General Counsels on the Front Line: Balancing ESG and Economic Priorities
In steering their companies through a complex, ever-changing era of corporate citizenship, general counsels face economic headwinds — and relentless pressure to evolve.
General counsels are known for serving as their company’s top legal adviser, but in recent years their role has expanded. The modern general counsel helps to map out strategy, shape policy positions, define company values and culture, support business growth, and safeguard the company’s reputation.
The role has also become increasingly public: general counsels often speak with the press, respond to investor and analyst questions, and make statements on corporate social media.
One factor accelerating the expansion has been the rise of the environmental, social, and governance (ESG) movement. As both stakeholders and regulators have pressured companies to become better corporate citizens, many companies have sought to embed ESG principles more deeply into their business models, and have tapped their general counsels to lead the way.
Balancing the budget pressures that come with running a company’s legal and compliance centers, while seeking to bless corporate growth and reduce risk, has always been a difficult job. But now it’s growing even more difficult.
Through around the end of 2021, general counsels could count on robust across-the-company support for developing and implementing ESG-related initiatives — like reducing emissions, diversifying workforces, or modernizing employment policies — on the grounds that advancing them would help create long-term value for both the business and their many stakeholders, including broader society. Most of this support remains, as does the rationale behind it.
The difference today is that gathering economic headwinds have swept other, more conventional priorities to the fore. Indeed, ESG is a long game, requiring decades-long investments of resources: time, energy, personnel, and money.
And in a world of stubborn inflation, volatile markets, geopolitical tension, and rising interest rates, this long-term effort must compete with the near-term need to manage costs, post profits, and otherwise meet Wall Street expectations.
Redefining the role
To navigate these dynamics, general counsels must evolve to advance their company’s business goals and values, while tending to the demands of a complex economic and regulatory environment.
One challenge involves shareholder engagement. In evaluating their company’s strength, boards and senior management often focus largely on quarterly and annual financial results, because they paint a clear picture of the company’s recent performance and prospects for growth. Financial results also provide simple bases for comparison by industry analysts and commentators.
But many shareholders care about more than nearer-term financials, and the most powerful among them can play a major role in determining the company’s strategic direction, including as it relates to ESG.
Shareholders are not a monolith. Whether on capital allocation, executive compensation, corporate strategy, or another issue, their perspectives can vary widely.
But in recent years, shareholders have overwhelmingly (as measured by assets under management) come to expect their companies to think longer term — a task made more difficult by the near-term expectations of today’s challenging macroeconomic environment.
In balancing these competing expectations, general counsels advise the company on how best to anticipate and react to diverging shareholder interests and demands, helping determine which best fit the company’s strategy, and which could be disruptive or counterproductive. In doing so, they’re in constant communication — and building invaluable trust — with the board, the CEO, CFO, head of investor relations, and others in leadership.
Another challenge involves managing in-house tensions. For example, in pursuit of sustainable growth, some departments will advocate for endeavors that nearly always carry some element of risk — developing new products, entering new markets, or acquiring businesses.
Other departments, including legal, are generally more vigilant in protecting the company, urging caution on novel endeavors or business risks and recommending safer alternatives.
But just as imprudent risk-taking has stung plenty of companies, excessive risk aversion has caused others to stagnate. In walking the line between the two, today’s general counsels act as collaborative, forward-thinking problem solvers.
They evaluate the business impacts of ESG-related initiatives as much as the legal nuance, identify where their company must evolve to stay competitive, and forge common ground between departments with competing interests.
Then, of course, there is culture: the foundation of a company’s ESG ambitions. For a company to realize its ESG-related goals, its people must understand the rationale for setting them, believe in the value of pursuing them, and trust that the leadership is taking them seriously, even in the face of economic uncertainty.
General counsels play a vital role here — both inside the legal department and outside it. As a pillar of the corporate conscience, they help establish the company’s core principles, put these principles into practice in a legally permissible manner, and hold the company accountable to them.
This work helps the company focus on its strengths while fostering a culture of confidence, where life inside the company aligns with its public positions and commitments.
A challenging road ahead
If recent months are any guide, general counsels likely have a challenging road ahead. According to new research from Axiom, cost constraints are making it more difficult for many general counsels to uphold department values. Expect this to last at least until the economic outlook brightens — and perhaps beyond.
Even so, companies can continue to rely on their general counsels to lead. With a companywide vantage point — alongside deep experience balancing legal constraints with company performance goals — general counsels are well-positioned to navigate novel risks and opportunities, and to help translate the cross-currents of stakeholder demands.
It’s true that ESG-related risk can differ from conventional legal risk. But as general counsels have become more important across the enterprise, they’ve shown a remarkable ability to evolve as conditions change. Count on that to continue, wherever the road may lead.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.