Introduction 1. Methodology and approach 2. Why do companies have an in-house legal function? 3. Why do lawyers go in-house? 4. Job satisfaction 6

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2 Introduction 1 Methodology and approach 2 Why do companies have an in-house legal function? 3 Why do lawyers go in-house? 4 Job satisfaction 6 Line of reporting 8 The conflict of goals 10 What GCs do at work and CEOs think they do 11 How the work is organized and delegated 13 The value contribution 15 Identifying risk and adding commercial value 17 Leadership 21 Measuring performance 23 Conclusion 24 About us 25 2

3 Introduction As legal recruiters we meet with many General Counsels and talk to them about their role in the company, about what they do at work, about the value that the in-house legal team contributes with and how that value can be measured. We also talk to CEOs and CFOs, hiring the GCs, they sometimes have a quite different view of the in-house legal role compared to that of the GCs themselves. On this notion we thought it would be interesting to find out more about the drivers of the in-house legal role. Why do companies have an in-house legal function? Why do lawyers choose to go in-house? What does the in-house legal function do? Are they doing the right things and how do they measure performance? Our report is based on a survey taken exclusively by 50 General Counsels and CEOs in Sweden and followed up by in depth interviews with a smaller number of respondents. The aim of this report is to discuss some of the aspects of the in-house legal role. Sharing insights of brilliant professionals and learning more of the legal market which we serve. Thank you all participants and contributors for your time and expertise in the production of this report. Anna Lensmar-Friedman CEO, Poolia Legal AB 1

4 Methodology and approach The purpose of this report is to discuss the content of the in-house legal role as seen by GCs and CEOs in Sweden. The report is based on a survey and also draws on follow up in-depth interviews with participants during the fall of The content of this report is not statistically verified, nor does it claim to reflect the views of all GCs and CEOs in Sweden. We set out to have an equal representation between different sized companies and various industries and this goal was met. The report covers companies with a yearly turn-over between billion SEK in all major industries. In what industry does your company operate? 19% 20% 17% 5% 4% 4% 5% 8% 8% - Finance (banking, insurance, private equity) 19% - IT & Telecommunication 20% - Manufacturing 17% - Retail 5% - Agriculture & Forest 4% - Games & lotteries 4% - Professional services 5% - Construction & real estate 8% - Energy 8% 2

5 Why do companies have an in-house legal function? Responding to the question "Why do you have an in-house legal function?" 100% of the CEOs stated "In order to proactively identify and avoid risk" respectively "To decrease external legal spending". Some of the CEOs also stated; "Due to that fact that regulatory demands have increased exponentially in the last years, with regards to financial compliance, environmental compliance, data privacy compliance and so on". According to our follow up interviews, many CEOs feel it is harder to navigate in the legal landscape today than it used to be. The tipping point for when companies choose to create a function for managing the legal issues in-house is, according to the survey, a yearly turnover of approximately 1 billion SEK. When asked; "In your opinion, has the demand for legal advice in your industry increased during the last five years?" All CEOs answered yes. Based on the steadily increased demand for legal advice, and drawing from our follow up interviews with the CEOs, the tipping point for bringing legal in-house may shift in the future to an earlier stage. To some extent depending on the pricing and business models of external legal counsels and services providers. Our survey shows that on average external legal spending amounts to 1% of the yearly turnover. However the variations are many, depending on company size and industry. In addition to the GC, half of the companies in the survey also have legal expertise on the board of directors. "We still grow through acquisition to some extent, our legal team is pivotal in managing external legal counsel and exercising legal cost control" "To minimize commercial risk and cut back on legal spending" "We set up an in-house legal department in order to identify and avoid risk and reduce cost for lawyers, we are still spending a headspinning amount of money on lawyers though." "Mainly to identify and avoid risk" "To manage the legal team and see too that we proactively identify and avoid risk crucial to the commercial success" "Legal cost control" 3

6 Why do lawyers go in-house? Prior to becoming an in-house legal counsel 78% of our GC respondents used to work as associates or partners with law firms. 10% worked within the judicial system, 6% came from government, 4% came straight from law school and the remaining 2% came from NGOs. Responding to the question "Why did you choose to become an in-house legal counsel?" A unanimous 100% stated that they wanted to move closer to business as a main motivator. Other motivating factors were to follow the business from A-Z, the opportunity to work in a broader role and also being able to plan ones time, which according to the respondents is hard to do while working at a law firm. What did you do prior to becoming an in-house legal counsel? 78% 10% 6% 4% 2% - Partner or associate with law firm 78% - Law clerk or judge 10% - Government 6% - Law school 4% - Non-government organizations 2% 4

7 Why did you choose to become an in-house legal counsel? "I wanted a closer connection to the business that the law shall assist, rather than increased specialization on the law itself" "I was interested in the more practical side of the legal expert role, wanting to use my skills and competence more as a tool in the business world than you do as a lawyer which was my previous role" "To work really close with the business and to influence the long term development of an entire company" "I like the idea of taking commercial decisions as well and working for the same entity in a longer perspective" "Interest for combining legal and business and interest to get a global work field" "I wanted to work closer to the business in a broader role" "I want to work close to the business and get more specialized" "The in-house role gives me the possibility to work closely with the client and provide not only legal advice on do s and don ts but also contribute to the commercial considerations, building a business model etc." "Interest in business operations and to be able to be a part of an operation, not just supporting it occasionally" "Mix of opportunity and an interest in working closer to the business with a somewhat broader role than that of an external counsel." "After years of being a lawyer and a partner at a law firm someone talked me into that this was the next step in my career and of course commercial interest." "In order to be more closely involved in business operations and also be able to own my schedule not possible at law firm" "A main driver is to be close to the business. The consultant role is less stimulating" "As in-house legal counsel I am working with legal issues, closely connected to the business. The legal counsels are a part of the business, enabling the business to avoid risks, develop it (and part of it's success)" 5

8 Job satisfaction A vast majority of the Swedish GCs seem to be very happy with their jobs. 83% state that they are satisfied or very satisfied with their overall work situation. 14% are neutral and 3% will not disclose. When it comes to expectations fulfilment, 95% of the GCs state that the role meets expectations regarding the content of the role. 100% states it meets expectations regarding influence over work, and 66% states it meets their expectations regarding work life balance. However 33% of the GCs state that they are working more, still burning the midnight oil, to a greater extent than what they expected when choosing to go in-house. How satisfied are you as GC with your overall work situation? 50% 33% 0% 0% 14% 3% - Very dissatisfied 0% - Dissatisfied 0% - Neutral 14% - Satisfied 33% - Very satisfied 50% - Will not disclose 3% The GC role has met my expectations regarding content of the role. 64% 31% 0% 0% 5% 0% - Strongly disagree 0% - Disagree 0% - Agree to some extent 5 % - Agree 31% - Agree completely 64% - Will not disclose 0% 6

9 The GC role has met my expectations with regard to influence over my work. 50% 50% 0% 0% 0% 0% - Strongly disagree 0% - Disagree 0% - Agree to some extent 0% - Agree 50% - Agree completely 50% - Will not disclose 0% The GC role has met my expectations with regard to work-life balance 43% 23% 23% 0% 10% 1% - Strongly disagree 0% - Disagree 10% - Agree to some extent 23% - Agree 43% - Agree completely 23% - Will not disclose 1% 7

10 Line of reporting Most GCs, 70%, reports directly to the CEO of the company. 22% reports to the CFO and 8% reports to "other" such as COO, Chairman of the board, CTO or HR. According to our survey there is a correlation between who the GC reports to and job satisfaction. The higher up in corporate hierarchy the GC reports the happier the GC. Also the CEOs that have their GC as a direct report tend to be more satisfied with the contribution of the GC and the in-house legal department. There are different theories from the respondents commenting on this result. Some think that it reflects that when the GC and CEO work closely together they learn from each other, which creates a greater understanding and respect between the business side and legal. Others claim that when the GC and CEO are working close together their goals tend to align. Therefore some find it inappropriate for the GC to report to the CEO. It might compromise the integrity of the legal function in its twofolded role as "guardian" and "business partner". It may be tempting to exchange the "legal-agenda" with the strictly business oriented agenda of the CEO who would be setting the performance goals of the GC. Who do you report to? 70% 22% 8% - CEO 70% - CFO 22% - Other 8% 8

11 Are you on the top management team? 70% 17% 13% - Yes 70% - No 17% - For specific purposes 13% Are you on the middle management team? 55% 20% 25% - Yes 20% - No 55% - For specific purposes 25% -Conflict of goals fig. 9

12 The conflict of goals Our survey shows that 100% of the GCs wanted to go in-house based on the longing to get closer to the business and to follow the business from farm-to-table. At the same time the survey shows that 100% of the CEOs choose to employ a GC in order to identify and avoid risk and decrease legal spending. However and as will be discussed further, 90% of the CEOs would like the GCs to understand the business better, develop a stronger business acumen and give advice that really matters with regard to the commercial success of the company. Meanwhile 95% of the GC 's state that the most value adding and important part of their job is to identify and avoid risk. Why the entanglement of goals? In the follow up interviews two theories kept re-occurring. The first was the theory of lack of common method and language when it comes to assessing and evaluating risk. The second was the theory of different personal and professional incentives and consequences for accepting risk. In our in follow up interviews with GC's and CEOs it appears that if the GCs and CEOs could speak about risk in a way that is quantifiable and understandable by both the business side and the legal side a lot would be won. "Why is it that if I ask my GC to assess a risk I get a memo of pros and cons that seem to be missing a page, the one with the numbers on it. I don t seem to have that problem with anyone else on my management team." "You have to be pragmatic in deal making. We need lawyers to seperate real risk from legalities" The GC's in our study are all very keen not to be seen as the leaders of the" sales-prevention squad". On the contrary they are committed to providing workable legal solutions to the commercial context and adding value to the company. However the personal incentives and consequences for accepting risk also adds to the picture. What are the upsides for a CEO that accepts a high risk and gets the deal done? What are the upsides for a GC that accepts high risk and gets the deal done? 10

13 What GCs do at work and CEOs think they do The GC role is obviously broad and differs depending on the size and line of business of the company. Some of the GC's are the only in-house legal counsel in the company, other GC's manages more than 100 in-house legal counsels. In general though, and as will be discussed further, the role seem to cover three main areas; - Identifying and avoiding risk - Understanding business and adding to commercial value - Leadership In greater detail most GC's keep busy with a wide spread of assignments during the day and not always the things they most prefer. We asked the GCs to list which seven items they spend most of their time on regardless of the relative importance and which seven items they would like to spend time on. We also asked the CEOs to make an educated guess on the top seven items the GC spends time on respectively state the top seven things the CEO would like the GC to spend time on. The CEOs do seem to have a pretty good idea of what GCs are doing at work. On the wish-list part they differ more. Where the GCs would like to focus on management, structuring deals, and complex problem solving, the CEOs would rather the GCs focused on creating standard agreements and templates as well as drafting and negotiating of commercial terms. We also asked the CEOs to state what the ideal GC and inhouse legal department should understand, know more of, start doing and stop doing. 90% of the CEOs stated that they would like the GCs to develop stronger business acumen. 80% of the CEOs also stated that they would like the GCs to focus on identifying and avoiding risk that is crucial to the commercial success of the company (as opposed to all legal risks under the sun). "Develop stronger business acumen" "Get involved in and understand business" "Become commercially aware" "Always business and negotiating realities" "I would like the GC to focus on identifying and avoding risk that is commercially relevant to us" 11

14 Top 7 list The items I as GC spend most of my time on at work, regardless of the relative importance: 1. Managing the legal department staff 2. Company secretary work 3. Structuring deals 4. Identifying and avoiding risk 5. Managing compliance & regulatory issues, advice and training 6. Ethics, policy making code of conduct 7. Drafting and negotiating commercial terms Top 7 list The items that I as CEO think the GC spends most time on at work, regardless of the relative importance: 1. Managing the legal department staff 2. Company secretary work 3. Drafting and negotiating commercial terms 4. Managing external legal counsel 5. Structuring deals 6. Identifying and avoiding risk 7. Managing compliance & regulatory issues advice and training Top 7 list The items that I as GC would like to spend my time on at work: 1. Structuring deals 2. Managing the in-house legal department 3. Commercial opportunities 4. Complex problem solving 5. Identifying and avoiding risk 6. Business planning 7. Drafting and negotiating commercial terms Top 7 list The items I as CEO would like the GC to spend time on at work: 1. Drafting and negotiating commercial terms 2. Creating standard agreements and templates 3. Structuring deals 4. Company secretary work 5. Managing the in-house legal department staff 6. Ethics, policy making, code of conduct work 7. Identifying and avoiding risk 12

15 How the work is organized and delegated According to more than 80% of the respondents more than 70% of the workload is managed within the in-house legal function. This number is high in an international comparison, although there is a strong trend in the US and the UK that an increasing amount of work is shifted inhouse. (BTI consulting, Corporate counsel strategy 2014 and the American Corporate Counsel survey 2014). Almost all work not performed in-house is sourced from law firms. Of the work performed inside the company very little is delegated outside of the legal function and if it is, primarily pushed back to functions such as sales and HR. Given that one of the CEOs top drivers for having an in-house function is cost savings, it may be surprising that so relatively little work is managed by automation or outsourcing. How work is performed and distributed: 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Work managed within legal department External legal counsel from law firm (excluding secondment) Secondment from law firm Legal temps from staffing company Managed by staff of my company, not belonging to the legal function Internal legal resources within my company, however outside of my legal function Outsourcing Usage of IT tools developed for legal work Other 13

16 "As country counsels we have access to internal resources in terms of cluster competence for certain legal areas (such as competition law, data privacy, environmental compliance, IP & trademark, M&A), legal competence for specific business areas (such as PC, print and servers) but also for legal concerns relating to different go to market models (such as channel-distribution, partner, alliances ). These internal competences cover both the legal aspects and HPs positions in regards to different solutions. In addition these resources are combined with all kind of virtual tools for further legal guidance and information (e.g. database for marketing rules, position papers on specific EU matters, relevant clause libraries e t c) Within the legal department there is an established program, -office that initiates new projects and actions to improve our methods of effective legal support to our clients. As a result of that work the globally applicable Commercial norms were adapted and implemented, as a guideline on how to reasonably assess and mitigate risk in a business aligned model. At the pan-ogc level, we do more work in-house than we did 10 or 20 years ago. This enables us to train entry level talent with the same rigor and practical experience that they would have gained in a firm, and it is also a cost effective model for us in that we create a sustainable pipeline of talent with intimate knowledge of HP products, businesses, processes, positions, etc. By the concept of different cross-border support-models and competence clusters, HP can also offer talented HP internal lawyers interesting carrier paths and rotationopportunities." Eva Blonde Nordic Region Counsel, HP 14

17 The value contribution We asked the CEOs and GCs to rank the strategic importance of the activities performed by the legal function. Then we asked them to evaluate the level of contribution by the legal department for each activity. The result shows that all respondents agree that "identifying and avoiding risk" is of greatest strategic importance, and where the strongest value contribution is made by legal, in rating it as critical for success. The CEOs value "finding commercial opportunities" higher than the GCs. But although the CEOs think the contribution of legal is lesser than the importance of the matter, they still feel legal contributes to a larger extent than the GCs themselves. The GCs think that complex problem solving is of great strategic importance the CEOs rate it as of average importance but all respondents agree that the legal department contributes a lot in this respect. Business planning and crises management are, according to the survey, areas where the legal department contributes the least. Tasks performed Greatest importance according to CEO Greatest importance according to GC Most value contribution according to CEO Most value contribution according to CEO Identifying and avoiding risk Finding commercial opportunities Complex problem solving Business planning Crisis management

18 "I started out in the more traditional GC role with the typical focus on complex problem solving, deal structuring and the drafting and negotiation of significant contracts; not unusual, the commercial terms already settled. A change of my role came possibly due to the financial crisis coincided with the challenges for us reaching sustainable profitability with showing the impact and value of involving the GC early in structuring complex transactions, assessing and selecting the set-up for different co-operation and strategic alliances etc. The role as a technical specialist, to be consulted when there is a specific legal aspect to consider, shifted to a role with more strategic responsibility involved in decision making, complex problem solving and serving as an advisor to the CEO. Subsequently, I m currently playing a more prominent and strategic role and I m part of the management team." Mikael Wågberg General Councel, Green Cargo AB 16

19 Identifying risk and adding commercial value GCs and CEOs agree that the most value adding activity of the legal departments is identifying and avoiding risk. Preferably risk that is crucial to the commercial success of the company. Some CEOs even suggest an actuarial approach, calculating legal risk mathematically and statistically. GCs say this may be possible in long standing supplier or customer relationships where behavioral patterns under certain agreements have developed over time. In other situations it's close to impossible. The GCs are however eager to provide workable legal solutions for their organizations. In order for them to focus mainly on risk that is of commercial consequence to the company, it is pivotal that they have a very good understanding of the business dynamics. With knowledge of the business comes the ability to put risk in context. It is therefore important for the legal department to be viewed as part of the business team and be given the opportunity to learn the specifics of the business. According to our survey and follow up interviews with both CEOs and GCs, the built in tension between legal and business in these matters is indeed a great source of experience. We are happy to share some of that experience with you: "I have as CEO participated in a number of successful processes to acquire or sell entire companies or units of companies. Most of these agreements have been reached fairly quickly from the initial contact to the principal agreement. Everybody was happy in the beginning, the Champagne was opened and the future looked bright. Then came the drafting of the SPA and the problems started, the saying "the Devil is in the details" suddenly got a deeper meaning. In one specific drafting of an SPA the counterpart got so offended that there was a serious threat to pull out of the principal agreement, it was not worth it to be scrutinized and questioned about the validity of certain information. There is of course an element of negotiation in all this, but I have seen it happen too often and in many cases the most debated areas are of a principal nature. The question I ask myself is what I, as CEO, could have done better or differently in these processes? Involve legal counsel earlier is of course one way, but that is not always possible and in some cases impossible. If I bring legal counsel the counterpart will do so as well and an informal and principal agreement will be impossible. You don't bring your parents on your first date!" Carl-Viggo Östlund Management (Former CEO of SBAB, Nordnet, SalusAnsvar i a.) 17

20 "In my work as General Counsel for a listed investment company, AB Traction, I get in contact with a very varied assortment of business, of different levels of maturity and accordingly with very different starting points for negotiations. In some cases Traction owns production companies, where we meet stiff competition from other parties who are able to offer similar goods or services and where the effect of a sudden change in valuation of the Swedish krona towards euro, dollar or pound, or other external factors, directly affects our competitive edge. In other cases, the initial negotiating position is much stronger, in cases where our companies have a unique offer to the market and the demand thus makes it easier to get a deal on favourable terms. The ability to understand where you are at on this scale of negotiating strength is of course vital (if we disregard sheer luck) in order to be able to land the best possible deal. Any deal involves risks. If I sell something today at 100 SEK, and have misjudged my negotiating strength and did not realize my customers willingness to pay 120 SEK or more, that is of course sad for me (at least if I do realize my mistake. I must after all have had the view in the first place that the deal was worth doing at 100 SEK). In practise, this negotiating strength may be totally altered a week later, if the actual cost for the customer to get the equivalent of the accepted 100 SEK at the time of payment thanks to currency fluctuation suddenly has reached 115 SEK. With knowledge of the relevant business, and experience of factors that are liable to change in the meantime from signing to performance of each individual action under the contract, a good businessman can reach the best possible profit margin when negotiating a contract. In this example, that could be achieved through addressing the currency risk in agreements to limit the effects of that specific risk. In business cases where the profit margin is razor-thin, the effect of controlling such factors as currency, raw material prices and other supply chain matters can become spectacular, and potentially the difference between bankruptcy or success. There are risks, which lie in the open for example your costs to secure the supplies needed for you to perform under your contract. These ought to be very clear to the experienced businessman, but sometimes the product or service is new, and your best bet for price must by necessity be something of a gamble, since you lack the precedent to be certain of your ability to perform. There are also other, hidden risks; the possible ghosts that may materialize during the performance of the contract. I have touched upon currency and raw material supply as such possible risks that a well-put contract will address - or solve through a separate agreement provided that this risk is relevant. However, the scope of possible risks is of course enormous, covering everything from bankruptcy of any party, to new laws or political events suddenly causing problems, and turning the tables. The approach to hidden risks is usually a defining moment for a lawyer. Will you be the lawyer who meticulously lists all imaginable risks: likely, unlikely, relevant or not, in your contracts? Confronted with a salesman from your party s business side, who needs to close the deal, and perhaps is fuelled by a wish to secure his turn-over based bonus and move on to the next deal - it quite easily happens that a relation, as well as a deal, turns sour. 18

21 Many of the agreements that I receive for review nowadays are initially law firm products. Ambitious, lengthy and with a clear idea of placing all risks on the other party. However, in almost all cases, it is obvious that the contracts have not had the starting point in the actual business, and its specific risks. As a former attorney-at-law and law firm partner, I can easily tell why. The client sees the high cost of involving lawyers, and is very reluctant to spend even a single hour unnecessarily on educating the lawyer on the specifics of a business and the full experience gathered through trial and error by the business unit. The potential added value that this might lead to (provided that we have involved an open-minded lawyer who can transform this reality into legal wording) is difficult to measure. The external lawyer on the other hand has to consider his own risks of being found to have missed out on closing any vital gap in the contract: malpractice law suits, bad PR, billable hours wasted on mitigating damage, etc. Quite automatically, the agreements thus do become lengthy, partly irrelevant, and so full of standard legal text that it leads business people to considering the agreement completely illegible. Unfortunately, this means that they will not adhere to the contract while doing business, and that they will need legal counsel to interpret any given situation. For many years this has been good news to the law firms; more billable hours, and also the added argument in defence of the legal cost look here, dear client, what a grand and complex contract that was required; with all these pages produced you do have an objective way of sensing the value I added to this deal!. The uncritical client will then send this major agreement over to the other party and sometimes that quickly ends the counterparty s willingness to enter into a deal. How does counterparty react to a 100+ page contract that clearly puts every conceivable risk on them? I have identified three main tactics being used the fool, the ostrich and the counter-attacker. The fool will choose to trust the other party. I am sure this is standard (although boring) texts, I won t even read all of it. I have no reason to believe that they mean any harm to me. The contract is signed, the deal is done, and perhaps it will never arise a situation when the gross breach of contract that many standard agreements automatically put their counter-party in from day one, is needed to be brought to either party s attention. It may thus still end well, but the fool has usually inadvertently assumed responsibility for any and all external changes, and runs a great risk of losing his ability to profit from the contract. However, not all fools are what they seem; perhaps their liquidity is so weak that any change of the circumstances will become the other party s problem as soon as they occur; thus the risk of accepting an unfavourable contract was in reality no real risk at all? Then the contract has just satisfied an initial tick-in-the-box, but resulted in a Pyrrhic victory. The ostrich can be played with greater refinement. The ostrich is very careful not to accept the dictated terms, but not necessarily outspokenly so. Own terms may be sent and a battle-of-forms may take place, but there are also more subtle ways of just securing enough evidence that the proposed standard terms were never approved, which is usually enough to provide for a large enough fog-of-war between the parties. Then both may claim internally to have put their standard terms in use (getting that tick-in-the-box), while the clever ostrich knows that the agreement will probably end up under national or international contract law. 19