Law Gazette: Something happened | Feature
By Eduardo Reyes | 30 November 2020
The clients of City law firms can begin to plan for life after Covid-19. But have their priorities changed? Eduardo Reyes reports
The low down
Any period of loss, threat or crisis invariably leads to a call to action: ‘Things can’t be the way they were before – we have to build better.’ The coronavirus pandemic has brought mass death and illness, unemployment, the heartache of separation and a huge hit to the public purse. Unprecedented state support aims to make it easier to switch back to normal life as quickly as possible. Businesses and their City legal advisers rightly assume it will not be that simple. So what might change? Good governance, trust, technology and equality and diversity have all gone up the corporate agenda. And legal fees too.
The UK government’s response to the coronavirus pandemic cost the public purse £210bn in the first six months of 2020. A huge component of that was the ‘furlough scheme’, which together with grants and loans to businesses aimed to prevent ‘scarring’ – of the economy and of people’s lives. Some of the City’s largest law firms benefited from such measures. Through that support we should (so the thinking goes) be better placed for a quick return to normality once the virus is under control.
Of course, not all businesses and jobs have been saved by such schemes: 750,000 people have lost their job through the crisis. Add to that more than 55,000 deaths from the virus, the impact on children of school closures, and the widely recognised hit to our mental health delivered by social isolation, and one thing is clear: things will not be as they were, and businesses that fail to reflect that in their corporate conduct may pay a price.
The practical experience of the pandemic has coincided with widespread support for the Black Lives Matter movement, and dramatic climate change events. How will corporate clients respond to 2020’s challenges, and what does that response mean for their legal advisers?
There are four broad areas for commercial clients and law firms to consider: governance, ethics and corporate responsibility; equality and diversity; technology; and legal fees.
Governance, ethics and corporate responsibility
Last month Tony Williams, former Clifford Chance managing partner and principal of the Jomati consultancy, published a report, Reimagining your business in a post Covid-19 world: rebuild better. Williams’ analysis places ‘environmental, social and governance’ (ESG) at the heart of the report.
‘Lawyers and law firms should familiarise themselves with the concept as a matter of urgency,’ Williams argues. ‘Most obviously, law firms should expect to see far greater scrutiny of their own ESG-related behaviours during tenders.’
But is the Jomati report also ahead of clients’ own agenda and priorities on some points? London-based executive networks company Winmark recently published its 10th annual Looking Glass report, based on replies from 162 general counsel and company directors, and jointly written with international firm Clyde & Co. It found GCs accorded a relatively low importance to environmental considerations.
‘Environmental risk remains near the bottom of the hierarchy of risk concerns. The prominence of climate change on the global business agenda does not translate into a concern about an immediate impact for most respondents,’ the authors of Looking Glass conclude. ‘However it is important to recognise that environmental issues are increasingly recognised as touching on organisational, reputational, economic, competitive and regulatory factors.’
The Jomati report, however, points to the stress placed on reporting for major companies, which they are increasingly undertaking in line with two sets of measures – the World Economic Forum’s 2020 paper Measuring stakeholder capitalism: towards common metrics and consistent reporting of sustainable value creation; and the UN’s Sustainable Development Goals (SDGs). A PwC study of leading global companies, Jomati notes, found that 72% mentioned SDGs in their formal reports, and 65% mentioned specific goals.
‘With many clients now keen to demonstrate their environmental credentials,’ Williams says, ‘it is quite possible that these clients will increasingly consider law firms’ environmental initiatives during the RFP [request for proposal] process. Having a compelling “story to tell” may become a commercial advantage for bidding law firms, because they demonstrate a clear willingness to “do their bit”.’
Wider governance concerns were already a much higher priority. Looking Glass interviewed Thames Water non-executive director Paul Donovan, whose experience reflected survey findings: ‘Culture is going to be a key differentiator as to how businesses emerge from Covid-19 – cultures which are characterised by openness, collaboration and trust with all their stakeholders are the ones who are going to win.’ And Trowers & Hamlins’ general counsel Claire Larbey says: ‘There is a growing interest by clients in governance and ethics and this can, at times, impact upon whether a firm is appointed or reappointed to a panel. This driver is mainly from the larger corporate clients, who themselves have defined and strong governance and ethics structures.’
What are the practical repercussions for law firms though? Some, Jomati notes, meet such standards already because they are listed. DWF and others meet the World Economic Forum’s suggested reporting standards, listing ‘composition of the highest governance body and its committees by: executive or non executive; independence; tenure on the governance body; number of each individual’s other significant positions and commitments, and the nature of the commitments; gender; membership of underrepresented social groups; competencies relating to economic, environmental and social topics; stakeholder representation’.
Recent wildfires in the US and Australia have been linked to climate change – as has increased storm activity. On 18 November, the UK government announced that the sale of new petrol and diesel powered cars will end by 2030 – earlier than expected. Yet executive network Winmark and Clyde & Co’s survey of general counsel and board directors shows ‘environmental risks’ to be close to the bottom of corporate concerns.
Environmental risks are increasing fast, and the policy response of governments and international bodies to climate change will force companies to prioritise this area. Some already are. For Irwin Mitchell, ‘having the right environmental ISO standards in place is considered to be a basic requirement for most bids’, its general counsel Bruce Macmillan says.
A report by Jomati consultants on the ‘post Covid-19 world’ suggests clients will increasingly consider law firms’ own environmental credentials when awarding instructions. The report suggests membership and participation in three organisations can help law firms here.
- The UK’s Legal Sustainability Alliance (LSA) is a group that includes many of the country’s leading law firms. The LSA produces an annual report which benchmarks its members’ environmental impact according to a range of measurements, including total and per capita carbon emissions, and the production of waste and paper usage by tonne. In the eight years since the LSA started monitoring its members’ CO2 emissions, these fell from 9,338 tonnes in 2008 to 4,106 in 2017.
- The UK-based Chancery Lane Project includes leading international law firms, in-house legal teams, barristers chambers and universities. It has published a contract ‘playbook’, covering issues as diverse as carbon performance clauses and net zero convertible loan notes.
- The International Bar Association has produced a ‘model statute’, which provides a framework for interested parties to commence proceedings against governments that fail to act on climate change. This guidance note sets out the legal basis for bringing a claim at various stages of the process, and also outlines useful tactics and test cases to cite when doing so.
Equality and diversity
Equality and diversity are not new areas for law firms, of course, and before 2020 their importance had grown steadily. General counsel have acted with increasing confidence in promoting a more demonstrably diverse legal profession. In February 2019, US tech giant HP said the percentage of law firms instructed who met its minimum diversity requirements had nearly doubled since it threatened to withhold up to 10% of costs for those who did not two years earlier. Also in the US, 170 general counsel, making up the Law Firm Diversity Network, made a similar commitment. ‘We expect,’ they said in an open letter, ‘the outside law firms we retain to reflect the diversity of the legal community and the companies and the customers we serve.’
That was a US-led initiative, but in June this year, the UK’s Black Solicitors Network wrote an open letter to ‘senior leaders of law firms and legal services providers’, challenging them to ‘walk the talk’ on diversity. BSN asked for ‘metrics, targets and accountability’. Irwin Mitchell’s general counsel Bruce Macmillan confirms: ‘We are seeing more emphasis on what is being done around race. We expect this to continue to be an area of focus for our clients.’
‘The legal profession cannot afford to be complacent about its own record on societal issues,’ the Jomati report concludes. ‘Globally, the sector is plagued by diversity challenges – notably, in relation to gender diversity.’
There is wide variation in law firms’ responses to these challenges. Increasingly, firms are formalising their responses. This year several major City and international firms have announced BAME targets for recruitment and partnership, among them Clifford Chance, Allen & Overy and Linklaters.
In September Linklaters launched a ‘diversity faculty’, a ‘client offering’ that ‘combines legal advice with strategic business guidance on diversity and inclusion issues’. Neha Rao, client diversity and inclusion, and engagement manager at Linklaters, says: ‘Like us, our clients want to ensure that their approach to D&I is in line with their cultural values, and upholds their duties as a responsible business.’
Equality and diversity rank differently in importance for clients in different sectors. ‘Property is not great at equality and diversity,’ reflects Wedlake Bell partner Suzanne Gill. Nevertheless, she relates some progress: ‘We are being asked for details when we send in tenders but haven’t particularly been troubled for any follow-up and it doesn’t seem to matter after that.
‘It would be nice to think that’s because we demonstrate those values when we deliver our services – but the diversity and inclusion teams here… are constantly working out ways we can raise our game and I would have thought the clients would feel the same way.’
Alessandro Galtieri, deputy general counsel of multinational telecommunications and data centre services company Colt Group, relates a close interest as a client: ‘We monitor this quite closely, and in fact we’ve partnered with one of our firms to try to copy each other’s best practices. It will become harder for firms to just do some “box-ticking” on this, as they will have to show genuine progression in terms of gender equality and other diversity metrics.’
One area of friction that clearly predated the pandemic was over law firm fees. Client frustration overflowed at a corporate counsel roundtable discussion the Gazette held last year. ‘The cost of external spend is going through the roof,’ Deutsche Bank’s Amanda Gill told the discussion group. She had noticed that ‘law firms are paying their employees more’, as evidenced by the dramatic increase in newly qualified solicitor salaries in global and City firms. She related ‘deals that have become extremely expensive as a result of higher hourly rates’ and noted a resulting ‘pressure on us to shop around or use some of the more cost-effective firms on our panel’.
Colt’s Galtieri, also present, added: ‘It’s difficult for me to understand what is the value-add of a newly qualified’s price tag of £140,000. I struggle to see what valuable contribution the newly qualified, however bright he or she may be, makes when I can get a lot of lawyer for that in-house.’
One surprise in 2020 has been how well City law firm profits held up. Recognising this, some firms are even repaying furlough scheme money.
Currently, though, this feels like a topic on which discussion has been postponed. The reasons for income resilience among leading firms are not yet established, and any discussion has a fragmented, sector-specific character. ‘Fees, as ever, reflect the sector in which the client operates,’ Wedlake Bell’s Gill notes. ‘Restaurant and hospitality businesses are really feeling the pinch… There’s less pressure on fees for those clients operating and investing in logistics – but everyone likes to feel they’ve got a good deal.’
General counsel and COO of wealth management business Signia, Kirin Ohbi, says: ‘Gone are the days when law firms can rely on a prestigious brand to charge out hourly rates without the client batting an eye. Providing a flexible, transparent and competitive fee structure for clients is just as important as the quality of the advice itself. For me it shows the law firm understands the client’s needs and more importantly values their business.’
Perhaps the strength, or otherwise, of the economic recovery will determine whether more pressure on fees is an eventual legacy of 2020.
The use of technology, especially remote working technology, has been an obvious consequence of ‘lockdown’ and restricted movement. Front of mind, though, is not the cutting-edge technological advances in which some law firms have invested heavily. Referencing automation and artificial intelligence, Colt’s Galtieri now says: ‘We are still not where we need to be with this. There are pockets of innovation in many firms, but they all tend to be quite inward-focused… and the benefits are not widely shared with clients. Not just in terms of cost savings, but in working practices and efficiencies.’
Instead, operational concerns dominate. Winmark’s Looking Glass report concludes: ‘All organisations are thinking in terms of more investment in secure, remote infrastructure to be in a better position for future crises, and to capitalise on the efficiencies and practical benefits that some organisations have discovered for the first time.’
In property, Gill reflects, it is the Land Registry’s actions that have transformed key parts of the legal process. ‘The real story for us has been technology,’ she says. ‘The Land Registry decision to accept electronic signatures has made a huge difference, particularly now DocuSign and other software packages can be used. This has been welcomed by clients who turn out to be far more familiar with DocuSign than their solicitors. I think that’s a permanent change.’
On practical technological infrastructure, she adds: ‘At the start of the pandemic it was very obvious which firms had competent IT back-up and which firms hadn’t quite invested in that enough.’
For general counsel, such practical application would seem to match their definition of ‘digital innovation’. ‘For many, Covid-19 is an impetus for digital innovation,’ the Looking Glass report concludes. Thus: ‘Many organisations have swiftly become adept at digital delivery and distribution, and are beginning to appreciate the speed with which their organisations can move.’
Human suffering, and personal and commercial sacrifices do not inevitably lead to positive change that makes sense of what was lost. It is simply that the conviction that a loss ‘must be made worth it’ might lead to change.
Lawyers and the law have an important part to play in such a process. While in politics, trust based on agreed truths, such as the law promotes, may be in short supply, that is not reflected in current corporate priorities, where an increased emphasis on transparent reporting and societal impact are the new order of the day.