CASEINPOINT
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By Constance E. Bagley
JUNE 2007
Legal Astuteness: Practice and Pedagogy
The options backdating scandal is but the most recent example of the perils of failing
to manage the legal and ethical dimensions of business. Meeting legal and ethical
challenges requires the development of a managerial capability I call “legal
astuteness.”1 Legal astuteness is the ability of managers to communicate effectively
with counsel and to work together to solve complex problems and to protect and
leverage the firm’s resources.
Legally astute managers have the ability to identify and pursue opportunities to use
the law and the legal system to increase both the total value created and the share
of that value captured by the firm. By being proactive, they can often forestall more
onerous business regulation and convert regulatory threats and constraints into
opportunities for value creation and capture. Conversely, managers who lack the
ability to integrate law into the development of strategy and of action plans can place
the firm at a competitive disadvantage and imperil its economic viability.
There are four components to legal astuteness: (1) a set of value-laden attitudes,
(2) a proactive approach, (3) the ability to exercise informed judgment, and (4)
context-specific knowledge of the law and the proper application of legal tools. I shall
discuss each below then conclude with a brief summary of the pedagogical
implications of this construct.
Value-laden Attitudes
Legally astute managers recognize the importance of law to firm success and accept
responsibility for managing the legal aspects of business. They also appreciate the
need to meet societal expectations and realize that ethical considerations may
determine how the law is applied in a given case. They recognize the importance of
selecting not a “hired gun” but a true counselor at law who combines knowledge of
the black-letter law with judgment and wisdom.
Proactive Approach
Instead of viewing legal considerations as an after-thought or add-on to the firm’s
business strategy, legally astute managers include legal constraints and
opportunities at each stage of strategy formulation and execution. They bring
counsel in early in the cycle of decision-making. They are proactive and do not wait
until the last minute to fight a fire that has already started or to bless a deal that has
already been struck.
1
See Constance E. Bagley, “Winning Legally: The Value of Legal Astuteness,” Academy of Management
Review (forthcoming).
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For example, Al Bru, the head of PepsiCo’s Frito Lay unit, worked closely with
PepsiCo’s lawyers to craft PepsiCo’s strategy for dealing with increasing concerns
about obesity and related diseases, such as diabetes and heart disease.2 Instead of
viewing health concerns as a threat, PepsiCo saw an opportunity to create new
products and to reformulate existing products to meet consumers’ demand for
healthier snacks. PepsiCo became the first major food company to remove trans fats
from its products then used the absence of trans fats as a marketing edge.
Exercise of Informed Judgment
Legally astute managers have the ability to exercise informed judgment when
managing the legal dimensions of business. They recognize that it is the job of the
general manager, not the lawyer, to decide which allocation of resources and
rewards makes the most business sense. At the end of the day, as long as counsel
has not advised that a particular course of action is illegal, it is up to the
management team to decide whether a particular risk is worth taking or a particular
opportunity is worth pursuing. Thus, although William C. Foote, the CEO of USG
Corporation, consulted with experienced counsel to evaluate the risks of trying to
address USG’s asbestos liability in bankruptcy, Foote accepted the ultimate
responsibility for deciding whether to put the leading building-materials supplier in
Chapter 11.3 Doing so effectively required Foote to understand the legal issues at
stake and the legal tools available, such as a channeling injunction to divert the
asbestos claims to a separate trust.
Context-specific Knowledge
Although the experienced manager may understand the role that law plays in setting
the rules of the game, it is often less obvious how law affects the risk/reward ratio
for any given venture. To become legally astute, managers must attain a degree of
legal literacy appropriate to their context and learn the proper application of legal
tools. Managers and lawyers need a common vocabulary before they can work
together effectively. Managers who can harness the creative power of legal language
are more adept at understanding and shaping the legal structure of their world.
Summary
There are legal and ethical dimensions of business and managers can learn how to
manage them more effectively. Warren Buffet characterized USG Corporation’s
emergence from bankruptcy with all creditors paid and shareholder value intact as
“the most successful managerial performance in bankruptcy that I’ve ever seen.”4
The three-part strategy USG pursued of (1) litigating the spurious asbestos claims
while settling the valid claims, (2) seeking federal legislation to ensure a fair
2
Constance E. Bagley, Winning Legally: How to Use the Law to Create Value, Marshal Resources, and
Manage Risk (Boston, MA: Harvard Business School Press, 2005), p. 77.
3
Constance E. Bagley and Eliot Sherman, “USG Corporation (A),” “(B),” and “(C),” HBS Case Nos. 807090, 807-120, and 807-121 (Boston, MA: Harvard Business School Publishing, 2007).
4
Karen Richardson, “Years into Filing, USG is Smiling,” Wall Street Journal, February 15, 2006.
resolution of all claims, especially those by the truly sick victims of asbestos disease,
and (3) growing the company to increase its ability to pay all legitimate claimants
was predicated on the top management team’s recognition of their responsibility for
resolving the legal claims in a manner that was fair to all stakeholders; their
proactive approach to litigation, settlement, and legislation; their ability to exercise
informed judgment in a highly uncertain legal and business environment; and their
ability to work effectively with Stan Ferguson, a general counsel valued for both his
business acumen and his legal expertise and judgment, who was recognized by CEO
Foote as a valued member of the USG top management team. By studying cases like
USG Corporation managers can learn how to harness the power of the law to
manage the firm with integrity and more effectively.
Pedagogical Implications and Reference Materials
The construct of legal astuteness underlies both my new book Winning Legally: How
to Use the Law to Create Value, Marshal Resources, and Manage Risk (Harvard
Business School Press 2005) and the pedagogical platform I developed for my course
“Legal Aspects of Management” (LAM).5 (I developed LAM at the Harvard Business
School and will be rolling it out at the Yale University School of Management this
fall.) My Harvard Business School cases and other materials identify many of the
legal issues likely to arise in the course of starting, managing, and growing a
company and provide opportunities for students to develop the attitudes, proactive
approach, judgment, and knowledge necessary for legal astuteness.
This unique approach to educating managers about the law differs from traditional
approaches in several important respects. First, the unit of analysis is the manager
not areas of substantive law, such as torts and property. Winning Legally and LAM
are organized around the managerial objectives of creating value, marshaling
resources, and managing risk, not around the “legal silos” traditionally used to teach
law in business schools.
Second, the goal here is to develop students’ ability to exercise informed judgment
when managing the legal aspects of business, not to teach black-letter law, that is, a
set of legal rules. The focus is not so much on what a court would do as on what the
manager should do. Third, my work seeks to reframe students’ understanding of the
relationship between law and management by highlighting not only the constraining
but also the enabling aspects of law.
***
Thoughts, discussion questions, or comments for the author? We welcome them all!
Please send all responses to Alex.Roberts@aspeninstitute.org, who will pass your
praise, questions, or criticisms onto the author.
***
5
LAM is described in detail in Constance E. Bagley, “Legal Aspects of Management: Course Overview
Note for Educators,” HBS No. 806-178 (Boston: Harvard Business School Publishing, 2006).
Professor Constance E. Bagley is an Associate Professor of Business Administration at
the Harvard Business School and, as of July 1, 2007, a Visiting Associate Professor of
Business Administration at the Yale University School of Management.