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Robert C. Bird, "Legal Knowledge in Organizations: A Source of Strategic and Competitive Advantage" (Cambridge UP, 2025)
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- [00:00]
A
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- [01:07]
B
Welcome to the New Books Network. I'm Alfred Marcus, professor of Strategy and Technological Leadership at the Carlson School of Management, University of Minnesota. On this program, we will explore, as we always do, the intersection of strategy and ethics, how businesses pursue advantage while navigating the moral and the legal dimensions of their choices. Today, I'm speaking with Robert C. Byrd, professor of Business Law and the Eversource Energy Chair in Business Ethics at the University of Connecticut. His new book, Legal Knowledge in Organizations, argues that law is not just a constraint, but a powerful, underused source of sustainable competitive advantage when approached strategically and ethically. We'll explore in this podcast how firms can move from compliance to transformation, and why legal knowledge needs an ethical backbone. So welcome. Robert, let's start off by having you tell us about your academic journey and what led you to focus on the intersection of law, business, and strategy.
- [02:27]
C
Sure. Glad to be here. I've had a long interest in how organizations works, and ever since high school, I was interested in business. There was a time when I thought I'd be working on Wall street after my graduation from college, but I also had a strong interest in justice and fairness. And so I had these two competing interests. One in the interest of how an organization worked and how commerce was able to span the globe and provide so many goods and services to people. But I was also interested in. In concepts of right and wrong. And when I graduated from college, I went to law school, and I graduated with a law degree and an mba, Keeping law and business firmly in mind. These were my disciplinary interests. And strategy was the glue that brought these disciplines together. And I've been pursuing that interest ever since.
- [03:14]
B
Fascinating. I see that you have a Jesuit education, and how did that shape your ethical perspective on the law? It shaped it quite a bit.
- [03:24]
C
I have seven years of Jesuit education, four years at a high school called Fairfield College Preparatory School, and three years at Fairfield University. Jesuit education gave me a strong sense of justice and fairness, and I think that's where my perceptions about justice and obligations in service to others really evolved. Back in the 1980s and the early 1990s, liberation theology was prominent, and that focused on justice for the oppressed. The oppressed. And it was taught then, and it certainly made an impact on me. When I graduated from a Jesuit university, I felt a commitment to making a difference in a positive way. And even at that time, my time at Fairfield University, I was thinking about how law and business could work together and how business could be a force of good in the world. My undergraduate honors thesis was about the deforestation of the Brazilian rainforest. And instead of simply arguing that to stop clear cutting, which is causing all kinds of problems for the environment, but I look to identify ways that the rainforest could be used commercially while still preserving it as a valuable ecosystem. So even then, I was looking for the common ground between commerce and justice, between business and values.
- [04:37]
B
I also see that in your chair, there's a title of energy, and that's something I've explored a lot in my research. Could you elaborate a little bit on. On, have you done research on energy sector or energy law also? Is that part of what you've done, or is that just part of the title, which is also. Okay, it's a little bit of both.
- [05:00]
C
It's a lot of. It is the title. I received the chair in 2012 as being the Eversource Energy Chair in Business Ethics. And I'm in occasional contact with the organization to tell them about the work that I do. And so the chair has really given me a platform to discuss ethical issues in greater depth, to travel, to learn more about business ethics abroad, also to host conferences and other activities. The endowed chair has been just so valuable to not only to advance my own research, but to help proselytize that research to others, to spread the idea that business can be a force for good. And that ethics are so important in the conduct of organizations.
- [05:40]
B
Does it work at Connecticut with regard to students? Do they have to take a course in business law? Are there other people teaching business law at at Connecticut? I know it varies a great deal across different universities.
- [05:51]
C
Sure. So unlike most law professors who teach at a law school.
- [05:57]
B
Right.
- [05:58]
C
I teach at a business school and it's at that school. Each business student must take one course in business law depending upon whether it's undergraduate or graduate. We call it Business Law and Ethics in Modern Society. And in this course we have 14 weeks, which is not a long time to dig in to some of the most important legal questions and enable our students to become what I call legally astute. And by legally astute that they're able to identify legal issues when they arise, resolve the simpler problems on their own. And when a legal problem becomes too complex, they know to whom to refer to that problem to solve it as well. And I talk about ethics in these classes as well. It's not just about understanding the law to avoid penalties, but understanding that the rule of law has an important role in business and society. So this class every student at the undergraduate and graduate levels is required to take. I'm always excited to teach those classes because I know I'm going to make a difference. When those students walk out of those courses, they have a greater appreciation for the law that they would have when they first walked in.
- [07:09]
B
Are there other faculty of Connecticut doing business law and teaching this course?
- [07:15]
C
There are. We have four full time faculty and one part time faculty. So we have others as well. We have a junior professor named Rachel Chambers who focuses on business and human rights. And she's one of the very few professors in a business school whose focus and tenure line focuses on issues related to human rights. She brings fairness, injustice into the curriculum in a unique and interesting way. And that plus our other colleagues who teach business law. We have a small but robust group that I think punches above our weight. And we make sure to have as much impact on business education as much as we can.
- [07:52]
B
Let's go to the core of the book. And the book has in the title Sustained Competitive Advantage or Sustainable Competitive Advantage. And it's. It really uses the term from the resource based view of competitive advantage of valuable, rare, inimitable and non substitutable. So how does legal knowledge meet this classic criteria of sustainable competitive advantage? And I thought that was because in my own teaching as well, I think the law and how companies approach the law and how companies approach politics in general is Very critical to competitive advantage. And there has been, as you know, growth in this area of non market strategy, in academic scholarship, especially in the strategy area. So how does the law, what is the role of the law in sustaining competitive advantage?
- [08:55]
C
There's a significant role there and I actually have my business colleagues to thank for understanding sustainable competitive advantage and how it works. Being in a business school, I'm surrounded by individuals who think differently than I do, use different methodologies and have different training. And being surrounded by business faculty, you learn some of their fundamental concepts. And the one that always interested me was this idea of sustainable competitive advantage. I'm sure that I would have been less exposed to it had I been teaching at a law school. And to those colleagues, I am grateful. So a sustainable competitive advantage has four criteria that you need to meet. Value rarity, imperfect imitability, and that it is non substitutable. So I'll go through each one in turn. First, legal knowledge is valuable, right? It impacts the internal capabilities of the firm. It helps reward innovation through the protection of intellectual property rights. Law establishes free and fair competitive in markets and legal knowledge in the organization, and helps avoid and minimize liability and lawsuits arising from contractual disputes. There's a lot of value in understanding how the law works. Second, law in its own way is rare. There are. There's jurisdictional variation, but each industry has its own specific rules that they have to deal with. And I call this in the book, the legal mix. Each company has its own legal mix of regulations that it to which it must adapt. Even companies that are direct competitors have different sets of laws that they must follow. And regulators will enforce rule against one company, but not another, depending upon different conditions. So just because law seems ubiquitous, the conditions under which companies exist is unique because each one has their own legal mix that they have to contend with. Third is that law is not something that can just be imitated. There are unique conditions within the law that apply to firms. Some firms take advantage of grandfather rules, meaning that they may have conducted business in a certain way. The law changed and regulators said, well, okay, your practice is not legal going forward, but since you were already in the industry, you can be grandfathered in to sustain that legal practice. There's also causal ambiguity, meaning that attorneys and clients work together closely in organizations and they have privilege. That information cannot be easily obtained and it cannot be easily copied. Also, there's social complexity. Relationships between managers and regulators. Managers and lawyers take time to grow and can become very close. And the closeness of those relationships helps generate valuable legal outcomes. So legal Knowledge in an organization is not something you can pull off a shelf and imitate like a book, but rather it requires a deliberate cultivation of lawyer management relationships. And finally, it's not substitute. Go ahead. It's not substitutable. You've got national laws, but variation is starting to decrease and a lot of laws are becoming supranational. So you can move to different jurisdictions, but if you want to do business in the United States, you have to follow federal law. And that is something that all competitors have to do if they meet a certain jurisdiction. So all four criteria are met when it comes to legal knowledge. And it becomes an important basis because, as you know, a sustainable competitive advantage is a powerful thing. It's something where a firm can get an advantage over a rival that they cannot easily copy. And if you have that, you've got something really valuable.
- [12:37]
B
Sustained competitive advantage, my view is like having a dynasty. You know, it's, it's that you don't like win one World Series or NCAA championship out of luck, but you can, you have something inside the capabilities and competencies to do it in a repeated way. And, and it's hard for others to imitate what you have done. I was at one time, fairly recently, and it's hard to get the data. Like I, I had this theory in my mind from Thorsten Veblen, the, the engineer in the price system. I don't know, it's a very, very old book. But I had studied intel, and his basic argument is that business mentality destroys companies and values and engineering mentality makes companies great. And I've studied Intel and followed it for a very long time. And there are other companies where I think this had an impact. But I think when intel went from having CEOs who were engineers to CEOs who were MBAs, even though I teach MB, and I saw that happen at other companies too. Like 3M had that same difficulty, and there was the same difficulty that occurred at Boeing. The same individual was involved to sort of destroy two great companies. But it's very hard to get that data. But to make this question shorter, what I realized was that to the extent that I was able to get it, something like 80 to 90% of all top leaders in American companies have MBAs or have executive MBAs or undergraduate degrees in business. But some of them also have engineering degrees. And some of them also the second biggest group of top executives were lawyers. So I think that's just an interesting fact. And I think it would be very interesting to kind of compare performance based on. It's a very complicated question. And to do this well empirically, you'd have to be much younger than these because I think it's a difficult question. Yeah, go ahead. You were going to comment.
- [14:50]
C
It is. You raise some important points. There have been empirical studies that look at the performance of a lawyer CEO or a CEO that has legal training compared to MBAs. And what these studies have found is that lawyer CEOs improve the performance of the firm over MBAs when the firm is in a highly regulated environment. So if you're in the financial sector, you're in the pharmaceutical sector, you want a lawyer CEO at the helm. And it makes a big and it makes, it makes a difference from these. What happens though, is that lawyer CEOs who work in comfort companies, in industries where regulation is relatively minimal compared to other industries, lawyers don't do as well because they're too conservative and they emphasize the legal rules too much and aren't as risk aggressive as MBAs. But it's really surprising to think a law degree, a degree whose purpose is to practice law, argue in courts, and to give consultation, can be the pathway to the CEO position better in some situations than MBAs who are explicitly trained for the job. When did making plans get this complicated? It's time to streamline with WhatsApp, the secure messaging app that brings the whole group together. Use polls to settle dinner plans, send event invites and pin messages so no one forgets mom 60th and never miss a meme or milestone. All protected with end to end encryption. It's time for WhatsApp message privately with everyone. Learn more@WhatsApp.com this episode is brought to you by Indeed. When your computer breaks, you don't wait for it to magically start working again. You fix the problem. So why wait to hire the people your company desperately needs? Use Indeed's sponsored jobs to hire top talent fast and even better. You only pay for results. There's no need to wait. Speed up your hiring with a $75 sponsored job credit@ Indeed.com podcast terms and conditions apply. This episode is brought to you by White Claw Surge. Great podcast pick, friend. No surprises there. After all, you're all about finding the tastiest flavors out there, just like White Claw Surge. And with big, bold flavors to enjoy like blood orange, BlackBerry, cranberry and more, it's time to go all in on taste. Unleash the flavor. Unleash White Claw Surge. Please drink or something responsibly. Hard seltzer with flavors. 8% alcohol by volume White cloth seltzer works Chicago, Illinois.
- [17:25]
B
One other thing I wanted to bring up as a follow up is in I've taught courses like Business of Society or Business Ethics, and we always come back to the stakeholder model. And many times, and I even say this to students, it's really not a stakeholder model. It's a model of different legal realms in each of the areas, because each of the stakeholders, there's a whole arena of loss around the relationships to customers, relationships to shareholders, relationships to communities that are embedded in law. So that it's almost not giving law its due respect. This emphasis in the courses that we teach, typically on business, society or business ethics, when we talk about it as stakeholder. A stakeholder relationship is fundamentally affected by law. Would you agree? I would agree, yes.
- [18:22]
C
Law deeply impacts stakeholder relationships. Virtually every stakeholder that is relevant to the organization is impacted by its legal environment. And you know, some companies treat their stakeholders very well and others don't. And sometimes the law has something to say about that and sometimes it's an ethical question.
- [18:38]
B
Right. And it's not the law, really. If you look at it as a legal obligation, it's not. It's so discretionary as if you look at it as a these stakeholders and groups I can mobilize and manipulate and satisfy and not satisfy. It becomes much more concrete, I think, when you place it in the legal framework. Can you give some examples of companies that have done this really well? You said certain sectors where it's critical, but is there an example of a company or two where the fact that they have legal expertise that is above and beyond what other companies have have led to their better performance?
- [19:28]
C
Right. That's a good question. These examples come up through specific instances when you have a major regulatory change. And I think the best example is a classic one which I'm sure you've heard of, the Sarbanes Oxley act of 2002, enacted some years ago that required companies to have certain disclosures made about their finances to the public. Most companies at the time viewed the passage of that act as just another legal burden, but a very small number viewed the new law as something like gratitude. And what they did is use the requirements of the act in order to better improve their internal controls, to better understand the information that they were required to gather, which allowed them to be a better organization. And ultimately they received higher ratings by external rating agencies, which allowed them to capture value. So major legal change is not just a weakness, but it's an opportunity. And there's another example much More recent that has come up where regulatory ambiguity can be an opportunity, and that is in a relatively new industry which is the production and sale of cannabis. Right. For decades, as you know, marijuana has been illegal under state and federal law. But states are gradually relaxing those requirements, decriminalizing the sale of marijuana under certain circumstances, while the federal law still prohibits the production and sale of marijuana for non strictly medical reasons. And companies are operating in this space where they know that the laws are going to change, but there still hasn't been a full turn towards full legality. And companies that can operate in that space and understand where the law is going will have a first mover advantage over rivals that sit back and wait until the die has been fully cast and the markets become fully legalized. So there's those kinds of questions that come up all the time. Wherever there's regulatory change, there is opportunity to capture a competitive advantage and it's up for the companies and their lawyers to see it, utilize it and achieve that goal.
- [21:37]
B
First mover advantage. If you're upfront, if you anticipate change beforehand, you have a classification system. I one time played around with classification systems about how companies can respond to potential legal change. Because legal change, typically there's a warning before it actually takes place. And getting yourself ready for that can lead to putting yourself in an advantageous position. But also if you can be too much ahead of the curve too. So how do you categorize these different pathways? I think that's a very important contribution that you're making.
- [22:20]
C
Sure. So in the book, I define five pathways of legal strategy. And these are five ways or a suite of behaviors that firms use when interacting with their legal environment. Some are less effective than others, some are not really strategic at all, while others are very strategic. And I'll go through each one in turn. The first pathway is avoidance. Firms that practice avoidance seem to circumvent legal requirements. They think of law as a nuisance. They think laws are there to employ lawyers, and their job is to do as little as possible and to only comply with the law when they're about to get caught. That's not really strategy. They're leaving lots of value on the table and they may get a knock on the door from regulators. The second pathway is conformance. A conformance firm just does the minimum to make ends meet legally. If a law says don't do X, they tell their employees not to do X and then they move on. They don't think about strategy, they don't think about lawyer business partnerships, they do the absolute minimum of following the law and moving on. And those companies, if you're just doing the minimum, if there are any mistakes, you fall into illegality, and that can be a problem. The third pathway is prevention. This is where we get more sophisticated prevention. Firms make business decisions to ensure that legal problems don't happen in the first place. This is where you create a bureaucracy of rules. This is where you have an ombudsman that will take complaints from individuals in the organization. This is where you have a business policy to make sure that legal mistakes never arise. And that's a good thing. Fourth pathway is value. This is where lawyers and business people start to work closely together. And legal knowledge is seen as a source of not just value protection, where we avoid liability, but value creation, where legal knowledge is seen as a source of competitive advantage. Say you have to comply with a number of employment laws to make sure that your workplace is free from discrimination. That could be seen as a legal obligation, but it's also a value opportunity. Because if you're very good at eliminating discrimination in your workplace and treating all members of the company equally, you now have a selling point to attract employees to your firm who want to work in a discriminatory, free workplace and who believe that they can reach their highest potential without discriminatory barriers, without harassment, without other unfair and unjust employment acts occurring in the organization. And companies won't leave. And companies that have these employees, they'll stay more loyal. And these employees are less likely to leave and go somewhere else because they believe they're working in a hostile environment. Fifth, transformation. This is the highest pathway. Not every regulation enables transformation and not every firm can achieve it. But those that can use legal knowledge to redefine their organization, to change their culture to one that is a culture of integrity toward the law, where every employee in the firm follows the rule of law not because they have to, but because they believe it's the right thing to do. And what happens is that employees police themselves. They drive the culture of integrity. And such companies can make decisions and be far less likely to make mistakes, far less likely to incur accidental liability, because all employees at the firm understand how important the law is and how important it can be to make decisions within the bounds of the law. Lawyers and business people are strategists, co strategists, solving problems in the executive suite. And that allows companies, when they have more information, they can take better risks. And when they take better risks, they can have better returns. So five pathways of legal avoidance, conformance, prevention, value, and Transformation, each one takes you in a decidedly different direction. With regard to legal knowledge.
- [26:23]
B
When I used to do work on business in the natural environment, there was always this strategy where if a company could comply early and at less expense than and set a standard that would, that was always a good tactic to take so that its competitors, this is really a way of blocking its competitors. How would you classify that kind of use of the law for a company's benefit? So like, you know, you can imagine, let's say a pollution requirements and you show the government that it can be done. None of your competitors do it. It's the same cost that you can do it and then gain a competitive advantage over them because your costs are lower and they have to comply at a higher, higher cost.
- [27:18]
C
Good question. It depends upon every classification is scenario dependent. But from what you're explaining to me, that sounds like a value proposition. What companies are doing is learning how the law works and using that law to comply with its requirements in a way that is cheaper and more effective than their rivals while still complying with the law in the first place. Right. Value is not cutting corners or ignoring what the law requires. That's avoidance and that's not a smart pathway to follow in most circumstances. But if you could set a standard better than your rivals, you have that first mover advantage. And regulators may come to you and say you're complying with our regulations better than anyone else. How are you doing it and how can we get everyone else to do it? Well now you help own the standard and now you've established new best practices. It's good for the business that has a first mover advantage. It's good for the regulator that sees their goals being fulfilled and it's good for society because it benefits from the regulatory protections that are being enacted by a democratically elected government.
- [28:25]
B
For established companies, having a complex legal environment and regulations is actually something of a barrier of entry to new entrants. Would you say that that applies to some extent or to a large extent? And you often see new industries being underregulated in general and the executives of some of these high tech companies saying what's the phrase exactly? We're just going to push forward and break everything around us and then we'll catch up later on with all the pieces that have been flying everywh. And we're facing this of course in AI right now because it's very hard to understand legally what to do with it. So I guess the question is technology and law don't really advance at the Same levels. And sometimes the law protects old companies and established companies in regards to progress of technology. And sometimes new technology companies push forward so quickly that they do harm to society because they are. They act in an unregulated, regulated fashion. That's a statement. Virginia, why don't you comment on what I've just said?
- [29:49]
C
It's a true statement. And it's, it's. Law follows innovation, law follows technology. Because law must react to the new creations that occur in technology and commerce. Lawyers and regulators cannot predict the future fully and completely. So they must wait for new technologies to appear and then ask themselves what is the correct response to this technology? What are the justice and fairness implications? How can this new technology be deployed for the benefit of commerce but also protect citizens in that society as well? And you're talking about a certain kind of risk. In the book I talk about how to strategically manage legal risk. And there are four kinds of risks that I talk about that most firms usually ignore. They're described by the acronym of Vuca v U C A and that's volatility, uncertainty, complexity and ambiguity. And these, if you look at risks in this fashion, you can create a competitive advantage because you can respond to risks in ways that your rivals do. Don't know how to do so. So for example, volatility is a sudden shock. A new law is passed that's unexpected. A court decision appears that no one predicted. And in that situation, a company needs to prepare slack for volatile events. Second, uncertainty. Uncertainty is driven by a lack of knowledge. We don't know the significance of a regulation that has been passed. We know that it's been a long time in coming, but how will regulators interpreted it? That's uncertainty. Complexity is the third type of risk, which involves convoluted regal rules, legal rules that are so many provisions and regulations that are labyrinthine in nature that they're just so hard to understand. And then the fourth and most challenging legal risk is ambiguity. And ambiguity is a risk that we are currently facing. With AI, you have an unclear relationship between cause and effect. You don't know what the right questions to ask are. It's extremely difficult to know where AI will be in 10 years, 15 years from now. And so in that situation, the regulatory environment is just emerging. And so when you have a legal environment where the technology is so far ahead of where we expected it to be, there are some responses you can do when you have no other option. One is to co regulate with standard setters. So you work with regulators to say let's develop some standards now so that we're comfortable with them as business people and you're comfortable with them as regulators. And if you help develop standards, you have an advantage on those standards. Second, if that's not possible, you can self regulate. Companies that start to self regulate and establish their own standards can become standard leaders because they start to be adopted in the industry. And if the industry follows your standards, you become the de facto expert on those standards. Finally, if there's no other option, you're not able to self regulate effectively. Co regulation isn't an option. Companies need to carefully experiment. And what they need to do is to try different options and to see if this practice will be interpreted to be legal or not. That's a risky strategy and you only use it as a last resort. But how can you do that better with rivals if everyone is experimenting? Well, what you do is if you build what's called a learning organization, you can process the results of your experiments better than rivals. So if you interpret a law a certain way and that interpretation doesn't work out, if you could process that information more quickly, understand what went wrong, and then make a right decision the next time more quickly and more effectively, you are going to learn faster than your rivals. So even in chaotic regulatory environments, in environments we don't even know what questions to ask, those are opportunities for competitive advantage. From legal risk comes opportunity. The firms just need to see it to make it happen.
- [33:50]
B
Incredibly volatile, chaotic state, and there's a lot of pushbacks on laws. There isn't the firmness. Businesses need to make long term decisions. And if the law keeps changing, it changes their ability to know what the payoff is going to be from these decisions. How do companies, especially in the current environment, we just heard that General Motors, I think, lost just $6 billion because of the reversal on electric vehicle subsidies. And how could they have managed that better? I mean, they were really. How do you even anticipate these things? Is it possible in the end you just have to swallow losses when these, when it happens?
- [34:43]
C
Right. And what you're talking about really is regulatory turbulence. Regulatory turbulence is frustrating rapid and unexpected changes to legal rules that companies must be forced to adapt to. And General Counsel have said this to me in the past, that council can handle complex legal environments. They've got the legal expertise to do it. They can handle difficult legal environments. They know how to manage hard rules. But the hardest thing, or one of the hardest things for general counsel to manage is a truly unpredictable environment where standards change on the drop of a hat. I wrote an article just a few months ago in the Conversation about how disruption to the rule of law is bad for society, but it's also bad for business. If laws change upon a dimension, companies don't know how to predict what the law will do. They cannot adapt as readily to those legal changes and it's going to dramatically increase their costs. A rule of law that is stable and predictable is one that is profitable for organizations. Even if that rule of law is challenging or has significant regulatory requirements. Stability and gradual change allows firms to thrive, turning laws on and off, like the pause to the Foreign Corrupt Practices act which happened earlier. Those kinds of quick changes are something that firms are not ready for and then they incur unexpected losses. So then how do firms respond? Firms respond by interpreting legal rules in as most conservative way as possible. I don't mean politically conservative. What I mean is that they will assume the worst about legal regulations. They'll be less likely to grow, they'll be less agile, they're less likely to hire new workers to meet new demand. And that's not good for firms in a globally competitive economy. A stable rule of law and one that protects society while also enabling business to adjust to changes in the rule of law. That's the kind of rule of law that we need. Society does not benefit from a rule of law that is turbulent, that is unpredictable, and changes dramatically over a very short span of time.
- [36:57]
B
I completely agree and I think that this contributes to competitive disadvantage at the national level, as you were suggesting. And it's, you know, nobody likes an authoritarian regime like China for its limitations on freedom of its people. And. But in the end there's more stability and that allows companies to make long term decisions with the assurance that even in China that there's more turbulence that's occurring at the whim of the top leadership. So that also can inhibit growth. I guess it's when is it necessary for law to be adjustable and flexible and when is it necessary for law to maintain its direction over time? I know that's a very broad question. Depends.
- [37:59]
C
Yeah, it's a broad question that has broad answers. So laws need to be flexible and do need to change as the needs arrive. It's when laws change on an unprincipled basis or do it in an extremely short span of time that businesses are unable to adapt. Companies are agile, companies have to be if they want to compete in global markets. And most corporations, especially those of significant size, have general counsel on their teams that can deal with a variety of challenging legal questions. And there have been Empirical studies that show that having the very top chief legal officer in your organization can actually move the needle on firm metrics. Very effective clos, the very top chief legal officers can reduce stock price crash risks, they can impact firm performance, they can reduce insider trading. So very good lawyers produce firm wide beneficial outcomes for the organization and they can adapt to changes in the law. And changes can happen rapidly, but it's when they happen extremely quickly and extremely unexpectedly without a connection to some sort of principle or idea, that's when the problems arise and that becomes a competitive disadvantage. A stable rule of law, and one that is also flexible and adaptable but not unreasonable is one that can enable businesses to thrive and is one that is also fair to society.
- [39:27]
B
Getting back to your five different pathways. Why do some companies go in one direction or the others is just a matter of having better organized legal teams or is there something about the companies that lead them? And can you provide again some examples of companies that you think have really thrived because of their legal expertise and their application of their legal expertise to achieving sustained competitive advantage?
- [39:54]
C
Sure, companies have certain traits that appear to be ones that can lead themselves to a strategic positioning. And most important is its legal team and where the legal team is situated within the organization. So does the chief legal officer have a direct reporting line to the CEO and the board of directors, which is good? Or does the chief legal officer report to the chief financial officer or to some other C suite executive which subordinates the legal position to another executive function? That can be a problem because the chief legal officer's voice is not necessarily heard. Strategic positioning in the law can also be influenced by the attitudes of managers. Do managers in the company view the law positively? Do they understand why the rule of law exists or do they just see it as a nuisance? And MBAs that receive legal education before they graduate, in my opinion have the knowledge to understand why the rule of law works. If you hire an MBA that's never had a course in business law, you're hiring an MBA that is going to be sleepwalking through their job. And surprisingly, there are many top business schools where MBAs get a degree without any legal education whatsoever. And that's a problem. So are your Companies, are your MBAs in your companies? Do they have legal astuteness? Are they aware of these legal issues? The more aware they are, the more likely they can cooperate with legal professionals. And the more likely they can cooperate, the more likely these strategic partnerships can happen. So you need managers receptive to understanding how the rule of law works. And appreciating its value. And then you need lawyers who appreciate the importance of business and understand strategy. And either side can make this relationship thrive or falter, right? If lawyers are too doctrinal, if they reflexively say no, if they instinctively kill good ideas, that's going to slow down the relationship. If managers ignore the rule of law and don't appreciate legal advice or the value of legal knowledge, that's going to impede the relationship. Strong relationships like these help companies to thrive. And there's actually one group of people that we haven't talked about yet that are highly valuable to the success of the rule of law in an organization, and that is compliance professionals. Compliance is a rapidly growing field and the chief compliance officer and their subordinates are very important to making any organization thrive. Compliance and legal are natural allies and they should work together to create value, especially in internal control functions and decisions that impact the operations of the firm. So compliance is important to have a strategic mindset. Lawyers are important for the strategic mindset. And of course, managers. Managers need to be on board in order for legal strategy to succeed. This episode is brought to you by State Farm. Listening to this podcast Smart move Being financially savvy Smart move Another smart move Having State Farm help you create a competitive price when you choose to bundle home and auto bundling. Just another way to save with a personal price plan like a good neighbor, State Farm is there. Prices are based on rating plans that vary by state. Coverage options are selected by the customer, availability, amount of discounts and savings and eligibility vary by state. The holidays have arrived at the Home Depot and we're here to help bring the excitement with decor for every part of your home. Check out our wide assortment of easy to assemble pre lit trees so you can spend less time setting up and more time celebrating. And bring your holiday spirit outdoors with unique decor like one of our Santa inflatables. Whatever your style, find the right pieces at the right prices. This holiday season at the Home Depot.
- [43:55]
B
You talk about contracts as a source of competitive advantage. So let's imagine a hypothetical private equity firm or a hedge fund which is buying and selling properties, businesses, parts of businesses, all the time shares in businesses, and you have the general counsel in the organization looking at the contracts. So on the one hand they're just looking at the contracts for traps that the company should avoid so that it doesn't have any financial liabilities that it's not aware of. But is there a way? Can they play a more active role? If you were to talk to somebody who was in that role in a hedge fund or a private equity, and their main job was to look at all the contracts. How would you advise that person to elevate their role to be one that's more strategic?
- [44:54]
C
Sure. No, it's a good question. Lawyers that are working in those industries are already highly skilled, right. And they're going to know the risks. They're going to understand the language in these contracts and what they mean. And they have the expertise to make the decision on whether a specific contract term is worth agreeing to or whether it's something that they need to say. Hold on a minute. You know, we need to discuss this further. And this creates too much risk for the organization. So lawyers and those firms are very well positioned to identify what contractual issues are and to be able to give value to their organizations. What I would advise any attorney in any industry that's dealing with contracts a lot is do these contracts have the potential to build relationships between the buyer and the seller, between the party and the counterparty? Because if you can build a relationship of trust and through repeated transactions and a stated commitment to build a relationship over time, those contracts become more efficient. And how do they become more efficient? They become more efficient because your monitoring costs decline. If you've been working for the company for five or 10 years and they've always delivered on time as promised, you don't need to monitor them every time the shipment arrives. You know they're going to do what they need to do. And that company can trust you to pay because they know you'll pay on time, as you have done for the past 20 contractual relationships. Trust creates efficiency. Efficiency lowers monitoring costs. And when you lower monitoring costs and you understand each other's company's needs, you can start making what I call contract specific investments. You can build technology that specifically meets the other party's needs. You can determine or establish your operations according to the needs of the other contracting party because you know they'll deliver that value for you. And then you create what I call a relational surplus. You create this efficiency and that benefit is shared by both parties. Parties that trust one another create value. Parties that distrust one another simply exchange goods and services at a significant and unnecessary cost.
- [47:08]
B
Like the kinks in an merger and acquisition can be worked out much more quickly if the contract actually facilitates the relationships between the acquirer and the acquired company earlier and better. That's something that can be done well or poorly.
- [47:31]
C
That's correct. Depending upon the law firm that's involved in the merger acquisition. Good law firms focus on the client's needs first and foremost and want the deal to happen in a way that benefits their client and also benefits the relationship. Lawyers that are just looking to bill additional hours don't provide optimal value. And I think most large law firms do focus on the needs of the client because they know if they deliver the client good service today, that client will return tomorrow with additional business that's needed.
- [48:01]
B
It's the general counsel who's inside the firm. But then there's also the ease of the outside law firm and law firms. And when that takes place and when it doesn't, what can be done in house and not in house. What about you speak in the book about legal knowledge? Needs an ethical background. What do you mean by this? Right.
- [48:23]
C
I make that point near the end of the book, and I remember giving a presentation once at a conference about legal strategy and discussing the five pathways. And a colleague of mine stood up and said, I have a question for you. And I said, sure. And he goes, what if companies manipulate these pathways in a negative way? Do you have a response to this? Is this something you have thought about? And I had, but not as deeply as I should have. And it was from that experience I thought to myself, I'm going to talk about an ethical backbone and its importance. And legal knowledge needs an ethical backbone. Law is not simply a mechanism that can be used to either suppress or exploit other people or to find ways around the rule of law that's inherently destructive and inherently unethical. So when companies interact with the rule of law, it is with a commitment to not only follow the letter of the law, but also the spirit of that law. And if they do, they're going to be benefited over the long term because they're going to avoid violations, enforcement, investigations, and other problems that can arise when your primary goal is to exploit loopholes or other disadvantages. And it's also bad for society if companies erode the rule of law again and again, the rule of law weakens as a regulated force, markets become more chaotic and unfair, and that weakens democracy for everyone. So legal strategy definitely needs an ethical backbone and that companies that use legal strategy should think of the values that they're pursuing when they're making these decisions that should be in the forefront of their minds.
- [49:55]
B
I think it's ironic that you actually need sophisticated lawyers to destroy the law in some way and erode the rule of law. And that could be occurring to some degree currently in our environment, that the law is being used against having a society that's based on law you don't have to agree with that opinion, by the way. You can comment on it, but that's sure.
- [50:27]
C
No, it's an interesting comment, and I really focus on volatility. The questions that I'm interested in ask is how is the rule of law important to business? Because the more managers understand the importance of the rule of law, and the more we graduate MBAs that respect the rule of law, the more ethical organizations will be in the short and long term. And there can be turbulence in the short term. But a functioning rule of law that is clear and consistent and flexible is one that enables commerce to thrive.
- [50:57]
B
Institutional environment. Doug North's work is very critical for societies to grow, for economies to ground. Without it, without right institutional environment, it doesn't happen. And it's way beyond just protection of private property rights. And there have probably been thousands of studies done in economics that sort of support that notion. We probably should begin to come to the end out of concern about our listeners as well, because I'm sure we could go on and on. So what are you working on right now? What are your current projects? I know you're. You're in Finland, right? So maybe you can explain a little bit how, how that arose and what you're doing, what you're learning and where you're going with your own projects.
- [51:49]
C
Sure. So right now I'm. I'm serving as a Fulbright scholar at the University of Vasa in Finland, and I am studying legal strategy. And what I have found in Finland and other European countries is a significant interest in legal strategy and also from an ethical perspective. I've had doctoral students at other universities contact me and say, professor Byrd, I've seen your legal strategy articles. I've read them. I know your book is there, and I'm interested in this for developing my thesis. And so I think there's a new crop of students that will be interested in law and strategy that will elevate the importance of law in organizations. So that's been great to see. And I'm also working on a relatively new concept that's been around for a few decades, and that's legal design. Legal design is this idea of introducing design methods and principles to the world of law in order to make legal tools easier to understand, easier to communicate simpler in nature, and have greater fairness and justice for the people that must comply with the rule of law or deal with those legal documents. And legal design is populated within creative and intelligent designers who are looking for ways to communicate legal knowledge and legal tools in a way that is Clear, accessible and understandable and fair. And I think legal design is in the frontier of something exciting. Right? And as it develops, we will see how legal design can impact legal strategy. Because if you have a contract that may not be a hundred page wall of text, but also has clear visualization that identifies what the key issues in the contract are, the non lawyers will be able to understand the essence of the contract better and they'll be able to negotiate more directly and we hope more ethically and fairly. So I see a future for legal design being built upon some of the concepts in legal strategy, and that's one of the things I'm studying while I'm here in Finland.
- [53:51]
B
So in other words, legal language is often a barrier. And that's. We find this in many professions. Like why do we need doctors? Because the language itself is so complex to understand, you need a vocabulary. A lot of the trainings is just understanding vocabulary. And so if we could simplify that and then the effective law, I think that's what you're trying to say, the effective law will be enhanced under those circumstances. So along the lines of that, what about the use of AI? I mean, can AI Sometimes the answers you get when you use AI are more complex than are needed. Oftentimes I realize I have to simplify ideas that I'm getting out of AI if I'm going to use them. Sometimes the language is actually overly flowerly flowery and it has too many adjectives and so on. But do you think AI could be used? I guess if you probed it effectively, it could simplify legal documents and make it easier, clearer for people to understand.
- [55:01]
C
Right? We are only scratching the surface as to how AI is going to influence the legal environment. Right? And legal design and artificial intelligence can work together. Legal design is. It's intended to simplify documents and make them more accessible, but not at the expense of creating a document that is ambiguous and doesn't do its job. And it will be the challenge of legal designers to make legal documents more accessible without eroding necessary complexity. So there's a balance. Legal design is not a panacea, and neither is AI.
- [55:38]
B
Right?
- [55:39]
C
We don't know. I mean, the only true answer to where AI is going, right, Is that in the near distant future is we don't really know. Right. It's changing so rapidly and we really are in version 0.01 of artificial intelligence. But I think artificial intelligence will have a role to play, used by an intelligent user who understands the issues that that artificial intelligence can address will be able to use AI to create clearer documents. The risk comes when someone uses AI as a crutch where they don't understand the issues. They type a question into AI and they just get whatever answers that exist. You have to know what you're asking it. You have to create the right prompt and the right context in order to ensure that AI can do its job. And I think AI is not going to eliminate humans from the legal function. Right. But what will happen, I think, is that AI will become a partner in the practice of law. It will become a partner to general counsel and compliance officers. And through that partnership, you're going to find opportunities for competitive advantage. And the companies that have managed their partnership between lawyers and AI most effectively, those are the ones that will be able to predict law the best. To adapt to changes most quickly and to extract the most value out of the legal environment while still maintaining minimum ethical standards.
- [57:02]
B
People have to be smarter than the AI to use it effectively because otherwise it's going to fool them into false conclusions and they may use it literally rather than commanding it. They are the boss. That's, I think, the important thing. And they have to know that they're smarter. At least it's try to question it enough so that they get right answers or better answers rather than just accepting any answer that's correct.
- [57:29]
C
I mean, think of the simplest computer or laptop. We don't need as human beings to be able to add and subtract and to process code as fast as that laptop does. But we do need to know how to use that technology to its benefit. So it's not being smarter than just smarter than AI. It's smarter about AI, how to use it as a tool. You don't need to become AI to exceed its abilities, but what you can do is better understand how to use it, know its strengths and limitations, and understand the context in with with which you're understanding how to ask AI the right questions so that you get the right answers and don't hesitate to to reject an outcome from AI that is either illegal, unjust, unethical or wrong.
- [58:15]
B
Just to be able to evaluate and critique what it does and push it to get better, to give you better answers. So we probably have to bring this to a conclusion. I know we could go on and on. Professor Byrd, thank you very much for joining me. Your book challenge us to rethink law as not merely compliance. That is a strategic and ethical resource for our listeners. The book is Legal Knowledge in a Source of Strategic and Competitive Advantage, published by Cambridge University Press. I'm Alfred Marcus. And this has been the New Books Network where we explore the space between strategy and ethics. Thank you for listening. Foreign.
- [59:12]
C
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