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  • Leonel Melo

LQ: A proposal for a legal quotient

This document pretends to set the foundation for what I call “Legal Quotient” (“LQ”), defined as the inherent ability of a company (or individual) to detect and effectively capture the opportunities deriving from the legal environment. Once the LQ of a particular client is known, a Legal Strategy can be developed to increase LQ to the desired level.

Some very important precisions are needed from the onset. Firstly, the reference to an “inherent” ability requires clarification. The LQ is the result of a combination of factors that are internal to the client (I expand on the list of factors later in this document), and in a sense they are “structural” factors as they reflect a company’s vision, culture, values, plan and organizational chart, but absolutely all factors can be changed, altered, enhanced to build the company’s internal capacity to seize legal opportunities. In other words, a company can be trained to be legally intelligent. LQ is something that can be taught and developed in an organization.

Secondly, the idea of opportunities deriving from the legal environment calls for some explanation. I will use the term “legal environment” throughout this document (and in subsequent entries) to mean the sum of positive law (from the Constitution of a certain jurisdiction to lower-rank regulations and norms), jurisprudence (the interpretation that courts of law and arbitrators give to positive law, taking into account the relative importance that each jurisdiction attributes to such precedents), as well as the legitimate expectations of the legal community resulting from practice, experience and culture. The first two components are usually included in what is called a “legal system”; since the third component is not always included, and I believe it is essential in the process of building legal muscle, I choose the most encompassing term “legal environment”.

As to what I mean by a legal opportunity, I propose the following: an opportunity is any trait of the legal environment that allows for a company to build a competitive advantage. I like to think of these advantages as “legal advantages” to distinguish them from standard commercial competitive advantages. By now it is probably obvious that these legal advantages result as much from the strengths as from the weaknesses of a legal environment. In fact, the better the legal environment (if analyzed from the perspective of its ability to promote social welfare) the less likely it is to allow for legal competitive advantages; leveling the playing field, which is something a pure legal system aims to achieve, is precisely the opposite of creating legal competitive advantages.

Thirdly, there is the concept of “legal strategy”. I have proposed elsewhere that a legal strategy is a plan to accomplish a certain set of business objectives of a client by leveraging on the instruments provided for by the legal environment. In other words, it is the process for achieving legal competitive advantages. It assumes that there is indeed a set of objectives (“O”) that are known to the client but the strategist should be able to detect and assist the client in developing them. From the definition of the objectives a plan is then designed to achieve such objectives, with a sole focus on using the legal environment as the means to an end. Presumably other elements are being considered by other components of the strategy, non-legal components that are the responsibility of other strategists (by all means working in coordination), but the legal strategist is concentrated exclusively on leveraging on the legal environment, and by “strategy” (“S”) we mean “legal” strategy. The components of a strategy are the different tactics (“T”) that are developed to support the strategy. One of the most common tactical components of a legal strategy is what I refer to as “legal structure”, which I have defined elsewhere as the combination of the diverse legal entities selected (in whatever jurisdictions) to undertake a particular venture or project and the contractual arrangements proposed to connect those entities.

The idea of using legal strategy to achieve a certain LQ, as I mention in the introductory paragraph, suggests that a greater LQ should be regarded as a business objective in itself. Companies have tended historically to see the legal environment as a source of limitations and restrictions that need to be considered to “correct” whatever business objectives are established. Legally smarter companies do go beyond the identification of legal restrictions to detect and capture legal opportunities, and consider the legal environment proactively when developing strategy. The core message of this document is that the legally smartest companies aim at achieving a high LQ because they consider doing so a business objective in its own right. Instead of working on their LQ as part of an integrated strategy to reach a certain business goal, they build legal intelligence into their core values and organizational strengths, as they are confident that this by itself would bring opportunities, legal advantages.

Finally, some discussion is needed about the level of LQ that a company should consider “desirable”. Of course there is a cost to legal intelligence, and as with many other things the rule of diminishing returns applies here. Each company needs to assess the point where the added cost of legal intelligence is not adequately compensated by an increase in legal competitiveness. Finding out what is the appropriate LQ for a company is an important element of legal smartness.

I suggest that there are eight main factors with the ability to positively impact a company’s LQ, which is the same as saying that the legally smartest companies have some form of a powerful combination of these factors. I discuss in a later entry what possible weighting system could be developed to transcend from this list to an actual quotient. These enabling factors (which I describe in detail in subsequent entries, including the way each one impacts LQ) are: 1. A general knowledge of the functioning of the legal environment by the management team of the company; 2. An understanding of the underlying economic logic of the legal environment; 3. An understanding of the core legal instruments; 4. Integration of the legal function to the core strategic and operational processes; 5. Continuous monitoring of the legal environment for the identification of legal opportunities; 6. A strategy oriented towards the creation of “legal assets”; 7. A strategy oriented towards an effective management of legal risks and liabilities; and 8. A strategy oriented towards the optimization of the company’s worth.

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