Photo by Luke Sharrett (Bloomberg)
Photo by Luke Sharrett (Bloomberg)

GE’s former GC Talks About the ‘Money Chase’ and Why Legal Profession Not in Decay

By the time Ben Heineman retired as the top lawyer at General Electric, its legal department had 1,300 lawyers scattered around the world and the company manufactured everything from refrigerators and jet engines to complex financial instruments.

In his new book, the Inside Counsel Revolution, which I reviewed on Thursday, Heineman discusses his time at GE from 1987 to 2005 and the challenges of running such a large corporate legal department.

The title refers to the movement to strengthen corporate legal departments and offers his view on the role that strong GCs can play in the boardroom and within the corporation. See a review of the book here.

Ben Heineman_Headshot (1)I spoke to Heineman about these ideas. Below is a transcript of our conversation that has been edited for clarity and brevity.

 

Big Law Business: What do you mean by the lawyer-statesman as the practical ideal?

Heineman: What I mean by lawyer-statesman is kind of modest. And I make clear that even some of the early examples in U.S. history, Thomas Jefferson and Alexander Hamilton, were politicos. They were at each other’s throats. The lawyer-statesman as I talk about it really concerned someone who asks not just what is legal, but what is right? It is not an ideological statesman. I’m not a progressive or a conservative.

 

Big Law Business: Why do you think it’s too simplistic to say the legal profession is in a state of decay?

Heineman: I think it’s not in decay. There are lawyers strewn all over the executive branch. Half of congress is lawyers. There’s no question we’re in an era where money is terribly important to the profession and has skewed the profession away from the ‘what is right’ question and toward the ‘how can I make more money’ question. We are in one of those swings of the pendulum where money is more highly valued in the law than service. It’s not universal but we are in a highly materialistic age.

But I think in the modest way that I am stating it, I think there’s a renaissance and there’s more of a chance for lawyers in a company. I think the reason is that the general counsel of quality and experience is concerned about what is right for a company, and the CEO wants that person to perform that role because they understand that companies can get into all sorts of difficulties whether it’s ethical or compliance-related or regulatory difficulties. The CEO wants the GC to be in top management – and they go far beyond the law in that role. They’re at the table on a wide range of issues and have an opportunity to say, “Is this the right thing?”

The problem with the law firms is they are really in a money chase right now. A lot of the law these days is just about trying to get and keep business. I’ve seen this for a long time, although there are certainly great partners in law firms. It’s much harder.

 

Big Law Business: How will that tension with law firms resolve?

Heineman: Law firms are not happy places. The competition between the partners is huge. The mid-level partner who is taken out of the equity is deeply unhappy. The quest for money has destroyed these institutions.

Then there is the mistreatment of associates. They’re overworked. They’re part of huge teams. They’re super-specializing at a very young age. People are leaving after two or three years because they’ve made some headway on their debt. The funnel is very narrow on who’s making it to partner. So they’re going inside. There’s no question that there’s a lot unhappiness.

Of course, there are great partnerships. I think the general view is the law firms need to rethink their model. To some extent it is happening. There is the rise of boutiques which I’m in favor of because I think Big Law wastes a lot of money. There are some small firms that are about community service. Not every firm has profits-per-partner as its primary goal. There can be hybrids, where they do some high pay work and some work that’s quasi pro bono. But I do think the big firms have terrible problems in terms of feeding the mouths. The top 25 firms, they’re always going to be fine. But the rest, their margins are going to be less.

One of the big ideas in this area is segmentation. On the super work, you’re going to want the super firm. On the other hand, if you have just a routine run of patent work, you’re going to put that work out for competition and drive the law firm’s margins down. But the top 25 firms they’ll be fine. The question is all the other firms down the ladder, what does their world look like?

 

Big Law Business: Who will train young lawyers if not law firms?

Heineman: When I started in 1987, virtually all of the people I hired came from law firms. Today, the market has changed. Partly that is because over this 30 or so years, the inside legal department has developed a very large cohort of talented individuals. Headhunters may look in law firms, but they also may look in companies that are just a little smaller. They also look in government. Being the GC of the defense department is much more akin to being GC of a company than being a managing partner of a large law firm is. So it’s more diverse now.

 

Big Law Business: What could law schools be doing better?

Heineman: In a nutshell, the problem that lawyers are being asked to solve goes way beyond the technical matters of law. These schools should be very interdisciplinary with public policy and business schools, so young lawyers understand leadership, understand institutions, understand politics. In other words broaden out the basic materials to use.

The whole nature of  the professoriat has to be changed. It’s really a question of teaching complementary competencies and using a whole range of other materials.

It’s a much broader interdisciplinary – teaching problem solving that is broader than what law schools do today. And until you can change the faculty that is not going to happen. I have taught a course called challenges of general counsel and we don’t deal with any cases. We deal with what happened with Walmart in Mexico, what happened with BP in the gulf, what should Google do in China. It’s a lot of hard cases but the nature of the cases are different than your standard legal case. It doesn’t have to be about a GC, it could be the head of the state department, the head of a university. We all go out to the world with law degrees and a lot of people go to firms, but a lot of people don’t. So we ought to train them to be leaders and counselors, not just experts.

 

Big Law Business: You describe three roles for the lawyer: technical expert, leader, which I took to mean manager, and the last one is less clear — wise counselor.

Heineman: Well, as the technical expert, the law is ambiguous, you have to make all sorts of judgments about what is a reasonable range of discretion. Then, you can multiply that, because there are state and local jurisdictions and the company I worked for was in over 150 countries.

If you go to China, there’s no recorded law. The law may be different from one region to another. If you look around the world, the determination of the law is extremely difficult.

If you look at the leadership, it’s not just managerial. I say in the book, probably 80 percent of the time I was the ultimate decision maker. They’re also the leader in the fact that they’re in top management.’

This is where leader and counselor kind of merge. Obviously they’re different skills, being an effective participant in a discussion is different from sitting and listening and making a decision. But one thing that both the counselor and leader have to have, goes way beyond the law – lawyers need to have complementary competencies. The wise counselor is an adviser. He or she is going to counsel the person making the decision. And the leader is going to be the final decision maker.

They blur and it’s not quite so simple. Being an adviser, being a counselor in a complex organization and understanding how to present things, when to present things, the degree of difficulty in what you’re saying, when to stand up on your hind legs and  when to come back – they’re any number of factors that determine how effective you are.

Anyone who has worked in a big organization knows that group dynamics are fascinating. And it is different when you’re the last person signing the piece of paper. It is difficult. When I’m one of the people on the debate about the decision, I’m raising questions beyond the law.

 

Big Law Business: How many GCs are inhabiting the broader role you describe?

Heineman: I think that my anecdotal experience from knowing 50 to 25 of the top general counsel in the country, is they would describe the role in the same way. I think that what’s happened is not only the lawyers have changed, but also the CEOs and boards of many companies have adopted this approach.

One of the big problems is that no one person can do it, which is why it’s critical they hire the best people. And hiring is not cheap. If you’re leaving the deputy attorney general’s position, you’re going to be offered all sorts of remunerative positions within law firms. So you’re in effect going to be competing with law firms.

A lot of people would say this vision is not a theory, it’s something that’s happening. I’m fond of saying it’s not goo goo philosophy. I believe this movement is going to continue into the future, and is going to keep spreading.

 

Big Law Business: Will anything slow it down?

Heineman: At GE, we had between 1,200 and 1,300 lawyers around the world. It’s not like inside law departments are perfect. Running a huge law department is filled with challenges. I don’t want to leave the impression that they’re nirvana and law firms are hell. The legal departments have a vast array of management motivation problems as well. There are many, many arguments for being an inside lawyer, but there are still problems, maybe the biggest problem is how do you integrate a law department where you have lawyers overseas.

 

Big Law Business: Will this spread overseas or is it a U.S. phenomenon?

Heineman: I think there’s no question in my view it’s happening in western Europe. It’s happening in Asia — in Hong Kong, even in private industries in China. Increasingly, they’re facing the same problems that corporations in the U.S. face. And if they’re all over the world, the big global companies whether they’re headquartered in the U.S. or Asia or wherever, they’re going to face this problem. They’re going to want to keep the fees down. They’re going to want the speed, they’re going to want the vision of a strong general counsel. So I think this is going to happen.

Indeed, when I left, we had roughly 35 lawyers in China. They all had degrees outside China. They were very global. That’s happening, too. Not only is there a huge outpouring of law students in China, there’s a diaspora. I think the education is going to be very global. And the talent is going to be very global, so these huge corporations are going to be very global.

 

Big Law Business: You say the raft of corporate scandals helped accelerate the inside counsel movement. Will having better GCs decrease the number of scandals?

Heineman: There have been scandals forever – that’s the nature of capitalism. But the scandals of this era have been so big, in some cases, like Enron and Worldcom. In part, that’s because the scandals are just a symbol of what I would call much more complicated business and society issues. These become multi-front, multi-month, multi-year wars that get enormous attention because there’s no question the sums are bigger and the risk to the companies is bigger. For those kinds of issues, good general counsel and substantial law firms are needed.

I hope it will address that, yes. If they hire terrific lawyers, who then create terrific law departments, it creates a change in culture. The GC or in-house counsel can never do it alone. One of the important points is that it is a team sport and the GC can never do it alone, but he or she certainly can be a catalyst or a visionary.

One of the things I say is, we shouldn’t be dewy-eyed about capitalism. In a pure high performance company, the pressure to cut corners is enormous. So  I think the whole point is that a great GC and CFO and CEO, as they put pressure on people to perform, they need to be mindful of integrity.

If you look at the Fortune 50 companies, put the financial services companies aside, the big companies if they’ve gotten in trouble, they tend not to get in trouble again. I cannot give you empirical data to show you things are better, but people are very mindful. The fact that very high level and prestigious GCs are being hired, shows people don’t want this to happen again.

This is not a panacea in that we are not going to reform human nature, but I think the whole point of the book is people need to create this high performance, high integrity culture, and the GC as lawyer-statesman can play a role within the team.

There’s always going to be the rogue employee, the bad apple. The speech I used to give at GE is the bad apple is not going to blight your career. But if you’ve got a business problem that went on for too long and involved to many people because your culture sucked, you’ll get fired.

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