Recognize the Gap Between the Strategy Pillar and the Law Pillar

In this segment I want to focus on a big challenge with applying three pillars thinking to business decision-making. And that is the gap between strategy and law. This is the way the three pillars should operate in sync with each other, creating the zone of sustainability. I actually prefer to call that overlap in the middle the zone of competitive advantage. If you can overlap these circles, you have a great chance to achieve competitive advantage over your competitors. The problem is this is not the real world. The problem is that while there’s overlap between strategy and ethics, and between strategy and law, there’s often a gap between the law pillar and the strategy pillar.

Just, for example, with law and ethics there’s a lot of overlap that we’ll be covering later. For example, legal concepts such as fiduciary duty and fraud are very values-laden. They provide great guidance when you’re faced with ethical dilemmas, but that kind of overlap does not exist between law and strategy. Now, there are two big picture reasons. Number one, law is very complex, and it’s misunderstood by a lot people because of complexity. And there are also misconceptions about the role of a lawyer, so let’s talk about each of these. Let’s first of all start with the complexity of law. Let me ask you this question. Let’s say that you have a bad experience with a business.

You’ve purchased one of their products and it hasn’t worked as you hoped it would. And so you go to a website and you complain about the product, you tell about your experience.

You’re very surprised the next week to learn that the company has filed suit against you. Now, what would be the legal basis of that lawsuit, what would you call the theory that they would probably use in suing you? They’re going to claim that your statements about their product were false, that you were lying about their product. So what legal theory are they going to use?

Please hit pause and write down your answer.

The answer is defamation. They’re going to claim that you defamed the company by your misstatements about their products. Now, we’re going to talk about defamation later on in this course. It’s a huge issue when it comes to terminating employees. There’s a huge risk that an employee who is fired will file a defamation claim against the company. But my question here is, just to understand the complexity of law a little bit, defamation is an example of what type of law? Can you answer that question?

And the answer is tort law, personal injury law. And tort law is a part of yet a larger area of law which I’m going to call private law. And private law is a part of yet a larger area of law, substantive law. And now we’re getting to the very largest areas. And here’s a legal road map that I hope will be useful when you’re dealing with the complexity of law in the future. As you can see here, law is divided into two broad categories, substantive and procedural. And these words mean pretty much what they say. Substantive law deals with the substance of the law.

What are the rules and regulations that govern the way you make business decisions, and the way you operate your business? Whereas, procedural law focuses on the legal procedures used to enforce substantive law. As you might guess, substantive law is primarily a concern for people running businesses. Procedural law is primarily a concern for lawyers. How do you file a lawsuit, how do you appeal a lawsuit, what are the rules of evidence during a trial? However, in recent years, over the past couple of decades at least, there has been a movement called the ADR movement which stands for alternative dispute resolution. And as a result of this movement, non-lawyer business leaders have been much more concerned about procedure.

This movement began because business leaders began to ask, why is it that we outsource legal disputes to lawyers in the legal system? We have great problem-solving skills, why aren’t we using these skills ourselves in resolving disputes? And that let to the ADR movement and the development of various processes that we’ll be talking about later in the in this course that can be used to resolve disputes.

Within law firms, I’ve heard people say that ADR has another meaning, which is alarming drop in revenue. However, that’s actually a misstatement, many very prominent and leading law firms are very active in ADR. So we have the two broad categories of law, and then substantive law is divided into two categories called private and public. Now, some people would call private law civil law. I don’t like to use that term because it’s used in other contexts. It’s used to distinguish criminal law from civil law, and it’s also used to distinguish common law countries from civil law countries. So because it has different meanings,I prefer private law.

Private law basically focuses on the law involving individuals and organizations where there’s relatively little government involvement. And the three main categories of private law are the law of contracts, the law of torts, and the law of property. Public law, on the other hand, involves areas of the law where government is deeply involved. We’ve got constitutional law, which basically defines the responsibilities of government and the rights of citizens. And we have criminal law where the public is the complainant, the public in effect is a plaintiff, filing suit against people alleged to have committed criminal conduct. One specific aspect of public law that we will be focusing on quite bit is regulatory law.

And we’ll look at how regulatory law relates to the three branches of government, and how businesses can use regulatory law. So this is, again, a big picture road map of the law. The endpoints in this road map, the six endpoints, constitutional, criminal, contracts, torts and property, are so important that they represent the required courses in law schools around the world. If you are a law student entering law school with a mind of raw clay, in effect, this is the way the clay is molded. What we have here, in effect, is a picture of a lawyer’s brain. If you happen to stumble across a dead lawyer in the your feature, and you dissect him, this is what the brain looks like.

And that’s very important to think about when you work with lawyers because when you bring your business problem to lawyers, that problem will pass through the lawyer’s brain down these paths, and perhaps hundreds of subpaths, until sometimes it seems as though you’re talking at such a level of abstraction that it has little to do with your business problem. Let’s take a simple example, let’s say that you had a great year in your business, and you decide that you want to hold a Christmas party. So, you ask your lawyer, hey, and problems with our party? Well, right away, the lawyer’s going to talk about some of the things we’ll discuss later in the course.

Have you thought about religious discrimination in holding a Christmas party? Have you thought about sexual harassment if you’re serving alcoholic beverages at the party and there’s mistletoe around? Have you thought about respondeat superior, which means liability for employees who injure somebody on the way home? Have you thought about workers compensation for people who might be injured at the party? All of a sudden, you’re going to go down many, many subpaths when you work with lawyers. So complexity of the law is one reason for the gap between law and strategy. The other reason is that lawyers are portrayed in a particular way in the media and in popular culture. We have TV shows, for instance, called LA Law.

Now, other professions aren’t as popular, generally, apart from doctors, aren’t as popular. So we have LA Law, we don’t have shows called LA Accountant. We’ve got shows called Law & Order, we don’t have shows called Cost Measurement and Control. We’ve got Boston Legal, we don’t have Boston Economist. We’ve got Judge Judy, we don’t have Operations Manager Fred. For some reason law has captured the public fancy, both in the media and the popular culture. And what often comes out is that lawyers, basically, are involved in litigation because that’s the most dramatic piece of the law.

Let me ask you this question. When you look at, for instance, federal cases in the United States, what percentage of those cases do you think actually make it to trial? Please hit pause and write down a percentage.

The percentage of civil cases that go to trial in the United States is less than 2%. So despite the media portrayal, despite what you see on TV, litigation is actually a very small part of the work of a lawyer. And a broader look at the work of a lawyer is depicted by this diagram. Lawyers are essential to business in providing advice on virtually every form of business activity, and then certain activities require implementation of that advice. Sometimes if there’s a litigation decision made by business that involves following through with the litigation. But in most cases, it’s so-called transactional work, making sure that the transactions are completed in a way that meets your strategic goals.

Now in completing these transactions, one famous professor, Professor Gilson from Columbia, has called lawyers transaction cost engineers. I think that’s too narrow because it only focuses on one piece of the lawyer’s activity. I think a better term is risk management engineers. The key role of a lawyer is to manage legal risks, and here’s a couple of quotes that illustrate that philosophy. The CEO of a major consulting firm recently said, Our lawyer is the person charged with protecting the corporation and making sure risks are understood and managed appropriately. The lawyer for the New York Giants professional football team said, my goal is best characterized as how to get to yes while minimizing legal risk.

Legal risk is hugely important because recent surveys of business people conclude that legal risk is the top risk concern in business. And another survey by Norton Rose list the specific types of legal risk that you face in business. These are the most common, in order, in sequence. Contracts, labor and employment, regulatory, personal injury, intellectual property and patents, and dispute resolution processes. And we’re going to talk about each of these risks throughout the course. But the bottom line is, because of the lawyer’s emphasis on risk, there’s tension between law and strategy, and the gap between the two pillars. The law focuses on risk management, strategy focuses on value creation. Sometimes this is called risk versus reward.

A famous strategy professor I worked with over the years, CK Prahalad, called it the sour versus the sweet. Some of the executives I work with refer to the law department as the Department of Sales Prevention or the Department of No because of the emphasis on risk management. And in our next segment we’re going to talk about how, given this gap between strategy and law, how you can close the gap in a way that creates competitive advantage