WTO, regional arrangements in the Americas, Europe and Asia are now the frameworks within which supply chains are being organized. Drivers of supply chain shifts are no longer about considerations of maximizing profit through lean, just-in-time management, and now about ensuring resilience. The potential impact on supply chains could impose new costs and inefficiencies – generating slower growth, lower living standards and slower innovation. Meanwhile, national authorities have drawn from the crisis the lesson of protecting security of supply for sensitive sectors spanning food and agriculture to machinery, technology, hospital equipment and medicines. The specter of a new coronavirus strain, not to be dismissed, dictates a permanent shift in these trends.
The crisis has also brought to the fore the latent great power rivalry between rising China and the United States, resulting in tit-for-tat economic sanctions and trade controls. Who imagined six months ago an export restriction being imposed on the algorithm used for the popular teenager social media app, TikTok?
The core policy nature of these developments is driving more general counsel to focus on government relations, including building or expanding internal team resources to have expertise about the direction ahead in important jurisdictions. Government relations by nature is a local game based on local relationships. Increasingly, these relationships need coordination across markets and the sobriety to look past personal connections in favor of depersonalized judgment of underlying dynamics.
Equally important is the ability to get smart quickly on new jurisdictions to where the corporate footprint needs to move. Economic fragmentation means a focus on structuring smarter partnerships, surgical acquisitions and carve-outs, charting through market access issues for product roll-outs, implementing operational changes and, not least, achieving compliance in more diverse places.
Beyond the issues mentioned so far, unanticipated pitfalls may form as businesses change their profiles, causing them to re-examine governance protocols, the constitution of their boards and policies to protect against unintended antitrust or data privacy complications.
Next to economic policy fragmentation, the pandemic has also heightened the importance of ESG commitments. A downturn as severe as this one could be expected to force many businesses by necessity to compromise on ESG concerns, yet it may be that economic fragmentation affords greater protection to companies that do more, such as in the EU. Carmen Nuzzo of Principles for Responsible Investment highlighted during the GC Summit how ESG is migrating from a concern for financial markets to one that is about active business management, and from voluntary standards toward mandatory ones.
The most difficult of part of the ESG formula is also the one most exposed by the pandemic – namely, the social category, comprised of consumer rights, product liability, supply chain compliance, health and safety and data privacy. The destruction wrought by drastic pandemic lockdowns — the loss of jobs, elimination of businesses and national debt loads — puts more public attention on how corporations behave socially, not just when they fall afoul of the law or respond to a crisis, but in their day-to-day activities.
ESG commitments will be less an afterthought and increasingly a central concern for key decisions related to corporate transformations, but with the added political challenge of national authorities wanting to regulate more and with less regard for international coordination.
Finally, by necessity, digitization has become even more existentially critical for global business, starting with the onset of the crisis and the dependence on remote working and continuing through post-pandemic strategic change. The exponential growth in digitization brings significant liability exposure, and not only in regard to evolving data privacy protections and obvious cybersecurity risks. As companies enter new digital markets, they may encounter antitrust issues. The use of artificial intelligence systems and similar technologies can also create unexpected violations of the rights of customers, employees or suppliers.
Pre-crisis, massive capital expenditures and decisions about building value chains could be based on assumptions of globally integrated markets in technology equipment and service, as well as universal standards for digital connectivity. Those assumptions no longer apply in a world in which U.S.-China tech bipolarity is laid bare and the use of equipment has potential legal implications. The battle over 5G installations in Europe demonstrate how hard the fallout from this conflict can hit.
Undoubtedly, technology played an indispensable role in keeping business on its feet when the pandemic first struck. It will be just as decisive in shaping strategy to match the new terrain. Business will have a greater reliance on technology to facilitate cross-border relations, access data to manage operations and negotiate new transactions.
For general counsel, the challenge of a fragmented risk landscape is one of strengthening the agility of the legal function in order to source and deliver time-critical guidance for business decisions and to execute plans. The pandemic has required in-house teams to get up-to-speed more quickly on different areas of law and different jurisdictions to support decisions about cross-border investments/divestments, carry out diligence exercises, manage regulation and surmount problems.
What does agility mean? It starts with the recognition that the breadth of expertise needed isn’t in-house and can’t simply be hired into the company. A recurring theme heard by general counsel is that they will need each of their specialists to manage legal issues outside of their areas of specialism – and likely outside their current comfort zone. But it would be foolish to expect this of members of the legal team without organizing the resources to support them.
Agility has two related elements:
One comes through the ability to render faster-paced legal guidance when it is needed to form part of a business decision. If the guidance lacks, the decision by necessity moves more precariously ahead. Better to have a measure of informed guidance than no guidance at all.
The second element is the ability to read the emerging risk landscape with a horizon scan in order to understand the substance and potential of possible problems. Chances are the next crisis that will hit the company is not on today’s radar. Many legal departments lack a methodology and the resources to survey a broad range of jurisdictions in order to assess qualitatively what is brewing. Assuming that methodology was in place and that those risks were understood, how does the general counsel move the business to respect the insight?
There are two ways to use horizon scans: The first is by determining a broad set of risk areas to survey; the second, by identifying a narrower range of discrete risk areas for a deeper dive across jurisdictions. The range of jurisdictions can be tailored to critical nodes in the company’s value chain. The former approach lends itself to exposing blind spots that might frustrate the business strategy and to prioritizing issues for ongoing monitoring and preparedness. The latter approach is particularly useful for triaging action steps and supporting greater operational resilience, saving the legal team essential time and making the best use of resources.
Among the resources needed to support agility are clearly continuous training and development opportunities for the legal team, both in new areas of law and outside of law; access to coordinated, on-the-ground expertise that can flex with the changing corporate footprint; and the use of emerging technologies and data to direct attention to where legal advice can have more meaningful business impact.
Legal Panels Reloaded
The pandemic has spelled an end to business-as-usual for overall operations, and corporate legal panels are unlikely to be left intact.
In keeping with the longstanding trend of reducing the number of law firms on legal panels, the crisis has added to the pressure to streamline costs and consolidate external partners. It has added scrutiny to legal spend and enhances the need to demonstrate value. As in-house functions become more sophisticated and farsighted about supporting the business, law firms will be expected to follow suit.
Among the challenges of legal panels is the difficulty in fostering cohesion, given the lack of incentives to encourage collaborative problem solving across panel firms. The billable-hour model also remains an obstacle to supporting faster-paced legal guidance and horizon scanning. While these issues have previously been sources of some frustration, the pandemic has forced them to the surface.
If fragmentation of risk across jurisdictions is a defining characteristic of the new business landscape, then it follows that the challenge for general counsel is to mobilize deep local expertise that is geographically aligned with the corporate value chain. Mobilizing such expertise will allow in-house legal teams to see around corners and expedite critical decisions related to company strategy.
The pandemic will leave its mark as in-house legal teams make the shift from specialized, full-service functions to agile knowledge orchestrators of diverse, sophisticated advice – with greater relevance to strategic decisions and implementation.