Legal matters are not every one’s cup of tea. More in particular, the law is a field that entrepreneurs, business owners and executives tend to “forget” or simply wish not to think about. Not because they diligently wish to perform illegal acts, but because “legal” is perceived as much more of a money drainer than a money gainer for most of us. Fact is, that corporate law strategies used in your company are one of the most important areas for running your business!
The five different law strategies
Looking at the five pathways of Corporate Legal Strategy by Robert C. Bird and David Orozco (in MIT Sloan Management review 16 September 2014) there are 5 ways of looking at law within your company: avoidance, compliance, prevention, value creating and transformation.
When it comes to legal strategy, there is no one-size-fits all approach. What suits your business, doesn’t necessarily apply to that of your befriended starting-up neighbour! To identify the best legal strategy for your business, you first need to identify the fundamental differences between the options: where avoidance, compliance and prevention focus primarily on managing risk, the value and transformation options target towards generating business opportunities.
Bear in mind, the ideal legal strategy in theory may not always be the best in practise.
What is your corporate legal strategy?
What should you pursue and how does it affect your business positively (or negatively)? First, figure out within which of the five key strategies you fit: avoidance, compliance, prevention, value creating or transformation. Each of the five key corporate law strategies is used by all companies whether you consciously realise it or not. The key for you is to decide what kind of legal strategy you want to implement in the business model that works for you.
What do the five strategies look like?
Unfortunately, this strategy is quite commonly used, but it certainly isn’t ideal. While it may sometimes be effective, it could also easily lead to complete disaster! In short, when implementing this strategy, you consider legal expertise to be of little concrete value and certainly do not take the legal consequences into account when making (important) business decisions.
Within this strategy, you understand the importance of law as a mandatory requirement for business success. Or to put it bluntly: you see the law as a burden on your business goals, but one you can do little about. It’s just a matter of keeping the costs relating to it as limited as possible. This in itself is not a bad strategy, but when using this strategy you may not realise that the law can help you grow your business or really seek to understand how it can.
A preventive approach is one that seeks to understand the law and use it proactively. That’s also how it differs substantially from the previous 2 strategies: these don’t make any attempt to use the law to an advantage (and rather are reactive approaches).
Companies that engage in a preventive legal strategy understand that the law can benefit them. They can use it to minimise risks and at the same time increase business growth. As an executive you consult lawyers to achieve your risk management goals.
An example of taking a prevention approach is when a company files a patent. The company is disclosing technical information that can bring the company a future profit, and this gives them more freedom to pursue developing their technology for that specific purpose.
Here, the corporate strategy turns into a completely different ballgame: law and legal experts working within the company are seen as invaluable assets! Managers have a strong understanding of the legal system and how it can be tailored to generate value. Simultaneously, the legal department must view itself as a key stakeholder in helping the company to increase its return on investment. Using their expertise legal counsel are able to advise on areas like minimising business costs, reducing tax payments and are generally involved in all strategic decision making processes within the company.
Think: reducing costs by strategic assessments (for example by minimising liability claims), and increasing ROI by generating additional revenues for the company (such as creating licensing agreements).
Finally, the transformation strategy is the most complex strategy, but it can also be the most rewarding one profit wise.
Transformation works by implementing a corporate legal strategy into your business model. This makes legal a crucial part of your operating model and profit strategy, instead of a separate goal. Simply said: within this strategy the legal aspects are directly related and play a big influence on how much profit you will generate. Think: IBM’s patenting and licensing strategy that had a direct influence on the company’s annual profits (from less than 20 million USD in 1991 to $1.1 billion in 1998!).
Working out the best strategy for your company may be difficult and overwhelming. Just realise that in itself, there is no right or wrong (though intuitively, you may wish to overlook the avoiding strategy in my eyes). However, effective and well-planned legal strategies are the key to maximising success in the corporate world. The law can often be limiting and restrictive, but when used to one’s advantage, it can be incredibly rewarding!