The structure of legal departments within organizations has long been a topic of discussion. General counsels and business leaders frequently ponder whether to shift towards centralized or decentralized models. This blog post explores the advantages and disadvantages of decentralization in legal departments, shedding light on the challenges faced by in-house lawyers in effectively aligning with business needs while maintaining ethical principles.
The Need for Structural Changes:
According to a recent survey conducted by Axiom, many general counsels feel that their legal departments are not structured to meet the evolving business needs of their organizations. In response, around two-thirds of the surveyed general counsels expressed a preference for a centralized legal department with some lawyers embedded in business units. Only a small percentage favored either complete decentralization or full centralization.
The Evolutionary Background:
Three decades ago, the concept of placing lawyers within business units emerged with the expectation of saving time, money, and facilitating prompt legal guidance. The image of in-house lawyers as slow and obstructionist generated a demand for strategic legal advice that aligned with the speed of business decision-making.
Ethical Considerations:
While business professionals prioritize quick answers and solutions, it is essential to acknowledge the ethical responsibilities that lawyers operate under. Lawyers not only deliver timely legal advice but also uphold ethical obligations and boundaries. Balancing client representation with the role of being officers of the court presents lawyers with a dual responsibility that may not always be understood by their clients.
Loyalty and Responsibility:
Decentralization raises questions about loyalty and responsibility in the face of ethical dilemmas. Should an in-house lawyer act upon an unethical request made by a business unit, especially if instructed not to disclose the matter to the general counsel? What obligations arise when an assignment could potentially result in substantial liability for the organization? Is the lawyer’s loyalty to the business unit or the greater good of the entity? These complexities underline the importance of advising the general counsel and seeking guidance.
Business Understanding of Legal Matters:
A significant challenge faced by in-house lawyers embedded within business units is the divergence in legal knowledge between legal practitioners and business professionals. Legal terminology, timeframes, cost estimations, and the various intricacies of the legal process may be foreign to many business professionals. This knowledge gap can lead to misunderstandings, frustration, and strained relationships between legal and business units.
The Risks of Advocacy and Detachment:
Another concern arising from decentralization is the potential lack of objectivity and detachment when lawyers are closely integrated into business units. Advocacy for the unit’s interests might compromise legal judgment, leading to decisions that create substantial legal risks. The compensation and performance review process, now often influenced by business units, raises concerns about the ability of embedded lawyers to push back against unwise ideas.
Balancing Risks and Benefits:
In-house lawyers, particularly general counsels, point out that decentralized legal departments limit information silos, enhance corporate governance, optimize resource deployment, and foster efficiency across business units and geographies. However, there are potential risks associated with advocacy-oriented lawyers, a lack of shared knowledge, and insufficient understanding of legal costs and processes from business units.
Whether to opt for a decentralized legal department or not is a nuanced decision that depends on the unique circumstances and goals of each organization. Striking a balance between aligning legal functions with business units and maintaining ethical standards is crucial. By acknowledging and addressing the challenges associated with decentralization, organizations can work towards creating legal structures that genuinely serve their business needs while upholding the principles of sound legal counsel.
Market Capital Research 