How legal teams should respond to the recession

By Jerome Doraisamy|16 June 2020
How legal teams should respond to the recession

Australia is officially in a recession, placing further pressure on corporate counsel to support their businesses and organisations.

The curve has all but flattened in Australia, but that does not mean that we’re out of the woods just yet. We are now, as announced by Treasurer Josh Frydenberg in early June, in our first recession in 29 years, given that the economy has shrunk by 0.3 per cent over the last quarter.

This, according to three corporate advisory lawyers, will not only enhance the importance of the legal function in businesses and organisations, but also further constrain the capacity of that function to spend money.

The role of corporate counsel during this time

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Recessions place unique stresses on businesses, Gilbert + Tobin partner Kevin Ko mused, noting that risks that are unlikely during boom times can be exacerbated during a recession.

“Businesses will be looking to their legal departments to steer them through this tougher landscape while at the same time prioritising limited resources to ensure that core business activities continue running smoothly from a legal perspective despite the disruption of COVID-19,” he said.

At this most critical juncture, the role of in-house lawyers will be to continually manage legal and risk issues, said Norton Rose Fulbright managing partner-elect Alison Deitz.

“For many, these risks have heightened due to the pressures their industries are facing and broader economic conditions. The role of trusted [adviser] to the business becomes even more important in a downturn, as time-poor people rely more heavily on receiving the right advice from a carefully selected pool of [advisers],” she outlined.

“Depending on organisational size and complexity, corporate legal departments should be reviewing their company structure and exposure to poor or underperforming subsidiaries or ventures. They will be able to play a key role in ensuring they limit the erosion of the value of better performing entities. Reviewing all business contracts, including supplier and employment contracts, will also be critical to ensuring continuity of resource and supply.”

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Mills Oakley partner Gavin Douglas supported this, noting that while legal teams can play a variety of roles, supporting the business at this time should be the highest priority.

“For the [board] and the executive, the in-house legal function plays a vital checking and balancing role on the identification and management of risk. Subject to the risks that present, the legal team responds. Often risks need to be identified (not all issues present on a platter!), so an in-house legal team typically plays both reactive and proactive roles,” he advised.

“The COVID-19 pandemic created so many immediate new legal issues for businesses, I suspect some in-house teams are still spending a lot of time dealing with issues that have arisen from the changed business and legal environment. Our experience is that the initial phase of regulatory change gave rise to a marked increase in pure advisory work on the nature, extent and application of the changes in law and policy.”

Responding to constraints on budget

Firms are “acutely aware”, Ms Deitz mused, that general counsel are being forced to do more with less – something that will only worsen as a result of the pandemic and now recession.

Given the need to do more with less, Mr Ko surmised, GCs and chief legal officers “will need to leverage their familiarity with their business to differentiate between what would be the most efficient use of internal resources and what would be more cost-effective to outsource to external advisers”. 

Ms Deitz said: “GCs should be considering their current law firm panel structure to see if it is driving the right behaviours between in-house and external provider teams. Is it incentivising the right number of firms to want to invest in the relationship and properly partner with them to achieve the legal objectives of the business? Is the relationship deep enough that there is a good understanding of their risk appetite?”

“We see law firms as having an important role in helping general counsels during difficult times. One of the steps we’ve taken is to develop a free legal operations health check with Xakia Technologies. We are providing this to clients to help them assess how their in-house teams compare to others and to provide actionable tactics to increase the efficiency and effectiveness of their operations.”

According to Mr Douglas, managing budgets and resources in a way that does not place an unsustainable burden on an in-house legal team and, at the same time, protects the business from normal, pre-existing, novel and emerging risks will be a real challenge.

“I expect that many businesses will be demanding more from their in-house legal team than ever before, given the volatility of the markets and fluidity of the environment,” he predicted.

“Our experience is that opportunities abound, but can move rapidly, ramping up and slowing down at short notice, with lots of innovative and moving parts that demand an adroit and immediate response from lawyers. Just keeping on top of the volume of regulatory change is a challenge. Anecdotally, I understand that GCs have adjusted by reassessing which matters require prioritisation.”

Next week, Lawyers Weekly will outline some of the ways that the legal department can turn the recession into an opportunity and best make their mark on the business or organisation during this time.

How legal teams should respond to the recession
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