Introduction
The advent of new technology, staffing models, and legal operations strategy is driving profound change and disruption in the way in-house teams are delivering legal services for their organisations. Just as the global in-house sector is rapidly evolving, the Japanese in-house sector too is experiencing immense change. Underlying factors include an increased focus on international merger and acquisition activity and the emerging prominence of the Chief Legal Officer (CLO) within the Japanese in-house legal function.
The recent change and disruption within the in-house legal sector have coincided with an increasingly uncertain global business environment. An environment characterised by shifts in regulation, compliance, globalisation, technology and the growing expectation that organisations address environmental, social and governance issues. The emergence of the CLO as an influencer of corporate strategy has coincided with in-house legal departments playing an increasingly proactive role in risk mitigation and organisational strategy.
Each year, the Association of Corporate Counsel (ACC) conducts a global study of the issues and environment in which CLOs operate. With the publication of the 2019 ACC Chief Legal Officers Survey, ACC marked the start of the Age of the CLO. Feedback from 1,639 heads of legal departments in 55 countries indicated the Age of the CLO is advancing on a strong foundation. The Age of the CLO means that CLOs are occupying positions of power and influence within their organisations and taking on roles beyond that of technical legal adviser. Over 150 Japanese heads of legal departments participated in ACC’s 2019 CLO Survey. This article highlights key contrasts between the Chief Legal Officer in Japan to that of the global CLO.
The Japanese Chief Legal Officer
The role of Japanese in-house counsel contrasts significantly with that of CLOs in Europe and North America. The description of a CLO in Japan is someone who coordinates the functions of the legal department and is mostly likely to report to the Chief Administrative Officer (CAO). This is distinct from American or European CLOs where the majority report to the Chief Executive Officer (CEO) and are widely viewed as strategic advisors to the company.
A CEO in Japan is more likely to source strategic and risk advice from an outside legal counsel than they would their CLO. This indicates that their advice is being sought on strictly legal matters, instead of a range of diverse areas including strategic planning, financial affairs, business processes, project management and data security.
Employees within Japanese legal departments often have sound legal knowledge, however, most of the time are conducting low impact type work, with more complex matters outsourced. An empowered CLO not only supports a reduction in external legal spending, but more importantly supports a culture of legal and ethical compliance. The company is the CLO’s client, and Japanese CEOs and their companies could undoubtedly benefit from greater empowerment of the CLO role.
Contrast with the Global Benchmark - North America and Europe
Findings from the 2019 ACC Chief Legal Officer Survey revealed that 35 percent of respondents in Japan hold the title Head of Legal. This is significantly higher than North America and Europe where just 15 percent of combined respondents hold this title. Further, in North America 76 percent of respondents are regarded as General Counsel (GC) and 42 percent hold the title of CLO. In Europe 42 percent are GC and 12 percent hold the CLO title. However, only 15 percent in Japan hold either title, which may indicate that Japanese companies tend to hire outside counsel instead of utilising their legal staff.
It was also reported that 59 percent of Japanese respondents report to the senior executive team, again lower than the 82 percent and 74 percent reported in North America and Europe. These statistics identify a weak reporting line in Japan when compared globally. This indicates the executive leadership is less likely to seek input from Japanese CLOs on business decisions and discuss operational issues and risk areas including reputation management and public policy within the organisation. This negatively affects the CLO’s ability to proactively protect their company and understand how global regulatory issues, mergers and acquisitions (M&A) and compliance operate - issues that Japanese CLOs have identified will most likely impact the in-house legal department.
This also suggests that Japanese CLOs are conducting low-impact, high-volume type work with the more strategically significant high-impact, low-volume work being outsourced. Importantly, this approach is counter-intuitive to the workflows of a high performing in-house legal department applying best practice principles.
For instance, many companies bring outside counsel with M&A expertise when considering a merger because of its intricate technicalities. However, in-house must be familiar with every stage of the M&A process. In-house involvement across the breadth of M&A matters adds value by ensuring both immediate and long-term legal and regulatory issues that are important to the company and its stakeholders are addressed. This cannot be achieved if the CLO is not acting as the company’s strategic advisor. At a global level, as M&A has become increasingly complex, major corporations have realised the need to expand in-house legal capabilities.
Centralised Legal Function
A key highlight from Japanese respondents to the ACC 2019 Chief Legal Officers Survey was the stronger application of a centralised legal team when compared with those in Europe and North America. Globally, the concept and application of a decentralised legal department has gained prominence over the past decade, providing further evidence of the growing relevance of in-house teams across multiple areas of organisations.
A centralised structure means the in-house legal team functions as a separate entity, overseen by a head of legal. Alternatively, a decentralised or embedded structure places individual lawyers within different business units. Decentralised lawyers usually report to a CLO; however, the commercial manager of their particular unit may also provide supervision.
Organisations are increasingly searching for corporate governance professionals who have excellent business acumen, and embedding lawyers is a good way to achieve this. Furthermore, working with business-side colleagues’ day to day ensures lawyers have a better idea of how their advice and legal decisions affect the wider organisation. Similarly, non-legal employees can learn more about regulations, compliance, and other aspects of corporate governance from embedded lawyers.
Importantly, sharing management and oversight responsibilities with commercial managers also allows CLOs to focus more on boardroom-level concerns, such as strategic direction. The reluctance of Japanese in-house departments to embrace the decentralised approach to legal team management could be attributable to the proportionally smaller in-house legal teams in Japan. However, it may also speak to the diminished perception of Japanese in-house teams when compared to their global counterparts.
It should be noted that in-house lawyers are becoming more common in Japan as a result of judicial system reform that was aimed at companies’ growing needs to strengthen their legal capacity. According to a December 2018 article appearing in the Japan Times, the Japan Ministry of Trades and Industry has in fact recommended that Japanese corporations strengthen their in-house legal departments to meet global benchmarks.
Corporate Social Responsibility
It is apparent that Japanese companies are more likely to have an established Corporate Social Responsibility (CSR) program in place, over and above their North American and European counterparts. Similarly, Japanese in-house lawyers are more likely to influence the implementation of company-wide CSR initiatives than their global counterparts. This is an interesting highlight from the report because it indicates that despite a centralised legal function and a lack of willingness to engage the legal department in broader strategic issues, the legal function does have a strong and prominent organisation-wide role in the evolving CSR space.
Japan has become the country with the largest number of participants in Global Reporting Initiative (GRI), which is the most acknowledged reporting system of CSR. However, many Japanese companies do not follow the GRI guidelines, given various differences in their socio-economic characteristics. Japanese firms predominantly use cultural mechanisms such as philosophy and guiding principles to address CSR. Japanese CSR reports are typically more specialised, restrictive and distinguished from comprehensive corporate issues than Western reports. There are also several specific CSR issues which Japanese companies are less likely to address than Western companies such as promotion of work/life balance and workplace diversity.
Japanese reports put far more weight on environmental issues than on social issues which Western companies are slightly more eager to discuss. Moreover, Japanese companies demonstrate a stronger willingness to collect public opinion about their approach to CSR, rather than the opinion of their employees, an approach Western companies take. While Japanese culture, the legacy of the traditional system, and the diffusion of different practices are the reasons GRI guidelines may not be adopted, some aspects seem to be increasingly aligned with Western practices, for instance, Japanese companies are increasingly expected to publish ‘sustainability’ reports. It should be remembered that there is a great diversity in the approach to CSR, and many companies develop their own framework, independent of the GRI guidelines.
The Changing Role of In-House Counsel in Japan
In 2017, the Legal 500 and GC Magazine hosted their inaugural event in Tokyo a roundtable to consider the changing role of in-house counsel in Japan. Various concerns and changes for Japanese in-house counsel were discussed. For example, changes to cybersecurity and intellectual property regulations are causing increasing concern for in-house counsel. The roundtable identified that in-house counsel must continue to develop closer linkages and relationships with policy makers.
Talent management was also an area with which several GCs admitted to having troubles, that is the ability to source, as well as retain top-tier in-house counsel. There is a clear desire for Japanese companies to hire CLOs that have the ability to speak in industry specific terminology, be proactive in negotiations and incorporate business circumstances when delivering legal advice. Without increasing the non-legal skills of in-house counsel, Japanese companies are unlikely to seek more input of their CLO when making decisions.
For Western companies that operate in Japan, hiring in-house counsel that are able to fit the increasingly international requirements – both from a knowledge and cultural perspective – meant that many were starting their search for talent outside of Japan. It was identified that there is a clear preference for hiring law firms as opposed to in-house departments, a trend attributed to the comparatively small role that CLOs play and the small size of legal departments seen in many businesses in Japan. This places an emphasis on strong relationships with external firms, however, it inhibits the ability to bring more work in-house.
Conclusion
In a time of unceasing geopolitical upheaval and regulatory change, the role of the CLO and the in-house legal department is growing in significance within Western companies. Evidence of the growing strategic role of the CLO is highlighted by the fact the CLO commonly reports directly to the Chief Executive Officer and is a strategic advisor to the board of directors. This growing influence ensures the CLO is ideally positioned to take a pro-active role in guiding the company through change and minimising exposure to risk around the myriad of regulatory and compliance issues facing the global business environment today.
Japan too is very much exposed to the shifting global environment and, given its proximity and close links to the Asian region, is very much at the forefront of global change. The Japanese in-house community is also undergoing change, as in-house lawyers begin their ascent to a higher profile within the broader Japanese legal sector. Importantly though, this change has yet to result in a true elevation of Japanese in-house counsel to a comparable strategic legal advisor role enjoyed by their Western counterparts. Interestingly, as demonstrated by the research, the role of the CLOs in Japan is influential within the organisation across issues impacting CSR, indicating a willingness to accept their input beyond core legal functions. As the Japanese in-house legal function and the role of the CLO continues to evolve, the global shifts across the in-house sector can be expected to increasingly influence Japanese in-house functions and roles in the near future.
This report was compiled using information drawn from the 2019 ACC Chief Legal Officers Survey. For more information visit: https://www.acc.com/2019-acc-chief-legal-officers-survey