Skip to content

The rise of transformational governance is among CLOs’ growing responsibilities

Natalie Runyon  Director / ESG content & Advisory Services / Thomson Reuters Institute

· 5 minute read

Natalie Runyon  Director / ESG content & Advisory Services / Thomson Reuters Institute

· 5 minute read

Corporate chief legal officers are increasingly addressing issues of ethics, social consciousness, and sustainability is today's business climate as part of their ESG duties

Business has an important role to play by promoting ethical leadership and building trust between public and private institutions and in these institutions by civil society, according to the United Nations Global Compact, which argues that this goal is achieved through transformational governance.

To achieve transformational governance, businesses should “foster a culture of integrity, fairness, and inclusion beyond legal formality” using the principle of ethics — doing not just what is legal, but what is right — as a standard for decision-making and conduct.

An organization’s chief legal officer (CLO) is by default its chief ethics and risk officer. In today’s more socially conscious business climate — and amid the rise in geopolitical and economic uncertainty and the growing importance of environmental, social & governance (ESG) issues — the leadership of the CLO as the primary executive advisor within the C-suite on ethics and risk has never been more important.

Indeed, this is part of an ongoing trend that started two decades ago. “If you look 20 years ago, the general counsel was much narrower role previously,” says Christine Uri, a CLO and an expert on sustainability and ESG. “Over this period of time you’ve just seen this role expand where more CLOs are on the executive team and are being expected to take on different tasks”, including being an enterprise advisor on legal, risk, and ethics issues.

Is the legal industry ready to lead?

While the legal community plays a pivotal role in the outcome of transformational governance and is a key component to achieving peace, justice and strong institutions, the question remains as to whether or not it is ready to lead the charge in transformational governance.

On one hand, it is easy to see that transformational governance is already underway with the sharp rise in expectations to evaluate both the ESG risks and opportunities by investors and company directors, and the ethical behaviors across a number of ESG issues by employees and customers. This trend emphasizes the ongoing expansion of the CLO role as the chief risk and ethics officer and advisor to the CEO, particularly related to horizon-scanning capabilities necessary to identify emerging risks as part of corporate governance.

Expectations of “legal foresight and scenario planning, which is a key part of risk management and governance, are not new for CLOs,” Uri states, adding that the difference now is that it is critical part of enterprise risk management.

Companies at the enterprise level conduct a comprehensive evaluation of their primary risks and develop multifaceted strategies to mitigate these risks and minimize their impact. “ESG risks are fast becoming integrated as part of the enterprise risk framework,” Uri says, noting that a critical component of mitigation strategies involves scenario planning, a task in which certain internal legal teams have demonstrated expertise. Uri indicates that more and more legal teams are instrumental in crafting comprehensive response plans that delineate functional responsibilities across the organization.

When CLOs lead, will law firms follow?

All of these actions are key functions of businesses’ embrace of transformational governance. And because law firms typically follow the lead of their biggest revenue-producing customers — often the in-house law departments of large corporate clients — this new style of governance can have a cascading effect throughout the legal industry.

In addition, in-house attorneys cited ESG — including related issues such as diversity, data privacy, and cybersecurity — at the top of the list of risks on the horizon they are facing over the next three to five years. Worse yet, the heated political discourse around ESG in the U.S. could make these risks more acute in the medium term. And, apparently, the concerns about political developments are not sole challenge of CLOs in the U.S. In fact, more than 40% of CLOs in Asia and Europe expected political developments to the be their top challenge, according to a 2023 survey of CLOs by the Association of Corporate Counsel.

Still, legal community members may not be ready. The majority of in-house law departments are experiencing increasing matter volumes and flat, if not decreasing, budgets, according to the Thomson Reuters Institute’s 2023 State of the Corporate Law Department report.

Finally, law firms may not be eager to expand their service lines beyond providing legal advice. “The question is, do law firms want to follow the expansion of the GC’s role into enterprise risk management and ESG or remain focused narrowly on regulatory aspects of these areas?” asks Uri, adding that using law firms for assistance in managing risks beyond the legal realm may not be cost effective for many corporate law departments.

Can law firms seize these business opportunities?

CLOs having the expanded responsibility for horizon-scanning of emerging risks, particularly around those stemming from geopolitical events, and setting the ethics standards for holistic decision-making beyond legal risks as part of transformational governance across an expanding range of issues outside of legal issues does open up a business opportunity for proactive law firms.

Those firms with already strong relationships with CLOs are in the best position to win the business by providing strategic guidance to clients. Indeed, they already have the expertise of issue-spotting and horizon-scanning across the four common areas of strategy on which law firms often advise: finance, regulation, disputes, and transactions.

In fact, the collective experience of providing strategic legal guidance across government, private sector clients, and other public sector institutions covering multiple matters and practice areas — including antitrust, labor & employment, litigation, tax, M&A, due diligence, sustainable finance, corporate governance, shareholder activism, and regulatory and compliance disclosure and reporting — leaves many law firms positioned well to convene multilateral stakeholders to influence transformational governance.

More insights