The China syndrome

The dominance of Western-trained lawyers working in global companies operating in China is ending quickly. Leigh Dance assesses the rise and rise of the homegrown in-house lawyer

Having recently made my sixth trip to China in the last five years to meet and work with locally-based lawyers, I was struck by the rapid changes in the country's legal market.

This was most clearly underlined by the senior in-house lawyers I met. All were senior in-house counsel of large multinationals, and every one had a Chinese name. In the past I had noticed progressively fewer Western inside counsel among China-based international companies, and now the unanimity stood out.

In a random selection of 40 global corporate counsel in China, to find that all were Chinese seemed significant. During my stay in Shanghai, and in ongoing conversations this last month, I asked inside counsel and private practice lawyers in the region just what this meant, and what is changing about the in-house counsel role in global companies in China today.

China-based expats and local lawyers have consistent views on the trend towards more Chinese in-house lawyers with major companies. One local in-house lawyer with a US-headquartered global company explained that corporations need to localise in the China market as they mature. Another said: "As the business grows, it's typical to obtain reliable services from within, in line with HQ practices and often for compliance reasons." And another cited the reasons as "pressure for cost reduction and a general mandate to use local talent".

Amy Sommers, a partner with Squire Sanders & Dempsey, who has been based in Shanghai for six years, sees two reasons for the trend: "There is a growing pool of highly-qualified and experienced People's Republic of China nationals with domestic and international experience. Global companies no longer need to look primarily to their existing roster of in-house counsel to transfer them into China in order to fulfil senior legal department functions."

Second, Sommers points to cost. "By hiring Chinese nationals, these companies can offer very attractive compensation but avoid an expatriate package. However, the highly-skilled practitioners sought by global companies command a high earning power and so, in total, the local hire strategy may not be as much of a cost advantage as they expect."

Dan Roules, another Squire Sanders partner and a US-qualified lawyer in China for eight years, says that a contributing factor is the effect of the world financial crisis. "It prompted a number of Chinese professionals overseas to return home where job prospects may be more alluring than in the US and other attractive markets of the past," he says.

We often forget that the existence of a class of legal professionals goes back less than 30 years in China, so the landscape will inevitably change. In 1992 there were just three international law firms with registered offices in China, and now there are close to 200. The expanded pool of local candidates for China in-house roles is also fuelled by their training in international law firms in China.

Angell Xi, Asia-Pacific counsel for GE Fanuc Intelligent Platforms, observes: "There is more Chinese legal talent in the market, with good qualifications and experience. They can practically solve more problems and can be less costly than foreign counsel." Xi finds that much of the new homegrown talent is well educated and equipped with good language and communications skills, and often good leadership skills as well. They have a global perspective, learned and fostered from practising in both domestic and international law firms. Many have worked within global companies where they were mentored by experienced foreign and Chinese counsel.

An overriding advantage mentioned by virtually all of the counsel I spoke with is the capability of Chinese-national in-house counsel to help interpret and guide their company's compliance with laws and regulations. Avoiding wrongdoing and complying with laws at home and abroad is a clear priority for global companies, considering the relatively high risk of fraud and corruption that exists in the region. Local in-house counsel bring their language fluency and cultural understanding to the implementation of compliance programmes. Chinese lawyers are viewed as better able to contribute on compliance than their Western counterparts due to their understanding of the Chinese business and regulatory environment, as well as their own companies' business and culture.

Beth Bunnell, previously a partner in a global firm, regional counsel for a Fortune 100 company in the region, and now co-head of Asia Legal Resources, argues: "With China's developing regulatory landscape, lawyers here must be particularly skilled at navigating the opaque filing and approval requirements and carefully managing communications both internally and externally."

What skills are expected of in-house counsel in China today? The answer depends partly on the perspective. Bunnell points out that the skillset for in-house lawyers in China is not unlike that of other jurisdictions - strong legal technical skills, effective communications, commercial acumen. Also important is the ability get things done - to work independently and replicate locally the company's internal processes. Another skill mentioned frequently relates to risk management. One Chinese in-house counsel described it as "the ability to bridge the risk management gap between local and HQ".

From an outside counsel perspective, Sommers echoes this last comment and suggests there are two key skills required, assuming a baseline of competency as a lawyer. One is an ability to function as a bridge - between the headquarters and the operations, between international and local expectations and between the business and legal functions within it. She says: "In-house lawyers working for [multinational companies] in China are often expected to act as referees: 'is what the business people are saying really true?' 'Can we really do this?' Or, 'why aren't we doing X, Y and Z the way we do at the home office?' A skilled and effective in-house counsel can bridge the differing perceptions and expectations of various stakeholders."

The second critical skill in Sommers' view is good judgement. Often in China the answer to what should be done or how to do it is not black and white. "Striations of grey colour almost every situation and so having well-developed judgement to assess what is an acceptable risk and what is not, what concern is real and what is not, is vital in protecting a company's interests," she says.

Squire Sanders' Roules argues that the greatest challenge facing smart native Chinese counsel when they become China counsel to a global company is the tendency for colleagues in the US or in Europe to imagine that China is 'the Wild East' and that their own counsel need to be second-guessed. The consistent exercise of good judgement is one way to overcome that challenge.

Mike O'Neill, general counsel for computer manufacturer Lenovo, has an excellent vantage point from which to comment. He has in-house counsel in North America and Europe, as well as a large team of Chinese-qualified in-house lawyers in Beijing. O'Neill sees the change happening more slowly, and sees real differences between Chinese and Western-trained business lawyers and their role in the corporation.

"Chinese legal training, while excellent in the law, seems to concentrate more extensively on codes and regulations than on case law. Consequently, there is not as much emphasis on the analysis of legal theories applied to fact patterns," O'Neill says. He believes that these differences in education and practice result in Western-trained lawyers being more adept as advocates, both inside and outside the court room.

Western lawyers are often engaged by their corporate leadership in a role that goes beyond their functional expertise as lawyers, a situation which he doesn't see happening often with Chinese lawyers.

O'Neill concludes: "As the Chinese business leader roles change into global executive roles, Chinese-trained lawyers who have global experience will be given similar opportunities to engage not just as lawyers but as business partners. There is a wealth of talent in the Chinese in-house legal functions that is yet to be fully tapped."

Leigh Dance is president of ELD International, a consultancy specialising in the legal services industry.

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Is the expat lawyer still relevant in modern China?

Given the rapid ascent of Chinese in-house counsel in global companies in China, an eventual impact could be a reduced need for Western-style legal advice from global law firms. Inside and outside counsel in the market agree that there is an ongoing need for international law firms with China offices. However, all suggest a trend towards far less dependence on them as compared to the days when international law firms were there to hold the hands of companies new to the region.

Many local in-house counsel say they need international law firms only for complex, cross-border transactions or matters with international impact. The practice areas often mentioned where they see global law firms' value include, unsurprisingly, M&A, regional dispute resolution, restructuring, financing, capital markets and international compliance.

Angell Xi, Asia-Pacific counsel for GE Fanuc Intelligent Platforms, summarises the benefits: "International firms with worldwide offices can support a multi-jurisdiction deal in a more reliable and effective way. They have a track record with complex global transactions, and their insurance and controls tend to make multinational companies more comfortable for very large deals." She finds that international firms present such clients with fewer challenges of culture and communication, and the quality of work and the end product tend to be "more manageable and foreseeable than with local firms". On the other hand, Xi finds that for matters such as domestic dispute resolution (especially litigation), global companies often prefer not to consult international law firms.

Another Fortune 50 Asia-Pacific counsel comments: "We still need them, but only in certain transactions and primarily M&A. Local firms have also improved their quality in M&A. The international firm advantage is only obvious when the M&A team is based outside of China."

One Western-educated Chinese inside counsel comments that there are times when the client needs to rely on the trust of a reputable international firm that "understands the gravity of executive liability back home and can navigate the nuances of operating abroad".

Lenovo general counsel Mike O'Neill (pictured) says: "For a global Chinese company, it's not completely clear how we can be advised more effectively by Western lawyers in China. They are much more expensive than the local counsel. I suppose an advantage would be if they could offer valuable information and guidance relative to other jurisdictions, integrated with the local China advice."

Peter Kalis, chairman of K&L Gates, suggests one way that international law firms are responding. "Our strategy in greater China reflects evident market trends: our lawyers in the region are predominantly Chinese lawyers who have been trained and educated both in China and in common law countries.

"This strategy allows us to meet the requirements of the Chinese market and of global corporations doing business in China. Indeed, in this region we represent both Chinese enterprises and foreign enterprises in roughly equal measure."

There's a subtle consensus among China-based legal practitioners that while the pool in China of highly qualified, experienced in-house lawyers who can adapt to competing expectations of stakeholders has grown tremendously, it's far from meeting the demand. Amy Sommers, partner with Squire Sanders in Shanghai, sums it up: "Global companies recruiting these kinds of professionals in China are typically finding them at international law firms, where the candidates have been exposed to Western expectations of how legal work should be done. This suggests that international companies do not necessarily perceive local law firms as possessing all the attributes they would expect in their counsel - whether outside or in-house."

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