Why Open-Systems Thinking Elevates The Law Department

With in-house legal teams increasingly being expected to contribute to their company's business strategy, general counsel must seek fresh approaches to stay ahead of regulatory and cultural shifts.

Open-systems thinking (OST) -- a development of stakeholder theory geared toward the ESG demands of the 21st century -- could provide a framework for finding creative solutions to legal matters that looks beyond the basics of what the law says companies can or cannot do.

"Stakeholder theory argues that stakeholders come first -- whether they're suppliers, investors, employees, customers or the community," writes R. Edward Freeman, professor of business administration and ethics at the University of Virginia's Darden School of Business and author of Strategic Management: A Stakeholder Approach.

Proponents of OST expand Freeman's list of stakeholders in light of a general consensus among the scientific community that the Earth has entered the Anthropocene Era.

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This time period is characterized by the negative impact of the dominance of humans as a species over the entire planet -- especially through interaction between ecosystems and human technology, a factor that has only increased since stakeholder theory was first introduced in the 1980s.

Constance E. Bagley, an attorney turned legal consultant and academic, is one of OST's most ardent champions in the corporate legal space. She argues that the OST framework holds the keys not just to more ethical business practices but also to new opportunities for in-house legal teams to turn regulatory action into potential business opportunities.

Above the Law recently spoke with Bagley about how in-house counsel can use OST in the context of a corporate legal department -- and how this approach can increase the value legal teams add to the company's bottom line.

<strong>A New Approach to ESG

"Open systems thinking is a way of looking at the world that acknowledges the fact that everything is connected," Bagley states.

Like stakeholder theory, OST argues that companies must shift their focus from maximizing short-term returns for shareholders and prioritize creating value for all stakeholders -- everyone from the company's employees, suppliers, and customers to, for example, the local community around a manufacturing plant.

OST takes things a step further, explicitly incorporating entities as vast as the Earth's ecosystem into its approach to corporate ethics. The framework is informed by the global need to address issues like the ongoing climate crisis, as well as cultural shifts caused by events like the #MeToo movement.

With ESG factors being of increasing importance, OST invites in-house counsel to leverage their experience as researchers, legal scholars, and protectors of their companies' reputations to devise legal solutions where the majority of stakeholders can come out on top -- all while driving and protecting long-term profits.

"It's kind of the John Donne 'No man is an island' idea -- no company is contained in and of itself," Bagley says. "It makes it very important to step back and see the broadest systems and not become so myopic."

Bring GCs Into the Board Room

According to Bagley, an essential factor in executing the OST approach within the context of corporate legal guidance involves changing the role general counsel play in the boardroom to adapt to changes in how regulatory bodies approach corporate legal violations.

"The courts are increasingly doing several things," Bagley says. "The regulators are going after individuals instead of just fining the companies -- which really kind of hurts the other shareholders and doesn't necessarily find the people responsible."

In practice, this means individual corporate leaders and board members might have their own heads on the chopping block if they are caught breaking the law.

Bagley and her colleagues have published guidance on how to best reduce legal risks and promote ethical behavior on the part of executive leadership and board members, but her advice boils down to one thing: General counsel should be involved in business strategy early and often, and they should have the power to step in when they think they see a potential risk at hand.

"The way [board meetings] are currently run, there tends to be a very tight agenda set by the CEO who is often also the chair ... and the meetings have everything scripted down to the minute in terms of reports and everything else," Bagley says. "There's not a lot of time for discussion."

"There needs to be more training," she argues, advocating for corporate counsel to set aside time to educate members on the reality of risks facing the business from regulatory and cultural perspectives.

Still, Bagley emphasizes that the onus is on general counsel to understand the inner workings of the company.

GCs "have to earn that spot at the table," Bagley says. "You need to be someone who can send to the board on a regular basis information about what other companies are doing that is relevant to your firm ... not just what legal cases are out there, but what business things are going on."

Increasing the role of general counsel as educator can improve negative impressions board members might have of the in-house legal team by showing how the legal department can point out business opportunities instead of just stepping in when the company might be out of line.

"To that extent, you should be able to say, 'Look, my job here is to help you succeed in the marketplace with integrity."

Ethan Beberness is a Brooklyn-based writer covering legal tech, small law firms, and in-house counsel for Above the Law. His coverage of legal happenings and the legal services industry has appeared in Law360, Bushwick Daily, and elsewhere.