2020 was an unprecedented year for business; companies have had to mobilise quickly in the face of various converging global and geopolitical events, such as Brexit and Covid-19, reviewing their operations and risk landscape, and the ensuing pressures of navigating the short, medium and long term impacts have been borne by legal teams across all sectors. As part of this year’s In-house Counsel as Business Partner conference, The Lawyer and EY were joined by ten in-house counsel for a roundtable discussion of the role of the in-house legal team in balancing commerciality and risk whilst maintaining and delivering a company’s “purpose” in light of these global events.
EY Law’s UK head of commercial and digital law Colette Withey led the roundtable, alongside manager Abigail James and associate partner Terence Devane.
The importance of purpose
Withey launched the roundtable by testing how important the participants considered their company’s stated purpose had been in directing strategy in the context of the events of 2020 and whether purpose had been reviewed to align more closely with stakeholder needs resulting from, for example, the Covid-19 pandemic. Noting that EY considers purpose partly through a lens of long-term value, James highlighted the role of purpose as a driver for the increasing focus on shareholder to stakeholder value. James noted how societal, political and environmental pressures are resulting in consumers demanding better company practices, which in turn are influencing legal and regulatory requirements, corporate governance, transparency and reporting.
The delegates were excited about the changes taking place within their businesses, although experiences and expectations differed according to their individual sectors, which included automotive, aviation, charity banking and finance and retail.
Withey asked the group if, and to what extent, their businesses purpose had evolved or their strategy changed in recent months. Most agreed that though a strategy focused on purpose wasn’t new, it had been brought into sharper focus as a result of factors such as Covid-19 and Brexit.
“It’s been bubbling away for a long time” stated an in-house lawyer from within the automotive industry. “We have been doing a review of our supply chain, not just for modern slavery but generally, addressing human rights, climate change and electric vehicles. I agree that it’s emphasised now because of the current situation. If people only want to buy from responsible companies, that’s the commercial fright.” It’s this “commercial fright” that has made leadership teams sit up and take notice.
The transport industry has been at the forefront of a push for sustainability, heightened by the UK government’s commitment to phase out the sale of gasoline and diesel by 2025. One counsel from the aviation industry stated that though his business’ purpose had long been built around inventing the future of flight, he had seen a dramatic acceleration in the push to reduce its environmental footprint. As with all businesses in the aviation industry, this also largely depended on coordinated support from policymakers, regulators and governments working together to achieve sustainability goals.
“There’s been a huge push from a regulatory perspective with EU and nation states looking at what they can do with sustainability. For example, French and German state aid has supported Airbus, Air France and KLM Royal Dutch Airlines and the packages come attached with very clear requirements on sustainability and renewables” he said.
“Air travel is borrowing an idea from the automotive industry and working to create hybrids. We’re now having to focus on next generation power much more quickly.”
Though Covid-19 has devastated the air travel world, it has boosted other sectors. A general counsel from a fibre infrastructure company noted the spike in the requirement for additional bandwidth and connectivity which has been critical to the continuation of life during the pandemic.
“We look at purpose through the lens of rejuvenating our company’s culture as we have new owners and new plans to grow.” They added that this revolved around culture – the two pillars of people management and talent retention.
“We’re not just looking at purpose from a corporate perspective. We are looking at it through an individual contributor perspective. Working remotely, it’s important to communicate effectively with your workforce to keep the culture alive and ensure talent doesn’t drift away.”
This individual nonetheless felt the same obligations to sustainability as the counsel in the automotive and aviation businesses. Running, and connecting to, energy-hungry data centres meant the company had been looking at how to improve its energy efficiency and conservation.
Withey referred to an EY survey which found a growing focus towards the importance of stakeholder value. The survey had found that 80 per cent of CEOs believed government, business and the public would reward companies for taking meaningful action on global challenges, meaning that competitive advantage could be gained through leadership on these issues. With regard to value creation for a company, EY’s Consumer Index Survey had found that 86 per cent of respondents agreed that a company’s behaviour is as important as what it sells. 81 per cent considered that brands must put society ahead of the drive for profit.
Stakeholders and governance
EY noted the importance of considering who the company’s stakeholders are and where they sit in, or outside, the business: shareholders, employees, lenders, affiliates, customers and suppliers, insurers, auditors, pension trustees, government authorities, regulators.
Devane noted that measuring and reporting the value of a company had gained importance and visibility due to factors including an increased focus on subsidiary board governance and Section 172 (Companies Act 2006) reporting – the “duty to promote the success of the company”.
“We have seen increased transparency and mandatory reporting around Section 172 compliance. Combined with Covid-19 and Brexit, can you see leaders looking at this as a way of adding value to their organisations? Is it cutting through to your legal functions?” Devane asked the group.
One delegate said that they weren’t convinced that Section 172 had brought many changes, arguing that its enforceability was still doubtful.
“Yes it’s a driver. But the main thrust comes when a company says: this is the modern world and we’ve got to change. Or more importantly – we want to change.”
A number of the participants had found that their businesses had also reviewed their purpose because of pressure mounting from potential new employees. In particular, scrutiny from younger recruits, who were keen to know that their new place of work is run as an ethical business. One lawyer remarked on how candidates had challenged the company’s values and purpose at interviews.
“There’s been a shift from questions about the company’s benefits package and working hours to sustainability-based questions” she said. These can include ESG (Environment, Social and Governance) credentials and whether the company has an internal task force devoted to sustainability.
A key point to emerge was the idea of businesses aligning themselves in a race to the top. When asked about their ethical stance, companies have to have an answer.
As another delegate emphatically put it: “A company’s social responsibility and pledge to sustainability should be in their mission statement.”
“It’s fascinating how businesses are driving agenda rather than compliance” they remarked. “It has the happy additional benefit of making the compliance easier.”
Lockdowns and transformation
At the beginning of the first Covid-19 lockdown, companies were focused on resilience: people, business continuity, cash flow and financial viability, situation management. That then started to move in stages; through restarting and adapting, resilient recovery and thinking about resurgence. Withey queried whether delegates felt that their purpose was influencing their approach to transformation and what companies had learnt since lockdown that may drive competitive advantage?
For one of the lawyers, it was less a question of purpose and more one of value. From his experience in-house in the aviation industry the two main questions were: how do you define that value, and what is your value as defined by your customer?
“For us it’s resetting the operations of the company over the next four to five years to understand how we provide value to a customer base that has been utterly transformed and will remain so” he said.
“Covid has had a different impact on different parts of our business. Overhauling our existing engines and equipment is indeed a big piece of the challenge – that market has been adversely affected. Define your value and ensure your transformation centres around delivering that value in a way that grants you competitive advantage.”
In the automotive industry, since lockdown, some companies have moved to a direct-to-consumer model.
“This has not been brought about purely by Covid however” one delegate pointed out. “The automotive industry was already undergoing seismic changes, with the introduction of electric, autonomous and sharing vehicles. I wouldn’t say our purpose needs to be revisited. We are still selling cars, not vacuum cleaners.”
A lawyer from the tech industry argued that the key was diversification. “Within your business, products, service and purpose will allow you to survive, evolve and grow. As a tech company we’re working with the automotive sector and a space exploration company. It has presented an exciting opportunity to combine tech with space aviation and automotive. Tech will play a crucial role in the future in helping to drive the ESG agenda.”
Withey noted that the three key priorities she had observed through discussions with in-house counsel throughout lockdown were driven by budget/cost reduction (doing more with less), increased demands from within the business and understanding how to use the right technology for legal functions. She put it to the group. “Does this resonate with you?”
The group shared their experiences of increased workload, including working with a smaller team and smaller budget. As the regulatory framework grows in most sectors, there is an increased reliance on in-house legal to advise across the board, wearing the function’s resources thin.
One lawyer had addressed this by upskilling and developing skillsets both in technical legal skills and soft skills.
“Typically, in-house legal functions are flat structured and the opportunity for promotion is not as prevalent as in private practice. So we decided to think of creative ways to retain talent. Developing individuals is top of my list. It’s upskilling in terms of looking at people’s lack of experience and filling in the gaps.”
Upskilling in-house lawyers also means that in house teams are less reliant on external firms and can use their budget more sparingly.
“From our perspective, tech is very important in reducing delivery cost and making sure that our lawyers are adding genuine value” argued Devane. Our job is often to flex around in-house legal teams and their capabilities and capacity to ensure that the right advice is delivered to the right places.”
“It’s important to recognise that the in-house team has the knowledge and the right people to make decisions about commerciality and risk.”
Facilitators’ comments: EY Law’s Colette Withey (commercial and digital law leader), Terence Devane (associate partner) and Abigail James (manager)
We wish to thank The Lawyer for the opportunity to facilitate a discussion on company purpose and the role of the legal function during the challenges in 2020 at this roundtable.
There was consensus amongst the delegates of the importance of purpose in delivering a company’s strategy and it having to be “at the heart” of the company. Whilst Brexit and Covid-19 were different influences in different sectors and businesses, these factors were not the main drivers for delivering a company’s purpose, notwithstanding the challenges presented in 2020. The group’s challenges were influenced by longer term factors such as climate change and sustainability, legislative, regulatory and policy reforms and increased societal pressures. These factors were continuing, rather than being new in influencing a company’s purpose and its role in society during this unprecedented period.
We continue to see the shift from shareholder to stakeholder value. Although a company’s primary duty being to its members while having regard to a number of stakeholder factors remains unchanged, in practice, companies are increasingly engaging with their broader stakeholders and their concerns. As discussed, Section 172 reporting has been introduced for medium to large companies and further publicises and, perhaps, helps to drive a connection between a company’s strategy and purpose and broader stakeholder values. Subsidiary board governance is also coming into further focus, as is increased scrutiny on sustainable supply chains with, for example, proposed changes to legislation on modern slavery.
Alongside the challenges presented to in-house legal teams this year, from increased demand, cost reduction and technology use, opportunities have also arisen. In-house legal functions are seizing the opportunity to have a “seat at the table” in these purpose-driven discussions. We’ve seen the role of the in-house lawyer continue to evolve this year as they do even more with less, embrace the use of technology to ensure they spend as much time as possible delivering value, and demonstrate how they can support the business in balancing commerciality and risk.