In the last five years, some Brazilian companies became well known internationally due to their involvement in some of the world’s largest corruption schemes.
As contradictory as it may seem, some of the companies involved in these scandals were highly regarded for their compliance rules and/or were listed in the Novo Mercado segment (which means the new market segment) of the Brazilian stock exchange known as the ‘B3′, which has the highest level of corporate governance requirements.
The direct involvement of these companies in corruption scandals of such magnitude put the credibility of the Brazilian companies at stake in the investors’ eyes.
Which institutional investor and financial institution would like to have their names directly linked to companies involved in Homeric frauds and, sometimes, cross-border schemes? Will Brazilian companies ever be able to gain their trust again? Why did they fail to comply with integrity and corporate governance principles?
These are just some of the questions that we have been reflecting upon since the scandals came to surface.
To mitigate the risk of future ‘bleeding schemes’ from happening again, to preserve public resources, and, perhaps one day, restore the credibility of Brazilian public institutions, and trust among foreign investors, the federal government enacted, in 2016, Federal Law 13,303 (also known as the State-Owned Enterprise Law), which is, as general rule, applicable to state-owned, to state-controlled enterprises and to their subsidiaries (state-owned enterprises).
Important best practices in corporate governance that were already followed by companies listed in the Novo Mercado segment of the B3 were replicated and became mandatory to state-owned enterprises, among which were the periodic assessment of managers and the appointment of independent members to the board of directors of these enterprises. At least 25% of the members of the board of directors of a state-owned enterprise shall not have any relation with the enterprise (including as a client, supplier, manager, staff member) and cannot be married or related to (up to the third degree) the chief of the executive power, to a minister of state, to a state or municipal secretary or to a manager of state-owned enterprise.
Compliance rules were also reinforced by Federal Law 13,303 and since then state-owned enterprises are obliged to create and apply integrity programmes which shall be implemented, monitored and supervised by internal auditors, and statutory audit committees.
Despite criticism, Federal Law 13,303 represents a landmark regarding compliance and corporate governance in the public sector.
As corporate governance principles proved not to be sufficient and not to be embedded in the spirit of certain listed companies, in 2017, after an extensive work conducted by the B3 alongside market participants, listed companies, and the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários), a new Novo Mercado listing regulation was approved.
The new listing regulation, which came into force in 2018, reinforces transparency and accountability, and expressly requires the creation of compliance mechanisms and the disclosure of the assessment of the board of directors, its committees, and the executive officers.
In both cases, corporate governance and compliance requirements were strengthened and they are now two sides of the same valuable coin. Codependent guidelines and principles for companies listed in the Novo Mercado and for state-owned enterprises match, as they should have always done.
However, a company’s staff members will not miraculously and voluntarily begin to observe best practices of corporate governance and compliance. Efficient compliance and governance programmes require significant time and investment in constant training, developing integrity programmes, technological resources, monitoring, remediation etc.
The management must do its best to transmit to stakeholders (shareholders, staff members, clients, service providers and suppliers) the company’s values, vision, social responsibility, and corporate governance and compliance rules and principles. The first step a company’s manager must take is to walk the walk and to act as a role model so others feel compelled to follow in their footprints.
Our experience in Brazil proves that if principles are not rooted in the company, and if managers are not looked upon as righteous leaders, corporate governance and compliance programs just become a matter of ‘ticking the boxes’ and ‘just for show’, and, therefore, are likely to be violated.
BDB Pitmans, Irwin Mitchell and Norton Rose Fulbright have been dropped from National Grid’s panel, understood to be worth about £12m a year in the UK. Womble Bond Dickinson is the sole new appointee on a roster that reduced the number of advisers from 12 to ten. Addleshaw Goddard, Bryan Cave Leighton Paisner, CMS Cameron McKenna Nabarro Olswang, Dentons, DLA Piper, Eversheds Sutherland, Herbert Smith Freehills, Linklaters and Shakespeare Martineau have retained their spots. Continue reading “Significant matters – Winter 2020”
It’s not often a FTSE 100 GC and a law firm offer themselves up to the media to discuss a deal. Even panel review stories rarely elicit comment beyond a few contrived lines about ‘innovation’, ‘alignment’ and ‘deeper relationships’. So when BT legal chief Sabine Chalmers and DWF arranged conference calls in the summer to announce a five-year managed services contract, it was difficult to not get caught up in the (relative) excitement. True, BT had spent more than a year assessing dozens of potential providers and DWF was talking up its first major post-IPO client win, but the mood music was quite catchy: ‘Law firms are going through a period of tremendous transformation’ proclaimed Chalmers, ‘It’s an incredible opportunity,’ gushed DWF’s managed services head Mark St John Qualter.
But are they? Is it?
Managed services deals involving transferring staff are far from new, but this was a substantial, multimillion-pound arrangement for insurance and real estate work that saw 40 of BT’s in-house legal team switch to DWF. It is a model GCs often espouse but rarely follow.
Yet it is the direction an increasing number of law firms are expecting and banking on. When Eversheds Sutherland chief executive Lee Ranson recently opened a client function launching his firm’s New Law arm, Konexo, he invoked Hemingway to describe the threat new delivery models pose to law firms: ‘How did you go bankrupt? Two ways. Gradually, and then suddenly.’
The past decade has also seen a boom in new legal service providers and investment, as well as the much-hyped re-emergence of the Big Four accounting firms in law. It is not that long ago that the New Law market was basically a coin flip between Axiom and Lawyers On Demand (admittedly with a bunch of legal process outsourcers toiling in the background generally failing to live up to their early-2010s sales pitch).
But it has gone quiet again over the past six months. The only industry figures who bring up the BT/DWF deal are law firm leaders, with few GCs having even noticed it. And yet there are still predictions of legal departments rapidly shrinking courtesy of a fresh wave of outsourcing, as experienced by other corporate departments such as finance and HR.
As Chalmers notes in the first of IHL’s new series of set-piece interviews with leading GCs, however, law firms will struggle to get the business model to work unless they land long-term commitments from a handful of clients at once. DWF’s competitors on the BT deal, for instance, still argue the firm offered a cut price nobody else could match.
GCs, meanwhile, complain that firms oversell their ambitions and that New Law providers are still too risky for much more than contract lawyer resource. One EMEA law head of a global financial services giant also contends regulators would be ‘crawling all over us’ if they outsourced in-house lawyers.
Outsourcing of staff is therefore consistently hamstrung by law firms requiring immediate scale to build the necessary platform and a lack of partnership buy-in on the one hand, and GCs having little appetite to ship off swathes of their own empires after decades of sustained in-house growth on the other.
For all the ambition of advisers, managed services deals – at least those based on wholesale staff transfers – are destined to be nothing more than the flavour of the month they were once again over the summer of 2019. ‘Innovation’ and ‘alignment’ do so often end up as mutually exclusive.
‘One reason I’m doing this interview is so I can send it to my parents. They’re really important to me. Ah, suddenly, the hard-woman persona crumbles,’ jokes Heather Mitchell, global general counsel (GC) for investments and head of EMEA at The Carlyle Group. Continue reading “Heather Mitchell – The Carlyle Group”
The In-House Lawyer (IHL): Eighteen months in the group general counsel role, what have been some of the key projects you’ve been doing since you landed? The wider business has been through a lot of transformation, how is legal keeping up?
Sabine Chalmers (SC), group GC, BT: When I joined Gavin Patterson was my boss. He’s since left the business and we’ve transitioned to Philip Jansen from Worldpay. During that time the focus has been on learning the company and industry, getting to know and work with a new CEO, new board, my team, and as a result of all that identifying as quickly as possible what the strategic priorities for the function are and how to best support the business. Early on I reorganised my leadership team to mirror the evolving structure of the business, to ensure we had GCs reporting to me that were lined up with each of the business and corporate units: we announced that in June last year.
IHL: How many in the leadership team?
SC: I have nine reports. GC of corporate, Bruce Breckenridge; GC of technology, Chris Fowler; the GCs of each of our business units: consumer, Russell Johnstone; enterprise, Jeff Langlands; global, Liz Walker; and then Openreach, which is a 100%-owned subsidiary, Nigel Cheek, who reports directly to Clive Selley, the CEO, but we have a dotted-line relationship. Initially, Chris was GC of technology and also my head of ops, but given the scale of the technology and transformation agendas at BT, we quickly concluded that Chris should be dedicated to technology and Dave Hart was promoted to director of transformation. In that role, Dave focuses on the evolving opportunities for the function being brought by technology and alternative service providers, talent retention and management, managing our budget, etc. In addition, when our former company secretary Dan Fitz moved to the Crick Institute as their GC, we promoted Rachel Canham from within the legal team, also reporting to me. Lastly, given the strategic importance of data to our business, a new data privacy officer role will be joining the leadership team and we plan to make an announcement in that regard within the next few months.
IHL: So you had the first crack at changing the structure, then tweaked and refined it, how’s it been bedding in?
SC: Well. Phase two of that was working with the leadership team and their direct reports to further align around the strategic priorities for the function and the business and how we want to deliver them. There were a number of areas core to business in which we definitely require deep internal expertise and business partnership – examples of that would be anything to do with telecoms regulation, competition law, data, security, big commercial agreements. We need to build the deep expertise internally and partner with the right advisers externally. And then there are other areas that are less bespoke – for example, certain aspects of litigation, commercial property – where a better way to deliver services and build careers for the talent involved and take advantage of technology and best practices across different industries was to partner with someone like a DWF.
IHL: Did you look at the strategic objectives per business line at first or overall?
SC: We did the two in tandem. It takes time to arrive at the right and thoughtful answers. But what’s challenging is that people in the teams also want speed and certainty. Getting that balance is hard.
IHL: DWF took what, a year?
SC: Yes, mainly because it was a robust [request for proposal] process with lots of different potential providers and ways of doing things. We went through various stages to whittle it down to a shortlist of four or five. We found the right firm to partner with and a home where a number of our people were going to be happy and add value.
IHL: Can you explain what that deal involves?
SC: It’s a five-year managed legal services mandate covering our insurance and part of our real estate work, which has seen 40 of our people transfer to DWF.
IHL: There were some suggestions another chunk of the team was heading over as well?
SC: There were headlines that BT Law – which is limited to our ABS-licensed claims business only – was later acquired by DWF and I think the name caused some confusion, which led people to think that the entire legal function was somehow impacted, but that’s completely wrong. It was always part of the agreement that BT Law would go across to DWF in the deal we announced over the summer. The changes on Companies House that were picked up were simply the final formalisation of the managed services arrangement.
IHL: Lots of change, any particular highlights immediately coming out of that or still ‘wait and see’?
SC: What’s always fun is having the opportunity to engage the wider team. Coming from consumer goods into telecoms, there’s no way I could do this role without really talented people. It’s been fun creating the solutions with them but also having an eye to moving people around to create new career challenges and opportunities. Rachel moving to the co sec role, Dave moving from litigation into the transformation role, Chris building out a technology team – that’s the fun part of this job.
IHL: How have you found learning about a new industry and new company?
SC: The big difference for me from where I came from is that in consumer goods it’s often the case that you land on what the business wants to do first and then legal and regulatory is more about execution. In telecommunications, it’s the other way around, not completely, but you almost always have to take into account the legal, regulatory and policy framework within which you are operating to define the business options and it’s much harder. But it’s also, especially for people in legal, really interesting. That’s how as a team you can add real value to the business by being knowledgeable and creative.
IHL: How does the function need to evolve? What’s next?
SC: I believe that with the way we’ve set up our structure, we’ve got the right mix of deep specialism and people that are physically co-located and partnering with the business. But as the business evolves, we are going to have to continue to change and evolve to keep lockstep with them. If the business priorities change, or we enter into new areas of business or experience challenges in particular areas, we’re going to have to evolve, both in terms of structure and skills, to adapt. We will likely also look at the way we partner with external law firms.
IHL: How much is the DWF deal a sign of things to come in that field?
SC: I genuinely don’t know. One of the big realisations I’ve had, particularly living outside the UK for the last 25 years, is that the market has changed enormously both in the fragmentation of providers and the many different offerings we now have. Therefore, the ‘Let’s have a re-look at the landscape’ is as much about the fact that’s changed, not just because BT’s changed. To ask, ‘What’s out there? What’s on offer? Where are the good people? Where’s the good technology? What are the different ways of doing things?’ It’s not a cost-cutting exercise, it’s about identifying the best ways to deliver, making best use of technology, creating the best career paths for our talent.
IHL: How hard is it to get around all those different providers? You spoke to 26 for the DWF one.
SC: Chris set up a fantastic foundation for that by building his transformation team and they are focused on that agenda. That’s the only way you can do it. Full-time, bringing in new thinking that challenges the status quo.
IHL: How big is that transformation team?
SC: There’s seven.
IHL: When we spoke at the time of the DWF deal you said this was the direction of travel and you’d expect other companies to do this sort of thing. How high are your expectations for those providers over the next 18 months?
SC: It’s going to be interesting. It used to be the case that the big law firms kept doing what they were doing and then you had a handful of alternative providers who were offering managed services or different bespoke services, often with a lot of offshoring. What’s interesting now is virtually every good law firm is at least looking at this for, if nothing else, to identify pockets of new growth. The only way the business model can work for some of the larger law firms is if they get scale and the commitment of a sufficient number of clients that are going to provide volume. A really interesting evolution would be if the top firms can bring together a consortium of, say, four or five GCs that say, ‘We’ll give you the work’, so they can build the platform and make the maths work, and then also provide the quality that only a big law firm can bring.
IHL: They’re very different business models. Eversheds Sutherland recently spun out their alternative services arm, do you give much to the idea of it needing to be a separate entity that can have its own strategy and investment or can it operate in the law firm environment?
SC: It can operate in the law firm environment. It’s a bit like the successful consumer goods companies, right? They have their luxury, premium end of the business that works in a particular way, but they also have the high-volume core business. At the end of the day the totality provides the customer with a broad range of products. The law firms that crack that nut and can come to a GC and say, ‘I can partner with you to solve multiple problems for you’, will do well.
IHL: Do you see much of that thinking from law firms at the moment?
SC: Not yet, but I’m sure they’ll get there. If you look at the way the world and the legal market has evolved, there are loads of talented lawyers who at some point in their career just need a different sort of flexibility: where they live, when they work… They lend themselves to different models of legal service delivery.
IHL: But you could see a consortium of maybe four or five GCs coming together…
SC: Consortium’s the wrong word. Maybe a law firm aligning four or five anchor GCs, who say ‘we’ll try this for five years’ and building over time the confidence that the model would work.
IHL: It does feel like it needs that tipping point or more momentum before this happens. Have you spoken to other GCs about this?
SC: No, this is an idea I had in the bath. I do get asked by law firms for my thoughts on this kind of thing and it came to me that to make the maths work they need the volume, right? But they are probably approaching it the wrong way around, by starting small to building from there. It would be interesting if you did it the other way around and went to four or five GCs and said: ‘Look, we’re thinking of building this, will you come?’
IHL: You mentioned talent retention at the start, is it something you’ve been looking at?
SC: There’s a lot that’s being done by BT as an organisation around leadership and development and we’re therefore just ensuring that we are putting folks from the legal and co sec team forward to take advantage. Within the legal and co sec function, Jeff Langlands’ team always manages to knock the ball out of the park on our annual engagement survey. He’s very thoughtful about it.
IHL: He’s a nice guy.
SC: He is leading the charge for us on talent, being clear about the different building blocks you need to have in a career. In my experience, it’s not about just getting successive promotions, it’s about getting that variety of experience so you have a well-rounded career. So, it might be making sure that folks that are in one business unit, say consumer, also get some B2B or corporate unit experience at some point, or a different legal qualification or language.
IHL: What about introducing non-legal professionals in some way?
SC: We have the mix that you’d expect of paralegals, new graduates who may want to become lawyers, obviously, the transformation team has a good mix of analysts and tech experts. At BT, because we have such a broad range of skills across the business, often rather than building it within the team, we harness the rest of the organisation.
IHL: What are the differences you’ve noticed between the US and UK markets?
SC: When I left the UK in 1995 and moved to the US I was shocked and, frankly, pleased at the relevance and stature in-house counsel had in the US. Company GCs that did not report to the CEO or form part of the executive team were in the minority. A lot of that was driven by the litigation environment and regulation but also it’s just a country in which lawyers have forged careers in business, in politics, in many fields. The UK is not quite where the US is and maybe it never will be, because the litigation environment is so different, but the gap has definitely narrowed.
IHL: Is that just because it’s had to?
SC: The world’s become a much more global place. I’d like to think it’s not just, ‘Oh my gosh, there’s many more lawyers in senior positions just because we need them’, but it’s because the profession is showing we can add value in many different ways.
IHL: What are the downsides to that? How does it evolve further?
SC: It’s great when people get moved around and have different challenges. In terms of the teams that I’ve worked with and had the privilege to lead, some of the proudest moments are when members of the team move outside the function into M&A or finance or general management. That trend will continue. But a lot of lawyers like being lawyers.
IHL: How far has legal technology come in the last few years and how much impact do you expect it will make?
SC: The GC is sometimes the worst person to ask that question because they’re so far from what the technology’s actually doing. There is a dizzying array of potential solutions out there and you can fall into the trap of investing in technology for technology’s sake. It’s important to be thoughtful about what is going to make peoples’ lives easier, are they going to embrace it, and what training are you going to have around it? The great thing about the partnering with DWF and others is they’ve tried and tested heaps of technology.
IHL: And they have dedicated tech budgets as well?
SC: Exactly, which would never make sense. If there’s a choice between putting the pounds behind our network and serve customers or some new piece of tech for the legal team, I know where the money will go.
IHL: What are the goals for the next 18 months?
SC: First, making sure that the team is ready to support the four or five key business challenges/opportunities that our CEO and ex co want us to address. Second, continuing the work on talent development and nailing succession planning, while third is getting the model of external partnership right.
Hamish McNicol
At a glance Sabine Chalmers
Career
1987-93 Associate, Lovell White Durant, London 1993-95 General counsel, Guinness, London 1996-99 General counsel, Guinness/Diageo Latin America, Miami 2000-01 General counsel, Diageo International Markets, Miami 2002-04 General counsel, Diageo North America, Connecticut 2005-08 Chief legal officer and company secretary, InBev, Belgium 2008-17 Chief legal and corporate affairs officer and company secretary, Anheuser-Busch InBev, New York 2018-present Group general counsel, BT, London
BT – key facts
Size of team 340 External legal spend More than £40m annually Preferred advisers Allen & Overy, Bryan Cave Leighton Paisner, CMS Cameron McKenna Nabarro Olswang, DWF, Freshfields Bruckhaus Deringer
Matthew Scully, Clifford Chance: There are two things that I wanted to touch on: first, whether there is such a thing as a good culture – I would say there is no one good corporate culture for all businesses but there are perhaps some basic common features – and, second, the notion of ‘tone from the top’, which is very important but it is not enough because culture has to be embedded. Why are we discussing it around the table here as a bunch of lawyers? We can inject common sense and pragmatism into the debate and to help people understand that the difference between right and wrong is not just what is legal and not legal – sometimes there is something that is legal but is a really bad thing for the business to be doing.
Mark McAteer, The In-House Lawyer: Is there such a thing as a good corporate culture?
Stephen Lerner, Three: Corporate culture is not about what is right or wrong legally. It is a unifying view as to what your company stands for and what employees get behind. If they believe in what you stand for, that engenders trust and that trust will then lead to a positive environment where risks will be escalated and people will feel confident in reporting. If you do not have that trust culture, you have bigger problems than just legal compliance and having your company fall in line with your appetite for risk. Those are all things that are in the purview of general counsel generally but they do not drive corporate culture.
Mark McAteer: Are we talking about the role of the GC as a gatekeeper of corporate values?
David Eveleigh, Serco: You cannot just have the GC as being the go-to person for working out whether culture is good or bad or indifferent. It is definitely not a legal issue. You cannot impose culture by way of regulation or law. People have tried and not necessarily been successful. They are starting to get it a little bit now with things like s172 [of the Companies Act] but, if you look at what is coming out around the culture of a company through ESG [environmental, social and corporate governance], it is all from a very different driver than the law and regulation. Therefore, if it is placed at the GC’s door, you are going down the wrong route because, just handling it as a legal issue, you are not going to get to the culture of the business.
Roger Leese, Clifford Chance: It is interesting now that there is this move to try to increase the relevance of s172 through this new mechanism, which seems to be the way in which this government thinks you can bring in good practice, by forcing transparency through reporting. As the lawyer what I see as the legal risk, for instance, is the gap between what a company reports and what is happening or what happens in the future.
Chinwe Odimba-Chapman, Clifford Chance: Is there a risk that companies that have too strong a purpose and direction do not create the right culture for employees and stakeholders if people who do not necessarily agree with that purpose feel they cannot speak up?
Matt Wilson, Uber: We used to have 14 cultural values at one stage, which is a few too many. There are now seven and they are very different. Some of those older cultural values included ‘principled confrontation’ and ‘toe-stepping’. Toe-stepping was meant to be this cultural value where you could challenge anyone else but it was weaponised and used as an excuse to be a bit of an arse. People said, ‘I am just toe-stepping’. ‘No, you are not. You are clearly being an arse.’
I became really interested in our corporate culture as a GC, and like to think I have played some small part in helping to influence it positively over the last few years with the rest of the leadership. It absolutely means complying with all of those technical things, whether it is equal pay or tackling modern slavery, but having the right culture also means lowering the risk for the business generally so you will have fewer problems. It will lead to the business making the right decisions and being an inclusive workplace where people are able to challenge power or what they see as a hierarchy.
Stephen Lerner: I do not think it is a question of having too strong a culture; it is having the right culture because, essentially, you want to have high levels of employee engagement. That is how you have high-performing companies that are aligned around a unified purpose. If you do not have the right people at the top, it has such a disproportionate influence on everybody else in your organisation. General counsel broadly have a huge influence on the organisation. If we are not aligned to that way of thinking and we act as the policemen of the business, we are not going to have the influence we need.
Mark McAteer: Is culture also linked to the business cycle? You may have the best-intentioned CEO in the world but if you are not turning profit, the message from the top changes.
David Eveleigh: Is it sustainable to have a culture that adapts to where you are in the market? I would worry because I have been in a company that has been through quite a cycle. I came in at the bottom part of it and there were issues. Did that drive the right kind of behaviours? While certain things might be very important to one of the stakeholders – the shareholders – long term they may not be sustainable and it can lead to some poor behaviour. It needs strong governance if that is a driver but the governance is really just a ~defence mechanism for a culture and, if the culture is not right, that is challenging.
Matt Wilson: We have heard about cyclical businesses and I can recognise some of that but I know, from my experience, that if you do not fix things for the long term with some level of baseline or north star that people can come back to, it causes problems.
“When a business is not going so well a GC can push home the message that it is not business at any cost.” Kate Danson, Johnson Matthey
Hannah Hullah, John Lewis Partnership: The John Lewis Partnership has a very clear purpose, which revolves around being a better way of doing business and having a happy and motivated workforce that puts customers first. The challenge is how to provide clarity around how this is achieved. As a co-owned business that encourages empowerment of our partners by involving them in decision-making and how the business is run, this can have unintended consequences. There have to be boundaries and support so that partners can be genuinely empowered to deliver the partnership’s purpose. Tone from the top is key to setting these. As widely reported, we are restructuring the partnership and embarking on a significant period of change bringing our two brands closer together, which is a big cultural shift. However this will, ultimately, ensure that we can continue to deliver against our purpose.
Stephen Godsell, Guardian Media Group: At The Guardian, we have an endowment fund, designed to support the long-term future of The Guardian, created out of the proceeds of previous disposals of non-core assets. The fund is committed to socially-responsible investment and alignment with the values of our organisation.
There is an increasing focus in the market on ESG investing – how investments can be made to generate long-term returns while still being in line with high ethical standards.
Roger Leese: There may be a couple of different strands to this. One of them is really about what we mean by culture. Cultures certainly ought to change and mutate as you go in certain directions. If you are in a start-up, you need to be in the business of taking risks, whereas if you are an established business with thousands of employees, you are stable and you have a different culture. There is also the other part of culture, of course, that is about people doing the right thing and not breaking the rules and not creating risks for the business, which ought to be a core that stays the same throughout the cycles.
“You have value statements and codes to help shape corporate culture but culture is very much shaped externally as well.” Nick Havers, Marsh
Mark McAteer: Isn’t this about communicating the message that doing the right thing can also be profitable?
Kate Danson, Johnson Matthey: That goes back to the point that, when times are tough, your culture goes downhill. When I think about culture, I often think about it being something much more long term. But when the rubber hits the road, what happens when a business goes through tough times?
Matt Wilson: Do you think part of the role of the GC is to provide some balance to that trade-off between short term and long term?
Kate Danson: Absolutely. Let us be clear that it is not just the responsibility of the GC alone, but one of the things that a GC can try to do when a business is not going so well is to push home the message that it is not business at any cost and make sure this message is coming right from the top as well, because it is then that people are more likely to make rash decisions to push the envelope further because they want to meet their targets.
James Sullivan, Monzo: Absolutely, and it is a dynamic thing. It is not static. As an early-stage company we’re still on a path to profitability but we have a very strong focus on culture.
Nick Havers, Marsh: You have value statements and codes to help shape corporate culture but in my more recent experience, culture is very much shaped externally as well. Like many of the industries represented here, we are regulated. The regulator’s gaze does inform our culture. We might like to present that it is what it is, but the regulator’s lines of enquiry do permeate through and determine the way that we present ourselves on culture as well.
The other externality is M&A activity. We have just gone through a large transaction and there are perceived to be slightly different cultures in the two businesses, and that brings an opportunity through integration to change a little by taking the best of two different cultures and blending them together.
Rupert Hopley, Informa: We have been very busy in M&A over the last few years. One of the biggest integration challenges to create a successful acquisition is bringing together two cultures.
I would point out the differences in cultures not only relate to the businesses themselves but the different country and local cultures they operate in. Those differences come in many ways even at the top of a company, where the corporate governance culture in US companies is different to UK corporate governance. A basic example is how our governance requirements focus on the independence of the non-executive directors and ensuring they do not stay on a board for too long. Similarly the chair’s independence and separation from the CEO role is a strong part of our governance. Our chair’s ability to create a collegiate and engaging atmosphere has helped our executive team take advantage of the knowledge and expertise the NEDs bring to the table. In turn, the chair and NEDs make sure that the goals that have been set and agreed at board level are being delivered in the right way and in the right culture for the organisation, so as to facilitate growth.
Mark McAteer: Can you effectively measure that?
Nick Havers: There is a fine balance. You have those measures, particularly in areas like whistleblowing incidents and customer complaints, for example. If you have none or you just have green RAG ratings, it may be too good to be true; and if you have too many red flags, you appear to have a bad culture. I am not trying to game the measurement but there can be this perspective, for example there have not been any whistleblowing incidents in the last quarter. That may not be accurate or the right indicator. Is the whistleblowing line well publicised, for example?
Mark McAteer: Chinwe, is the right information filtering through when the in-house function does this due diligence on people issues?
Chinwe Odimba-Chapman: In most areas where GCs are asked to advise in relation to regulation, law, etc, the rules are fairly clear. You know what you have to do to keep on the right side of the line. The concern I have with this real focus by the financial regulators on culture is that they find it very difficult to define what culture is. Therefore, how are you, as GCs, meant to go into your boardrooms or to your CEOs and say ‘we are doing everything right’? David, you talked at the beginning about the tick-box approach of the regulator being, ‘Do your s172 statement. Do your gender pay gap reporting. Make sure you choose one of three options for workforce engagement under the Corporate Governance Code.’ You can do all of that and you can say to your board or CEO, ‘We are doing everything,’ and it does not matter. You can have your whistleblowing hotlines and employee surveys but you just need one thing to go wrong and the way that you deal with that wrong thing can make the regulator say, ‘You do not have the right culture.’
David Eveleigh: If you are presenting to the board and that is the only time the board meet you, that is not ideal. If the people on your board are not out in the business on a fairly regular basis, unchaperoned, it is very hard for them to get any sense of the business other than what you have told them.
Rupert Hopley: That said, there is a balance to be struck, as they aren’t employees and may not have the time to be in the minutiae of everything going on in the business. With some of the issues that came out in your sector, it may be great to talk to the person on the ground doing the day-to-day job but, from what I have read, the issues have arisen in the contracts and obligations that people have signed up to. You may well have a challenging sales culture where getting the deal signed is key but the individuals may not know, or understand the nuances of what is being committed to by the company, and the risks that are being taken on. So if that is where the risks arise, closely managing those parts of the business and the localised culture are as important as setting the tone from the top.
Your role in those circumstances is as much as a member of executive management as it as a lawyer. Sometimes being a lawyer and simply giving advice isn’t enough; you are sitting in that room and can influence the decision making, so have a voice at that table.
“Your role is as much as a member of executive management as it as a lawyer. Giving advice isn’t enough.” Rupert Hopley, Informa
Matthew Scully: If that is not done then, you end up with situations where you have rotten apples inside the organisation. A lot of the things we have seen giving rise to massive investigation and litigation risk have come from situations where there is a nice message at the top and it is not just implemented properly because people within the organisation are incentivised to do things other than what senior management is telling them they should be doing.
Mark McAteer: Thank you all very much for your contribution.
Participants
Kate Danson, general counsel, group, Johnson Matthey
David Eveleigh, group general counsel and company secretary, Serco
Stephen Godsell, general counsel and company secretary, Guardian Media Group
Nick Havers, chief counsel UK and Ireland, Marsh
Rupert Hopley, group general counsel and company secretary, Informa
Hanna Hullah, director – legal, John Lewis Partnership
Stephen Lerner, general counsel and director of regulatory affairs, Three
James Sullivan, VP legal, Monzo
Matt Wilson, EMEA general counsel, Uber
Roger Leese, partner, Clifford Chance
Chinwe Odimba-Chapman, partner, Clifford Chance
Matthew Scully, partner, Clifford Chance
Mark McAteer, managing editor, The In-House Lawyer
There is a long-established truism among white-collar crime lawyers that when a country goes into a recession, financial crime rises to the surface. And with various reports suggesting Brexit uncertainty and low business confidence could tip the UK economy into a downturn, those specialists are predicting more work will hit desks soon.
Alex Novarese, The In-House Lawyer: It has been a record period for Asian activity into Europe. How do you see the general trends?
Abhijit Mukhopadhyay, Hinduja Group: China is an issue, because the main difference between the Asian companies, European companies and Chinese companies is that Chinese companies are directly or indirectly state-owned.
The second part of the story is their motives are under question. That is why you find in Germany the government putting up new rules. In Britain, it is looked at with suspicion and we are seeing what has happened with the London Stock Exchange [recently subject to a bid from Hong Kong Exchanges and Clearing].
Roger Barron, Paul Hastings: We talk about the trade wars. One of the ideas coming out is that the Trump administration is forcing people to not do business with certain entities. It feels there is a political side of things even before we get to regulatory hurdles.
Samantha Thompson, Anglo American: There are now more factors feeding into whether to do a deal. One of them is reputation and that includes the reputation of the counterparty. If you have to go to a shareholder vote, to what extent is reputation a factor? If we were to think of selling a big asset, a mine, for example, we would have to think long and hard about who the counterparty is because…
Roger Barron: … stewardship.
Samantha Thompson: Exactly, it’s not just about the money. It is about sustainability and governance – reputation. Even if you had a counterparty with very good sustainability and other credentials on paper, if it is complicated by the politics of whichever country, it just makes it a harder environment to get the deal done.
Alex Novarese: What would be the red flags for counterparty risk?
“It is a question of trust. So the client can accept not to understand every piece of a certain regulation but that you can manoeuvre him through it.” Regina Engelstaedter, Paul Hastings
Samantha Thompson: Reputation overall, environmental record, track record with communities and employees, not having a proper plan for running the asset… You have to do a lot more due diligence up front about how things are going to be run after you have exited, whoever you’re dealing with.
Paul Harvey, Arma Partners: How do you do due diligence on counterparties?
Samantha Thompson: You might use a law firm. You would use an environmental firm. There are other specialist firms if you have concerns.
Alex Novarese: Are there any other kinds of businesses or sectors where people are particularly concerned?
Parminder Nahl, Wyelands Capital: Industries where IP is a key asset. This certainly seems to be one of the key things that Donald Trump has sought to highlight in his statements about wanting a revised trade deal with China.
Roger Barron: There is a question as to at what point does concern for infrastructure and defence stray into paranoia? You find chips in all sorts of things from fridges to toys. The UK changed their rules and are looking at their ability to intervene in general areas of critical infrastructure. That is happening in Europe too.
That was a time when Europe generally was very open to business. We then had a period when the Cameron/Osborne government were very much encouraging of investment from Asia more broadly and China in particular. We now have strayed from concerns of national security arguably into potential paranoia. Discuss.
Regina Engelstaedter, Paul Hastings: It started with IP. This was the core interest of Asian investors and major concern of governments at the beginning. Today, only very few industries are excluded. Next to IP, it is tech and it is infrastructure. Data has now become a hot topic as well, including privacy of data and data technology.
Abhijit Mukhopadhyay: Over the last 30-35 years, you see a pattern going on. [Chinese companies] have acquired almost all the energy assets in many parts of the world, Africa as well as Latin America. There is a fight going on between India and China on how to acquire which assets, especially the energy assets. [Chinese firms] have acquired a lot of metal exchanges. Now, they are trying for the London Stock Exchange. Half of the major infrastructure here is owned either by the Qataris or the Chinese.
Natalie Salunke, Fleetcor: I find your comment about investment decisions being driven by the acquisition of knowledge rather than purely economical echoes my perceptions. We are seeing that countries are ‘empire building’ in a different way to the past.
Abhijit Mukhopadhyay: It is economic control.
“In the UK, the willingness of government to intervene in deals is often swayed by the general mood of the country.” Samantha Thompson, Anglo American
Natalie Salunke: Yes, the empire of knowledge. What I find interesting is the more passive roles of some investment versus your perception that it is a much more active relationship because it is not just a monetary value.
Neel Malviya, Moelis & Company: In late 2015/2016, we worked on six US public M&A deals involving Chinese buyers in a 12-month period. Every single target company had a technology/IP slant and the Chinese buyers were very purposeful about what they were trying to do. Once President Trump was elected, Chinese rules on outbound investment changed and our team suddenly had to reinvent what they did.
Roger Barron: Same here. When the Cameron government handed over to May, there was a definite change of approach. Sonya, what are you saying to your clients?
Sonya Rogerson, Bank of China: People have mentioned trade wars, but there is a very good opportunity here in Europe and people recognise that, despite uncertainty with Brexit. People are being very active in the market, at least in asking lots of questions and scoping for acquisition targets. Certainly, there is a bit of distrust, but it is just [an issue] of education and understanding that there are huge opportunities. People have to be smart about how they partner with the Chinese, understand the differences and try to make it successful.
Alex Novarese: What are the general mistakes that can creep into the process when you have large Asian companies bidding for European assets?
Neel Malviya: When we run sell-side M&A processes, the ease with which deals are done these days is very different to two or three years ago. Every deal is harder to do now. The perception with Chinese buyers seems to be that, while they may be prepared to pay a higher headline price, deal certainty is not there. Frankly, the right advice to the client on the sell side is to consider all bidders, not just the highest bidder. People are often much happier to take the slightly lower bid in exchange for deal certainty.
Roger Barron: We are advising parties on both sides so we find the same issues, whether you are on the buyer’s side or the seller side; basically you need to make sure you are facing up to these concerns early on.
Let us say you are buying in the UK. If you know you are going to have an issue, you go early to the local government authority. You explain it and present your solution to the seller’s side. You cannot just take it at face value. You have to show you have the solution.
Pricing is interesting. I have seen that going both ways. I do not necessarily think there is an execution premium people are willing to pay. What we are advising people is to very much cover that issue off early. Do not leave that to a negotiation on the sale and purchase agreement.
“Governance generally has improved massively across the developed world.” Roger Barron, Paul Hastings
Samantha Thompson: When I was advising Asian clients looking to invest, particularly into the UK, the Takeover Code could throw them completely. ‘What do you mean, “The spirit of the Code”?’
Roger Barron: ‘What happens if you break it?’ Yes.
Samantha Thompson: Exactly. Even when you have gone through that, the concept of what you say to the media, even if it is in your home country, impacting what you can do in the target country is really difficult to manage.
Alex Novarese: Is there any particular way to mitigate confusion around the Takeover Code?
Regina Engelstaedter: It is a question of trust. It is important to establish a really good professional relationship to the client so the client can accept not to understand every piece of a certain regulation but that you can manoeuvre him through it.
Samantha Thompson: The financial adviser can be key.
Roger Barron: You asked an interesting question at the start: ‘Are different types of buyers changing governance and regulation for the future?’ I am going to put it out there as a thesis that the standards of governance and transparency are such that it is no longer good enough to have this middle guy who will sort everything out for you.
Abhijit Mukhopadhyay: Completely true.
Roger Barron: I do not think there will be wholesale changes in powerful countries or players changing regulation. That is not to say they will not have input because the law and the regulatory practice changes all the time by consultation. But I do not think you will find a single player you can strong-arm into it.
Parminder Nahl: Does that point to the fact that, because there is a lack of certainty in who you are dealing with, that stops the potential [deal]?
Roger Barron: That is certainly what people think, but over time will surely increase the level of certainty and the degree of trust you can have in a process because it’s no longer contact based. It is more rules based.
Parminder Nahl: If you draw the analogy to Japan when it was going at a great pace in the 1980s and early 1990s, presumably there were the same concerns about that kind of M&A?
Alex Novarese: Yes, even just looking at the popular culture of the day, there were fears of economic nationalism.
Roger Barron: Governance generally has improved massively across the developed world.
Alex Novarese: Are people expecting resistance in Europe to build up? Will there be more barriers thrown up to Asia bidders?
Parminder Nahl: We are probably getting a wave of protectionism. Certain deals will go through and no one will know about them, but the big-ticket stuff, deals that are going to be on the front page, may meet resistance.
Roger Barron: Do you sense a change [in Britain’s takeover policy]? With the Cobham deal, Advent are a respectable US house [the US private equity firm this year bid for defence group Cobham]. Do you think that would have been reviewed three years ago? I wonder.
Samantha Thompson: In the UK, the willingness of government to intervene in deals is often swayed by the general mood of the country. At the moment, there is more willingness to intervene in part because there is this growing protectionist sense in the UK, given what has been going on for the last three years. There is also counterbalance where industry needs investment. If the car industry needs investment, the government recognises: ‘We may need to look at other options.’ [But] it is not necessarily a rational or predictable distinction.
Alex Novarese: You have just described the dynamic in which we are likely going to have two forces in direct opposition in Britain for probably the next 50 years.
Abhijit Mukhopadhyay: There are more nationalist governments coming in different parts of the world. This kind of government and the leaders that govern, for example Trump, will always try to play the protectionist part to a great extent. It is happening in many countries. It is not only political. It is more of a so-called nationalist approach. It happens especially in Asia.
Parminder Nahl: Having done less inward M&A into China, how easy presently is it to get away?
Roger Barron: [China’s] antitrust authority is famously involved, very sophisticated and often the very last one in a process involving lots of antitrust authorities. I have done deals in a whole bunch of countries around the world. No one is, as a country, especially difficult. They all have their individual issues.
Alex Novarese: So where would you put doing deals in China on the spectrum in terms of just overall challenge?
Roger Barron: M&A is less tried and tested, because of history and the economy. Sometimes on transactions, you may have to spend a little longer on those earlier steps. A lot of everything that goes wrong in deals is a misunderstanding, whether with each other or with the underlying factors. Creating clarity on what needs to happen is the main thing.
“It is about investing in human relationships and acknowledging that Asian companies still place a lot of value in that.” Natalie Salunke, Fleetcor
Paul Harvey: [I have heard it said that] Chinese firms do not pay sell-side adviser fees. I am curious: do they pay legal fees?
Alex Novarese: It is often claimed that Chinese clients pay better rates to Chinese law firms and advisory houses than Western equivalents. How scientific that claim is, I cannot say.
Roger Barron: You have a pretty good view across the board in your position.
Alex Novarese: I have heard it from so many people, there must be something to it. In the European collapse of King & Wood Mallesons, late payment or write downs for the European side of the business [from Chinese clients] was one of many contributing factors.
Sonya Rogerson: Doing M&A in China, you need a different mindset. How you are going to do it is going to be different than in any other country. Successful M&A is thinking long term and building trust. Most successful British or Western companies that have done it have been investing in those relationships over ten or 15 years before they have then executed the M&A strategy, whether an acquisition, a joint venture or starting through alliances. There is a lot of sophistication in the Chinese market, particularly with advisers. Some of the fees the lawyers are getting paid are much higher than they are here in the UK so I do think the market is increasing in sophistication. Western boards need to understand that M&A is just done differently. What would be a Western risk to a Western company may or may not be the same risk. They are coming at it from a completely different perspective.
Roger Barron: A related point on that in terms of knowing: if you are a Western counterparty dealing with a Chinese counterparty, is there a question about knowing who your decision-makers are? I have heard that a few times with people saying, ‘I think I’ve been negotiating with the wrong person’.
Sonya Rogerson: It is quite unlikely you will know who the decision-maker is in all circumstances. It is about access, being patient and not necessarily making your returns as quickly as you might want.
Roger Barron: Just in terms of the payments world, is that something people run into: trying to second guess where the Asian buyers are coming from?
Natalie Salunke: For us it is more about simple economics. The targets in our pipeline just aren’t going to draw the returns we would expect so we are biding our time. It is more about investing in human relationships and acknowledging that this part of the world still places a lot of value in that. The American way may be a lot more process driven, but that doesn’t always work here. There is still this arrogance that, if you want to play with these guys, are you going to play their game or are you going to be the dominant party? If you are arrogant, you are not really playing the game so why would you come out winning?
Alex Novarese: It is interesting that the vastly differing timelines of certain state-owned Asian businesses and the short-term decision-making in public companies in many Western companies is one of many factors causing tensions.
Roger Barron: That is a really good point, whether it is family wealth, state-owned enterprises or government-backed business. Although there are many opportunities that being a listed company will bring you, they also do have advantages in what they can do too.
Alex Novarese: Perhaps we could spend a few minutes exploring opportunities of European and Asian investment back and forth.
Abhijit Mukhopadhyay: Brexit is creating a lot of uncertainty. In the Asian world, there is the India/Pakistan conflict. We are global investors. Geopolitics plays a very important role for us. If the geopolitical stability is not there, there is a big problem.
“We have to assess what price we are willing to pay to get access, because there surely is a price.” Parminder Nahl, Wyelands Capital
Parminder Nahl: There is opportunity because while some industries will still have the same issues about IP, there are other investment avenues that may not be impacted as much. This will largely be dependent on whether what evolves politically is genuine protectionism or paper tiger protectionism. We all know that there are huge opportunities. It is just getting a balance in a way that all parties are comfortable with the risks and rewards of doing business.
Some of the challenge arises because the Chinese do not presently need foreign investment as much as other countries. They have the cash whereas other jurisdictions want foreign investment and are more inclined to change their rules to match whatever they think is the common standard.
Alex Novarese: So the normal leverage is not there.
Parminder Nahl: Exactly. How do you then do that? It is just a longer process. As China’s role in the world changes they will need to reconsider how they interact with the wider world and it is conceivable that it may be in their interests to protect IP rights as they move up the value chain.
Until then, we have to assess ourselves what price we are willing to pay to get access, because there surely is a price. If you are going to do a deal in America, you have to accept that.
Roger Barron: The cause for optimism is the increasing understanding of how to execute those deals. The more people do those sorts of things, the uncertainty or room for misunderstanding dissipates. You will find that will happen too with the internationalisation of advisers.
Neel Malviya: The importance of joined-up thinking has never been more apparent. We do a lot of deals with Asian counterparties and having the wisdom in each continent, and being able to join up, is the difference between getting deals done and not getting them done.
Roger Barron: That is absolutely right. We have all been at negotiating tables where there has been a simultaneous translation going on across the table. That can be a barrier, but you get the people engaged, have some humour through the translator to the other side and, all of a sudden, the room starts melting.
Alex Novarese: Thank you all for your time.
The panellists
Paul Harvey, group business development director, Arma Partners
Neel Malviya, general counsel, EMEA and APAC, Moelis & Company
Abhijit Mukhopadhyay, president legal and general counsel Europe, Hinduja Group
Parminder Nahl, general counsel, Wyelands Capital
Sonya Rogerson, general counsel/head of legal and compliance, Bank of China (UK)
Natalie Salunke, European general counsel, Fleetcor
Samantha Thompson, M&A and corporate legal head, Anglo American
Roger Barron, partner, Paul Hastings
Regina Engelstaedter, partner, Paul Hastings
Matthew Poxon, partner, Paul Hastings
Hamish McNicol, corporate counsel editor, The In-House Lawyer
Alex Novarese, editor-in-chief, The In-House Lawyer
Alex Novarese, The In-House Lawyer: How well do employment lawyers and the legal teams inside in house operations generally work with the HR department?Continue reading “Change is the only certainty”
Starbucks has a fundamental business tenet that we are creating a welcoming place for all people, and that means inclusion and diversity is critical to our success. We provide inclusion training and tools to managers to ensure we are preparing all leaders to foster a diverse culture based on merit. Continue reading “Different strokes”
Two ear-piercing siren blasts ring out across the Canary Wharf HQ of fintech unicorn Revolut.
‘May I have your attention please! Fire has been reported in the building! Please listen for further instructions.’Continue reading “Applying the brakes”
IHL: How hard is it to get around all those different providers? You spoke to 26 for the DWF one. 
