Over drinks recently, a Fortune 50 legal department executive declared to me “Our diversity initiatives are about to be completely dead. It’s all cost-cutting all the time now.”
The boldness of the declaration was a bit shocking.
Amidst the Black Lives Matter movement, a broader public focus on sustainability, and in the wake of a host of #MeToo scandals, companies began to take supplier diversity more seriously.
We’ve just gone through a pandemic, where companies slashed costs to remain alive. There was a fear during the worst of it that corporations would deprioritize initiatives around culture and impact that didn’t directly contribute to the bottom line. But as the economy shifted back into gear with vaccines, employers turned their focus to retaining top talent. Initiatives that created connection between employees and employers, as well as other employees, have proven critical to navigating the “great resignation.”
But now we’re facing a more tumultuous set of economic circumstances. Companies are staring at the prospect of slowing or negative economic growth amid the highest inflation rates in recent memory. Financing for both companies and their customers is more expensive, which will hurt growth.
All of this is forcing cost-cutting directives passed down from the board level that hit corporate legal departments. Such cuts could come in the form of internal headcount, which is significantly painful to execute. They can come from sweating external counsel relationships for better performance at lower cost. And they can come from deferring nonessential technology investments.
The net effect of all of this is a risk that companies begin to deprioritize longer-term initiatives to reshape their departments and impact the broader legal profession as they focus strictly on core spending. I’ve written extensively about how corporate legal teams have been spending an increasing amount of time and attention on ESG-related goals like ensuring their legal departments match their values. But will this all go by the wayside?
For those companies that have always deprioritized the issue, the current economic climate is an excuse to continue to do so. And for those that had made more performative commitments, it will become increasingly clear that they weren’t serious. While companies may continue to say the right things, a big piece of this will be slower progress on putting programs into place that systematically commit their departments to goals beyond their core functions.
But what about those that have already begun down the journey of, say, making sure their external counsel field diverse legal teams for their matters? Will they too cut back?
Omar Sweiss, founder and CEO of Justice Bid, a diversity analytics and outside counsel selection technology platform for corporate law departments, makes the case for a brighter outlook. “For the companies that have operationalized diversity into their day to day, it’s not going away.” Sweiss tells me that the companies that have best operationalized diversity are those that have clear baseline data and both track and audit progress. Creating internal processes to give different parts of the legal department points for making diverse selections makes a huge difference, Sweiss says.
Adrian Peyer, CEO of Impactvise, which provides ESG analytics on the legal industry, agrees. “Given the current economic and geopolitical uncertainties, there may be some companies continuing [to believe] that ESG can only be pursued in strong economic times. But we at Impactvise believe that the majority of the companies who have started or are already well advanced on their ESG journey will continue prioritizing ESG actions as they understand that it is no longer just profits which count, but also prosperity.”
Peyer points out the same is true with the law firms themselves: “Looking from the law firm perspective, we continue to see a high interest not only on the ESG advisory side of the house, but also on the internal efforts to align the law firms ESG actions with their clients and with the expectations of their employees.”
Indeed, both Sweiss and Peyer agree that now is the time to accelerate efforts rather than pull back.
Sweiss points out that when thinking about how economic crises impact society, especially under-represented communities, companies shouldn’t dare think of cutting back on equity and justice at a time like this, but rather, double down. Peyer points out that regulatory imperatives for broader ESG compliance are not going anywhere, so companies have no choice but to keep it front of mind.
For my part, I think we will see a shakeout of companies that are serious and not serious about the issue. Diversity or sustainability aren’t just values that a company pursues to show alignment with public opinion, though, no doubt, many take that route.
Instead, these are core values that drive performance for companies — and external counsel management programs are all designed to drive better results from outside law firms. Diverse staff bring diverse perspectives and novel problem-solving approaches. One Deloitte study found that inclusion and diversity enhances innovation by about 20% and reduces risk by 30%. Sustainable practices reduce waste and force companies to drive efficiency. Why wouldn’t you want suppliers who are innovative, less risky, and efficient?
That’s why, at Hence, we think about ESG criteria as part of the holistic and ongoing assessment of law firms. Is it helpful to know which law firm is the most diverse if you don’t also know if they are driving quality for your organization? Or that a law firm has recently signed the UN Global Compact without knowing if they already handle sensitive matters for your organization?
If you only know data about diversity and sustainability in isolation of supplier performance, then that’s a lot less helpful. But when you can see the full integrated picture of how your law firm suppliers are performing, then it becomes clear that such data is a key part of the puzzle and not extraneous or disposable detail.
Simply put, choosing law firm partners that see the value in innovation and efficiency makes good business sense, regardless of where we are in the economic cycle. No doubt there will be a temptation to cut back on new initiatives as the economy slows. But it is up to stakeholders both internally and externally to make the case for why this is a risky idea.
Sean West is Co-Founder of Hence Technologies, a software company that transforms how enterprises work with external counsel. He was previously Global Deputy CEO of Eurasia Group, the geopolitical advisory firm. He writes a biweekly column in Above the Law on geopolitics and the practice of law.