China Business Law Podcast
S1E4 Force Majeure with Kenny Tung
Welcome everybody to another episode of the China Business Law Podcast. I'm your host Art Dicker and today I have the pleasure of being joined by Kenny Tung. He's the founder of In-Gear Legalytics and he's also been a General Counsel and Regional General Counsel in China for many years before that. Welcome Kenny.
Thank you Art.
And so today's topic is about coronavirus and particularly we’re going to talk about the impact on business and specifically want to get into the role of In-house legal counsel especially as companies are reacting almost in real time to all of these new questions that are coming up. We’re going to talk about what companies can do to prepare and react.
So we are really looking at an extraordinary situation right now. The virus as people know is generating a massive response from the government and people themselves person by person are trying to defeat this. And at the same time we can't ignore that there's a business impact and it's a serious disruption to the economy and individual businesses. So Kenny you were in China back during SARS in 2003 and a lot of people compare the situation to SARS. You were a Legal Director at Kodak back. How would you compare the situation now to what it was like then?
Well, yeah, this is definitely reminiscent of SARS. But strictly answering your question, it is quite different as you know, but back in the period of SARS, we didn’t have this minute by minute development that actually the whole world can track the whole thing. It is really the media and then the knock-on effect on the people developing the fear and concern of people and then of course ultimately people who are governing.And how they deal with this and of course China has a very different profile in the world so that it triggers a whole bunch of other geopolitics issues.
So I think it's quite different and also, for example, we were in Shanghai mostly during the period of SARS and I have to say for my friends and I my wife and I were saying that oh goodness, we were working, you know going to work it would just we barely felt the difference during that period of time of SARS. We did hear about certain border closings or quarantine outside Beijing and Shanghai, but we certainly were not in those areas where they were probably implementing some kind of measures. Certainly we didn’t feel few people knew about it and the world certainly, you know, just look at it as a another flu came and went so I think that's a huge difference in that sense.
To get a bit into the role of the legal department. In a crisis like this you've got employees who are you know scattered and maybe not able to come back to work and not do their job as normal and you have a lot of fixed costs.Policies that are coming out from different cities or seem to be changing by the day or the week. You've also got ongoing relationships with suppliers. Customer contracts to fulfill and be fulfilled and you've got just this general brand image and you know public relations responses, which we know Legal is always often involved in as well.
So if you're the Legal Department, how do you dive into this? What kind of issues are you most worried about? And how are you working within an overall crisis management framework?
The legal function especially in business and of course the extended legal function, which today mostly is external counsel, even though it is gradually expanding beyond that, has often been viewed by businesses and also as a result as a remedial function. What I mean by that is when something goes wrong, you need a remedy then you often say okay, let's turn to the lawyers and when there's a lawsuit you see a lawsuit coming, you see a contract at the brink of being breached. You see employment or stop work stoppages or disputes over whether someone, you know…
I feel sorry for the Hong Kong hospitals. If some of your employees say, I'm not going to come to work because you are not providing me or there's nothing you can do that can provide me with the level of safety that I deserve. These are all very difficult issues which are going to end up with legal issues coming out of that, right and your broader value chain and supply chain for your customers and that goes beyond all these it's going to go be way beyond the border and the US, European, and even Japanese auto and other iPhones and all these suppliers are going to say okay, you know, we're going to have issues.
I'm going to start giving out warnings about even you know, someone would think of somebody who is in the e-commerce business in China and the delivery business when they have nothing to sell because the things that they sell are not being made, the meals they're delivering are not being cooked. Their income statements are going to get very seriously impacted also. So these are the kind of things that you can say, well what could a lawyer do about that?
Well first and foremost, you know, the business will come to you and say, okay, give me a quick lowdown on what is my worst case scenario of economic damages? How much of that is based on contract, contract management comes to the fore and there I can only say fortune favors the prepared. We have seen companies before, you know, not necessarily ones I worked for but definitely people many as far ask know sometimes don't even know where their contract is. That's something that maybe they should not be doing inthis current crisis, but maybe that would be a very good wake up call to say let's get that lined up wherever the organization silos might be because there's a good business reason.
In fact, we've talked about opportunity, a lot of these crises present actually opportunities like this is a good time for us to really get our ducks in order to figure out what are the liabilities and rights make sure that you know where your rights are.
The most important thing I do want to mention is we should as the legal function go beyond just fixing problems. We should take this opportunity and say well this if the legal people can latch onto what is the reason for existence of the enterprise and every enterprise has one. Even a nonprofit business has the reason for existence and we need to go from there and devise how can we help in each stage?
Even though they are not necessarily fixing problems, but there are things that lawyers can help with mostly about the relationship between Internal parties and stakeholders, which is a big problem by the way of crises because a lot of times it's about who going to end up bearing responsibility and sometime the organization ends up making a huge mistake because they're trying to protect their CEO. They're trying to protect some business executives and end up sacrificing the organization's opportunity to be authentic and transparent when they need it sometimes. Get into a cover-up situation which end up bouncing back at them later on with much heavier impact and so these are the kind of things that the legal department ought to take advantage of in addition to dealing with a claim under the contract and how do you negotiate with other people.
It's interesting. You said that because you know people often take care of you especially within companies that the legal department is strictly a cost center and therefore, you know provides limited value or at least the all its value only surfaces when it's as you say sort of has to react to some kind of a challenge or a particular specific problem in this kind of situation, you know, I wonder if you could almost view the fact that that legal departments, you know, legal departments are not valued on sort of like quarterly caught P&L kind of metrics right or let's say your sales quota on in the business department or if you're the finance department sort of, you know, are you hitting certain ratios and so forth.
For the legal department its always been much more subtle. And I wonder if that could actually be turned into an advantage here. It struck me you were saying how the legal department might be actually in a good position to look at the what the purpose of the company and why it exists and take a very long-term view. And I wonder if that's really an opportunity here because the legal department can almost by the way it's designed be set up to take more of a long-term view for a situation like this.
You hit the nail right on the head and this is definitely one of my favorite topics. In fact, you know what I'm really dedicating a lot of thinking and passion to the legal function as I'm I think I'm describing something really from a lot of conversations not just me from many other people who may not want to describe it this way in public but in private this is certainly the picture that I get of the legal department. Sometime it is straight jacketed into a silo like many other silos in larger organizations, but often in the what I call a goalkeeper defensive remedial situation. So when we are involved usually something is wrong or in the process of going wrong and that's fine. You know, that's what we're some people say, that's what we pay to do and some you know lawyers or even thrive on doing this. This to the point of being accused of profiting from other people's misfortune, but that's fine. That's part of what we're tasked to do.
But in a organization and a business, they don't hire us to practice law. Now this at this is sort of a provocative statement. Yes, they hire us for our legal skills and insight and abilities, but they don't hire us to practice law. What do they hire us to do to solve problems? Our better selves up front then when your options are limited and there's too late and too little and what is getting to be more difficult situation and reverse it into a more virtuous cycle. We have to persuade our clients that a lot of what we can do is actually like Finance. like HR, like business intelligence. It can be weaved into even the company's operation. You know, you just don't go and say okay I go become part of your strategy. But and in many ways many GCs say we are part of the company's strategic function at the GC level. Yes lot of GCs, especially at American companies sit on the board just like part of the C-suite, but we need to make sure the entire legal function also do that layer by layer rather than being a bit remedial as on the compliance.
There's a saying that oh there is tone on the top, but there is muddle in the middle and battle at the bottom. So that is actually the reality in many companies. So what we get a chance to do is to say well what most lawyers are so busy they really to be honest don't have time to do it. But somehow this has to be done one day when task is a time. We have many lawyers who have to get out of being from behind our desks and start really being part of the business. You start by going out onto sales calls, going on delivery trucks. You have to really walk through the factories and understand what's happening. Follow the aftersales service and product complaints. Because only through those that we can really start getting back in touch with business and the business also once they see that, there's better bandwidth communication. Then they can say okay, you know, we can start sharing more with the legal function rather than okay, let's keep this away from the lawyers.
We are settling into a future in which data is everything and lawyers are very good with laws. Of course, we can identify issues. We can even devise solutions.We can of course document these solutions, but what we don't have really at our fingertips are the data and the facts and we have to find a way to really get into it. Otherwise, we will I think this legal function would be very difficult to get ahead. Sometimes you say okay, that's not our job because we are managers. Risk Managers, right? But my short answer to that is you cannot manage risks without having a thorough understanding of what the up opportunities are, because managing risk alone is like clapping with one hand.
It ends up help making a lot more lawyers complain by many businesses and you're unduly risk-adverse because of this kind of profile and negative cycle many business decided not to tell the lawyers what was going on. So all the more we wanted to be more conservative because without knowing all the data and facts. So that's about it's a long way of saying that we have to have lawyers more than any other function, get out of the silo and be part of the team. In less a pit stop in the race car contacts the read be really part of the team not just by saying it and there are many ways to do it.
But the legal function has to do that and the crisis situation is as I mentioned earlier is one opportunity for just change has needs opportunity to sometime still people that you can have a your general manager or your regional president or your CEO during his or her first term they may or may not because the current issue about the gap between law and business they may or may not include legal as part of their solution. Sometimes you have to go into their middle of the first term or middle of their then when I say first term and that's not necessary number of years, but really a face to go into their second term then the then I think is a good opportunity for doing something that transforms.
We have to behave like an owner and when I say an owner, it's not just shareholder, but really owner of the whole ecosystem. Now people hear that some lawyer who have they're up to their eyeballs and contractor review those just roll their eyes and say I don't have time for that. I'm not trained to do I didn't go to law school to be a business guy. That's fine. But then we have to have it take a much longer time to get into a more meaningful dialogue being
How do we look at? We're not indeed. We're not trained to go to all these things but we are looking into longer-term issues. And when we say longer-term issue what it really means is I think we have to think about when all the dust settles how would the ecosystem for this particular client organization, this enterprise and sure there's something that we can be legalistic about it. We especially in the U.S. You know, we'll see you in court and then we'll see argue over the force majeure clause and the circumstances and something will come out of that. But sometime of course negotiation naturally will go into. Okay, then you push somebody go into bankruptcy or you lose a customer. You know, these are the kind of things that of course, it's not for the legal function to decide but the legal function should behave working with the client and this is not an we will not make this transition overnight.
But over time we will become to think like what our client would want and we will also be mindful of certain lines that we cannot cross as an organization because you don't people to go to jail. You don't want company eventually to hit some you may or may not want to hit the can down the road so to speak because and if you do, so make sure you have a way to pick up that can later on. These are the kind of decisions that not just a lawyer but the whole organization need to figure out and crisis is often the place that the lawyers are brought in on the remedial end, but this is also at the same time…we would have done enough homework about the company's reason for existence, each business unit, their value proposition and then equally important the stakeholders within each ecosystem some of those are external your supplier, your customer, your partners and so forth your contractors some of those even more important to large organization is internal and sometimes they have outsized influence on what the entity should end up doing.
And I have long make an argument to say that legal function lawyers, if you look at what lawyers have been doing over the centuries is we manage relationship between people, whether they are natural people or legal people and this relationship include stakeholders inside be it CFO or the supply chain chief, each of these people going to have outsized influence on what the company ought to be doing and if they have the company “best interests in mind,” that's great. But sometimes they don't so somehow, you know, maybe if lawyers many lawyers become more is because they want Justice right? Maybe this is the moment in which we try to really work with justice and say justice say what the ecosystem is. As for the ecosystem, but we have this solution and that solution and a third solution. Of course, we need to make sure we provide solutions. So we have to picture analyzed but we need to remind people in this solution, some stakeholders will prefer more than others. But ultimately we should try to get the optimal solution. That doesn't mean every single problem will have a clear-cut resolution, but that really the core of the decision that we as lawyers should be a part of rather than as somewhere to call in and say how much damage we would expect if we go down that rabbit hole.
It's really much more holistic thinking. And I think it's an approach which I know you've done a lot of thought about it's something that you've written about as well as the sort of this the redefining the role of the legal department and legal managers and yep and I think this this the way you framed it taking this chance, in this horrible circumstance and at least for the legal department doing right by the company, doing right by people that are affected by this, but also taking it as a chance for the legal department to take this crisis and turn it into an opportunity both for the company and for its own role in the company to harness that long-term view and show value beyond by understanding the business and what the purpose of the company is, as you said as a legal department actually is quite uniquely set up to do that. It sounds a little bit odd. It might sound a little bit counterintuitive, but I think for all the reasons you said it's there and it's a great motivator. I think for legal managers in a company and to redefine kind of what their role is and what their purpose is. To give a little spark to what they can do with their their position in a company, right?
Well I really appreciate you taking the time during these crazy situation to talk with us.
Well, thank you for giving me the opportunity to have this exchange and unfortunately crisis is an opportunity for us to really look at you know, these key things about stakeholders about the long-term and the short-term. But the domestic versus the home base that type of analysis which will hopefully he'll also help us to contribute to solving getting out on top of these crises.
Well, thank you so much Kenny. It's been wonderful and on the show notes and then when I we post on from the LinkedIn account, I'll will find a way for people to reach out to you if they want to talk to you or learn more about how you're thinking on all this could be applied for them and their department or their individual situation. So we'll do that and thanks again Kenny for joining us today.
Thank you, Art.