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The modern business environment is more heavily regulated than ever before. What if managers could turn their legal obligations into value-generating opportunities?
Organizations are on a near-perpetual search for competitive advantage over their rivals. Called the ‘holy grail’ for corporate strategy, a competitive advantage can enable a company to outflank rivals, maintain industry leadership, and take advantage of first-mover advantages in new environments.
Yet most firms overlook one of the richest sources of competitive advantage in the modern marketplace: legal knowledge. Legal knowledge is the comprehension and expertise that a firm possesses about legal rules in order to apply them effectively in their business environment. Firms need to know how the law works in order to avoid violating legal requirements, reduce the chance of litigation, and fulfill their contractual obligations. When managers do not respect legal rules, only by chance can they escape the scrutiny of government regulators and the inevitable penalties that follow.
Legal Knowledge is Valuable, but Too Often Overlooked
Legal knowledge is valuable to a wide range of company stakeholders. Compliance relies on legal rules to establish policies and practices within the organization. Managers must be aware of legal obligations to the company’s workforce in order to hire and manage talent correctly. Executives and others who sign contracts need to know the full implications of their obligations. Knowledge experts must be able to protect their intellectual property from the infringement of others. Businesspeople should welcome collaboration with their legal teams for issues all across the enterprise.
Unfortunately, this does not always happen. Too many managers, executives, and directors perceive law as a burden to overcome or just another cost for company operations. Poor communication between lawyers and managers does not help. Risk-averse legal and compliance professionals may treat managers as unnecessarily risk-aggressive and heedless of their legal obligations. Managers for their part may perceive law and compliance as naysayers who block the introduction of new ideas. There is reason why legal departments are stereotyped as the ‘Department of No’ or ‘Where Good Ideas Go to Die’.
Time to Transform Outdated Legal Perspectives
When managers and legal experts work together, the company unlocks new sources of value. This book shows how to get the job done. The book begins by highlighting how legal knowledge is a source of sustainable competitive advantage. A sustainable competitive advantage is an advantage that cannot be easily copied by rivals. This conclusion makes legal knowledge valuable, and a resource that firms must take seriously. It also provides a springboard for later chapters regarding how legal knowledge can deliver that value.
The first task for a firm is to cultivate organizational traits that promote a strategic perspective toward the law. Four key stakeholder attitudes – high organizational citizenship, strong self-efficacy of organizational actors, perceived legitimacy of legal rules, and positive attitudes toward lawyers and the legal process – can help seed the firm with a strategic perspective toward the law. Having a legally trained CEO and experience with a highly regulated business environment can also promote legally strategic perspectives. The more stakeholders are primed to think about law in new ways, the more effective legal strategy can benefit the enterprise.
The Five Pathways of Legal Strategy and Their Application to Business Practice
Next, leaders should candidly evaluate what kind of internal legal culture the company currently possesses. Firms generally follow one of five ‘pathways’ of legal strategy. These pathways determine whether a company perceives the law as an avoidable nuisance, a source of sustainable competitive advantage, or somewhere in between. The most effective legal strategies have the potential to transform the organization functions, and a robust law-business collaboration is the key to unlocking that value.
| Pathway of Legal Strategy | Pathway Goal | Perception of the Law | Level of Legal Knowledge | Role of Legal Experts | Applications to Business Practice |
| Avoidance | Circumvent legal obligations | Barrier to growth | Limited: How to avoid rules | Defender: Fight litigation and government enforcement | Legal evasion; Regulatory arbitrage; Willful ignorance |
| Conformance | Fulfill minimum legal requirements | Cost of doing business | Technical: How to comply with requirements | Monitor: Ensure compliance with rules | Checkbox compliance |
| Prevention | Preemptively solve business problems | Requirement for free and fair markets | Functional: Requirements and scope of responsibility | Policymaker: Develop business policies that guide organization | Integrated rules and policies that protect business from liability |
| Value | Generate value from legal knowledge | Source of value creation and capture | Informed: How to preserve and create value | Partner: Create value for the firm | Create value through superior legal analysis |
| Transformation | Create sustainable competitive advantage | Strategic asset to the organization | Strategic: Comprehensive understanding of strategic value | Strategist: fully engaged in strategic decision making | Reshape legal or organizational environment |
Leverage Strategic Legal Risk Management to Outflank Rivals
Legal risk management can also be transformed into firm value. Legal risk is more than the chance of lawsuits or regulatory fines. Instead, legal risk is a strategic opportunity. There are four types of legal risks that firms can face – risks that are volatile, uncertain, complex, or ambiguous. Volatile risks are quick to appear, uncertain risks remain unclear to determine, complex risks are difficult to process, and ambiguous risks defy even basic understanding. When legal experts match the perceived legal risk with the most effective response, the organization can manage those risks more quickly and effectively than their rivals.
| Definition | Sources of Legal Instability | Coping Strategy | Steps Toward Mastery | |
| Volatility | Volatility is an environment where change is fundamentally unstable and unpredictable. Forces in volatile conditions tend to fluctuate sharply and without warning. | Threat of private litigation; government enforcement of legal rules; sudden legislative enactments and judicial rulings | Train agility to react creatively and decisively even when external pressures demand immediate action. | 1) Stockpile resources, 2) Establish rapid response plans, 3) Leverage preparation for volatility to gain first-mover advantage. |
| Uncertainty | Uncertainty is driven by a lack of knowledge. This lack of knowledge is not of the cause or effect of a particular event, but whether an event is significant enough to require a meaningful response. | Finite rules regulating infinite problems; courts giving conflicting interpretations of the same rule; government agency discretion discourages clear standards. | Obtain knowledgeabout the legal environment that is shareable across functional units and is integrated into decision-making processes. | 1) Dismantle information barriers between managers and legal experts, 2) Involve key legal executives in core decision-making functions |
| Complexity | Complexity is the presence of numerous interconnected parts in a given environment that are difficult to process by an organization and, as a result, drain resources and confound decision making. | Convoluted legal rules and company policy generate unnecessary complexity and impede decision making. | Restructure intra-organizational legal structures to align the firm with irreducible intricacy of the legal environment. | 1) Eradicate unnecessary convolution, 2) Manage irreducible intricacy in order to optimize decision making, 3) Align legal rules with complexity through an effective system of compliance |
| Ambiguity | Ambiguity arises when relationships between cause and effect are largely unclear, weak historical precedent exists for a decision, and consequences are largely indeterminate. | Rapid changes in technology, accelerating innovation, and limited ability of government to regulate new ideas | Experiment with new strategies, collaborate with regulators, process and adjust plans according to the feedback | 1) Co-regulate with public entities, 2) Develop proactive self-regulation, 3) Build a learning organization that can process and improve upon legal experimentation |
Companies can also generate new value from their contracts. Contracts are not just mechanisms for exchange. Contracts can cultivate trust, encourage long-term planning, and promote joint investment. Firms that use contracts as relationship building mechanisms can generate value that other parties cannot. Costs between trusting parties are lower, transactions are more efficient, and information is more effectively shared. In this way, a contract has intrinsic value that generates competitive advantage over rivals who only use such agreements transactionally.
Building a Legal Culture of Integrity
Finally, legal knowledge is a valuable tool that should be used with consideration of its effects on others. Companies who embrace legal knowledge should evaluate whether they are using their legal knowledge in a responsible fashion. Legal rules are not just barriers to be manipulated, but essential democratically agreed upon expressions of values that are important across society. A robust legal culture of integrity is necessary to make legal strategy work. Such a culture of integrity integrates values-driven principles of good faith, ethical standards, and socially responsible behavior across the enterprise. Legal strategy thus becomes a force that not only benefits the firm, but upholds basic tenets of society.
Legal knowledge offers a treasure trove of value. Firms can unlock that value by following the principles in this book. Law is simply too important to be left to the lawyers, and this book points the way toward legally-driven success.
Robert C. Bird is a Professor of Business Law and the Eversource Energy Chair of Business Ethics at the University of Connecticut School of Business
Robert C. Bird is a professor of business law and the Eversource Energy Chair in Business Ethics at the University of Connecticut. He has authored over eighty publications, receive...
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