The regulator’s monitoring of the marketplace in 2022 found 1,882 promotions from unauthorized firms that required amendment or withdrawal following intervention by the agency, an increase of 34% over the 1,410 promotions that received such treatment in 2021. An additional 8,582 promotions from authorized firms were similarly required to be amended or withdrawn, compared with just 573 in 2021, a massive increase of 1,398%.

The FCA notes that “[l]ast year we saw an increase in the use of bloggers and influencers on social media such as Instagram, Facebook, and YouTube, promoting financial products, particularly investment products, to younger age groups. We also saw an ongoing trend in the number of bloggers promoting credit on behalf of unauthorized third parties, with a particular growth in financial promotions targeting students.”

Finfluencers & regulations

The emergence of finfluencers (short for financial influencers) – individuals on social media who advocate a particular type of investment option – is highlighted in the Royal Mint’s 2022 Gen Z Investment Report, which found that 23% of young investors are followers of finfluencers.

… finfluencers need to be aware that social media is not an oasis where consumer protection law, advertising standards and intellectual property rights can be ignored.

Some see the dissemination of financial information via social media platforms as a healthy way of engaging people in investment activity, and they welcome the greater transparency inherent in this mode of communication. However, finfluencers need to be aware that social media is not an oasis where consumer protection law, advertising standards and intellectual property rights can be ignored.

Regulators around the world have begun to issue guidance to both finfluencers and their followers. The 2021 Statement on Investment Recommendations on Social Media by the European Securities and Markets Authority (ESMA), explores the boundaries between providing financial information and providing financial advice and recommendations online. Also, the Securities and Futures Commission of Hong Kong’s Guidelines on Online Distribution and Advisory Platforms stipulates that any licensed financial adviser will be held accountable through all channels, including social media. The New Zealand Financial Markets Authority has a Guide to Talking about Money Online, providing tips for consumers and finfluencers. Meanwhile, the Australian Securities and Investments Commission has an information sheet for finfluencers who include details of financial products and services in their content.

If finfluencers provide financial advice and recommendations per regulators’ definitions of those terms, they must adhere to regional regulations on authorization and conduct of business. However, the popularity of finfluencers, which is being fueled by shifting attitudes among investors and the more varied range of channels through which they can enter the investment market, makes it difficult for regulators and firms to ensure that customers are being treated fairly.

New attitudes toward investing

Factors such as new technology, the global pandemic and climate change concerns have caused shifts in investors’ attitudes. The Royal Mint report paints a mixed picture of young adults’ investment behavior. On the one hand, social media was found to have caused 17% of those surveyed to adopt a get-rich-quick mentality, with people expecting to double or triple what they had invested within a short space of time.

On the other hand, the report also finds that when losses occurred, 64% of 16- to 25-year-olds actively looked to diversify their risk by adding what they believed were “safer investments” to their portfolios. A total of 80% of that same group now dedicates a portion of their income to investing in their future, with two-fifths stating the pandemic made them realize the value of having secure finances. As a result, more than one-third have taken it upon themselves to learn about investing as a way of helping to grow their money.

A 2021 research report by the FCA highlighted that, for those investing in high-risk products, “the challenge, competition, and novelty are more important than conventional, more functional reasons for investing, like wanting to make their money work harder or save for their retirement.

Case study of a finfluencer

Paul Pierce, a former Boston Celtics pro basketball player and NBA Hall of Famer, promoted EthereumMax (EMAX), a cryptocurrency coin or token, on social media as did many other celebrities. In his tweets, Pierce showed screenshots of alleged profits along with links where followers could make purchases. Pierce is one of many celebrities who made such claims of financial gain using these types of investments. During his promotion of EMAX tokens on Twitter, Pierce failed to disclose that he was paid for his promotion with EMAX tokens worth more than $244,000, the US Securities and Exchange Commission (SEC) alleged.

“This year, we will continue to put the pressure on people using social media to illegally promote investments, which put people’s hard-earned money at risk.”

— Sarah Pritchard  | Executive Director for Markets, Financial Conduct Authority

Pierce has now agreed to pay more than $1.4 million to settle charges he illegally promoted digital assets, the SEC stated in February. This settlement is larger than the $1.26 million paid by Kim Kardashian to settle similar SEC charges related to promoting EMAX. The settlements with Pierce and others mark the latest move by the SEC to crack down on celebrity endorsements of crypto products.

The increase in the number of noncompliant finfluencer promotions suggests that as investors appear more willing to take risks, firms’ marketing departments may be tempted to make financial promotions more exciting.

In the UK, for example, regulations are based on the principle of being clear, fair and not misleading. Regulations also provide detailed requirements for firms about including the need for financial promotions to give a fair and prominent indication of any relevant risks, and to be presented in a way that is likely to be understood by the average member of the group to whom it is directed. Further, these promotions cannot disguise, diminish or obscure important elements, statements or warnings.

The future

This year, there won’t likely be any letup in regulators’ focus on the use of financial promotions. Sarah Pritchard, executive director for markets at the FCA, gave clear indication what the future holds. “This year, we will continue to put the pressure on people using social media to illegally promote investments, which put people’s hard-earned money at risk,” she said.

As the number of tools and resources issued by regulators for monitoring promotions increases, so too does the risk to firms of being caught for noncompliant behavior. The FCA is consulting on the introduction of tougher checks for financial promotions and measures that will remove harmful promotions more quickly.

Finally, firms in the UK need to consider the impact of the new Consumer Duty, which many are due to implement in July 2023. “Under the duty, firms will need to demonstrate that they are providing consumers with information which helps them to make effective and informed decisions about financial products and services,” the FCA stated.

In the US, the SEC is moving to chastise all bad actors, not just celebrities, according to Gurbir S. Grewal, director of the SEC’s Division of Enforcement. “The federal securities laws are clear that any celebrity or other individual who promotes a crypto-asset security must disclose the nature, source and amount of compensation they received in exchange for the promotion,” Grewal said.

Replenishment is a metric the Thomson Reuters Institute tracks to essentially account for timekeepers leaving a firm compared to timekeepers joining it. A replenishment ratio of 1.0 indicates a 1:1 ratio of timekeepers going in compared to those going out. Anything below a 1.0 indicates a shrinking timekeeper group.

It should be noted from the outset that both non-equity and equity partner tiers are in a long-term pattern of contraction. In fact, each tier only shows a single quarter of replenishment above 1.0 since 2010, with the tiers frequently trading places in terms of which is being replenished more robustly.

But since early 2020, a clear and often widening gap between the tiers can be observed. Replenishment of non-equity partners has hovered around 0.8. In contrast, replenishment of equity partners has varied relatively widely, dipping as low as 0.54 before recovering to 0.75 at the end of 2022. At that same time, however, non-equity partner replenishment jumped to 0.94, the first time that non-equity partner replenishment reached that high since 2016.

An increasing population of non-equity partners could be both a benefit and a detriment to law firms with two-tier partnership structures.

On the downside, non-equity partners naturally tend to bear little responsibility for business development and new client generation. Their contribution to the firm’s bottom line, therefore, depends on their productivity and individual profitability. One might hope that a lack of business development commitments would mean that non-equity partners have more time to devote to billable work. However, long-term patterns indicate that non-equity partners consistently underperform their equity partner counterparts in terms of hours worked per lawyer per month.

Going back to 2005, as far back as our data exists, there have been rare examples of non-equity partners approaching parity with equity partners in terms of productivity. However, the typical gap between the average equity partner and the average non-equity partner is between 7 and 11 hours per lawyer per month. Given the typical billing rates of these lawyers, that can translate into a sizeable gap in revenue.

On a more positive note, non-equity partners usually contribute to firm profitability in other ways. First, as the nomenclature would suggest, non-equity partners’ salaries do not vary based on firm equity, so they represent a fixed cost for the firm. In heady times, this can be a particular benefit as the payout to these partners will not vary as greatly as it would for equity partners.

In that same vein, the existence of a non-equity partnership structure creates an opportunity for law firms to offer a place of relative prestige — within the ranks of partnership — to lawyers who otherwise might not meet the criteria for full partnership. Many of these lawyers might be high performing in their own right and bring value to the firm in other ways, and they also might be at a greater risk to leave the firm if not for an upward option to non-equity partner status.

On a related point, the existence of a non-equity partnership tier can allow law firms to create upward mobility options for lawyers within the firm, while still closely protecting the denominator in the ever-important profits-per-equity-partner metric.

The upside of fixed-cost, non-equity partners, could potentially count against law firms during times of economic contraction, however. As these partners are a fixed cost, their relative share of firm expenses could grow as a percentage of revenue should the firm’s share of legal demand decrease, creating negative pressure on firm profitability.

Non-equity partners may also create profitability pressure based on the realization percentage of their rates. As partners, non-equity partners typically command among the highest rates at the firm; perhaps not as high as equity partners, but certainly above those of associates. Looking at the realization of non-equity partner rates against their equity partner peers, it is quickly evident that non-equity partners are once again trailing the pack.

There is a persistent two-percentage point gap between the collected realization of an equity partner’s standard rate compared to a non-equity partner. This will likely have a detrimental effect on the non-equity partner’s relative profitability.

Some of this differential may be due to compensation structures and who has ultimate billing authority. It would be natural to suspect that, if an equity partner is the billing partner on the majority of matters and that equity partner’s performance is based in part on realization, the equity partner would be more likely to pass write downs or discounts on to other timekeepers, including non-equity partners. This could explain why non-equity partners also lag in terms of billing realization itself. If non-equity partners absorb a larger share of write-downs and discounts, this will predictably drive their billing realization downward, and their collected realization will decline along with it.

There is no clear answer as to whether a two-tier partnership structure is beneficial to a law firm. Indeed, there are myriad factors at play, well beyond those examined here.

Perhaps the clearest answer to whether a two-tier partnership structure is right for a law firm, is also a clichéd yet popular lawyer answer of It depends. If non-equity partner costs structures and profit margins, coupled with the potential to retain additional experienced talent, can work in a firm’s favor to outweigh the potential downside of a large, high-priced fixed-cost staffing tier, then it certainly can be beneficial.

Given the complexity of the question, however, this is far from assured.

This article was written in cooperation with Bruce MacEwen and Janet Stanton of Adam Smith, Esq.

Given that increased operational focus, there is a belief that corporate law departments are expecting similar innovative thinking from their outside law firms. However, data from Thomson Reuters Market Insights indicates that while law departments are generally satisfied with their outside firms, they believe firms’ overall innovation is lacking compared to other performance indicators. And even as law firms continue to invest in technology and other solutions, there may not be an incentive to innovate in the way that clients wish.

According to the Market Insights data, corporate law departments rate their outside firms’ innovation at a 7.5 out of 10 — a measure that has stayed consistent in recent years, as the rating has hovered between 7.3 and 7.5 dating back to 2019. While the rating may seem high, it actually ranks as the lowest key service attribute measured, with other attributes such as quality of work (8.9), communication (8.5), efficiency (8.3), and value (7.8) outpacing innovation in each of the past five years. The figure also stays consistently as the bottom ranking regardless of geography, including in the United States (7.6), the United Kingdom (7.0), Canada (7.4), or mainland Europe (7.7).

Corporate law departments’ overall rating of their outside firms stands at 8.6 out of 10. The data is drawn from interviews with 1,831 in-house counsel during the 2022 calendar year.

This rating of firms’ innovation may come as a surprise to the firms themselves, which have been continually pumping resources into technology purchases. The Thomson Reuters Law Firm Financial Index (LFFI) reveals that on average, law firms have seen jumps in technology spending of at least 4% year-over-year for each year dating back a decade. In each of the past five years (outside of pandemic-addled 2020), those tech spending boosts were all greater than 6% year-over-year.

So, where’s the disconnect? Jason Winmill, Chair of the Buying Legal Council and Managing Partner at corporate law technology consultancy Argopoint, says that based on his conversations with corporate law departments, they do indeed find their law firms’ innovation lacking. And Winmill says he has a theory as to why. Although firms may be innovating in terms of technology, he explains, they’re not innovating in the way that clients really want — in the firms’ business model.

“Outside counsel does excel in developing innovative responses to legal questions that emerge from today’s dynamic legal environment,” Winmill says. “Where outside counsel falls down is, as a group, they have failed to develop innovative business models, more attractive commercial approaches to solving clients’ problems, and innovative service delivery models or strategies that provide quality legal representation at better value.”

Law firms’ use of alternative billing structures and even alternative legal services is growing, but the overall alternative market still represents a fraction of the overall legal market. Thomson Reuters 2023 Alternative Legal Services Providers (ALSP) Report, for instance, estimates the total ALSP market to be around $21 billion, accounting for about a 20% compound annual growth rate. However, that figure still pales in comparison with an overall global legal market that’s nearing $1 trillion by various sources, with more than 40% of legal buyers anticipating even more upcoming spend increases.

Largely, Winmill says he believes the historical success of the legal market might be its own biggest barrier to change. “The law firms have built very impressive business models,” he says. “And my hypothesis is that the outstanding financial results of the Am Law firms doesn’t provide them with much incentive to innovate commercially. It almost seems to be a ‘If it ain’t broke, don’t fix it’ mentality.”

Then, are corporate law departments destined to think less of firms’ innovation than of their other attributes? Perhaps, barring a major shift in the legal business model. But even if law firms were to more rapidly change how they conduct business, corporate law departments themselves may not be pushing for more innovation out of their legal partners, if not by their words than by their actions. Market Insights data finds that when asked what attributes they want their law firms most to improve upon, just 2% of corporate law respondents mentioned innovation. That ranked far below more common concerns such as comparative costs (27%), responsiveness (8%), and quality of advice (7%).

Indeed, until corporate law departments start focusing on their outside law firms’ innovation and making purchasing decisions based on innovation, the incentive to change remains low. And until that happens, there may remain a disconnect between what corporate law departments see as innovative, and how their firms choose to approach innovation.

For the immediate future then, one can expect to see innovation remain corporate law departments’ lowest ranked key service attribute of their outside law firms.

If you’re interested in understanding more about how the insights that underpin this month’s “Insights in Action” article are generated and how this data can better position your firm to adapt to changing market conditions, visit here.

Therefore, it’s no surprise that in this recent released survey of tax officers from KPMG these concerns have not abated. Indeed, close to 50% of chief tax officers report that they continue to struggle to find talent and more than 60% believe the changes to U.S. and international regulations (for example, around BEPS and Pillar 2) will significantly impact taxes.

Thinking about data

Before there can be any discussion about technology and how to use to it to solve for the challenges mentioned, it is necessary to first understand the data situation. The corporate tax department is one of the few departments within the company that gathers massive amounts of data from across the organization. How tax departments go about acquiring this information is a challenge, but most would say the bulk of their time is spent gathering data.

Succinctly put, tax data problem can be “defined as the inability to identify, collect, and leverage data to efficiently and effectively support compliance planning and opportunity management within the tax function,” according to a recent KPMG webinar.

The typical tax department is challenged in numerous ways, such as how it:

• • • keeps up with regulatory changes and provide information faster to regulatory bodies;
    • gathers data;
    • determines the quality of the data; and
    • assesses the limitations of current technologies.

To solve for these challenges, corporate tax departments can look to build an ecosystem to manage their data. Doing so creates a repeatable, clear way of processing the data needed for their various uses. A data ecosystem is a platform that combines data from numerous sources and builds value through the use of processed data. The use of the term data ecosystem is often used and understood in technical terms, and it most often sits with the IT department; however, tax departments can create a less technical but highly efficient ecosystem. (Of course, this is not to say tax departments don’t need to work with the IT department. They do.)

What are the necessary pieces for an ecosystem?

In the general terms there are four central components to a data ecosystem: data sources, data extraction, data storage, and data analytics. These terms can be specified for use in a corporate tax department in the following ways.

Data sources — Tax departments can catalogue the list of information that is needed for compliance work, strategic business decisions, and advising the company. Next, they will determine where each of the information resides and whether the data is structured or unstructured. Structured data is data that is in a standardized format, has a well-defined structure, complies to a data model, follows a persistent order, and is easily accessed by humans. While unstructured data is datasets (typical large collections of files) that aren’t stored in a structured database format, and most likely needs to be human-generated.

Data extraction — After determining where the various data resides and the format in which the data exists, there will need to be plan for how and when to access this information. Based on the timeliness of the information needed, priorities should be set accordingly. Included in this step should be considerations on how the data will be managed. For example, if the data is unstructured and therefore needs to be downloaded, departments would need to determine the best format needed for where it is to be uploaded and how it is to be used. If the data is structured, (i.e., if it is in an ERP or CRM) then, the department needs to identify how best to move the data into a format that can be analyzed by the tax team.

Data storage — The decision of how and where to store the collected data is the next step in establishing a data ecosystem. Ideally, this is an opportunity to create and use a system that is duplicable, especially when information is gathered from certain departments with frequency.

Data analysis — The tax team is now ready to have the data analyzed so they can do their job. However, this maybe a place where upskilling is required. The ability to quickly access information, make sense of it, and then provide an output can be key to working better and smarter, but it may require specialized training or hiring.

By creating an ecosystem for data, tax department leaders can now sit with their IT colleagues for a robust discussion on which technologies are needed to enhance how the corporate tax department works. The data ecosystems provides the IT team with a clear map, including what the pain points are for the tax group, and what technology or personnel investment is needed to allow the tax department to function at its best level.

More recently, momentum for more tax transparency — which essentially defines whether or not an organization is paying its fair share in taxes (whatever that means) to the communities in which it does business — has accelerated as an important part of tax policy considerations. In part, this push for more transparency has been driven by the increased priority of sustainability among stakeholders.

One aspect of these key tax policy tactics is the use of reward or punishments to drive preferred outcomes. However, as governments require more disclosure around environmental, social, and governance (ESG) issues, the stakes in using the carrot-or-stick approach get higher, as government regulators demand more information. While what to disclose becomes easier with regulation, the potential for blowback and negative reputational issues for companies increases, again because of the expanded potential for misinterpretation of tax data.

Given these risks, companies are spending more time assessing their communications strategies around tax transparency. Brett Weaver, partner and ESG Leader in Tax at KPMG, says that the narrative around disclosure of tax information is something he spends more time helping their clients think through.

Using rewards & punishments to measure progress

Up to this point, tax credits have been a predominant mechanism to spur investment in emerging industries in the corporate tax space, primarily within the U.S. Indeed, the Inflation Reduction Act (IRA) is the most recent example of incentivizing tax policy by using reward mechanisms. Weaver describes it as the most fascinating modern industrial engineering policy of its time because of the Act’s use of “layering” incentives.

The IRA’s baseline investment tax credit is set at 6%, but for companies that agree to pay a prevailing wage and invest in apprenticeship programs, the tax credit can be as high as 30% for the construction of a solar power plant, for example. Also, if raw materials are domestically sourced and equipment is made in the U.S., the tax credit opportunities are even more attractive.

Yet, outside of the U.S., penalties are more common, and Weaver predicts that will continue as a primary practice both in the U.S and in other countries. One of the emerging areas of utilizing penalties is so-called “dirty supply chain taxes,” such as an increased levy on the use of plastics for packaging. California is leading the way in this area, and Weaver says he sees other states likely to follow suit.

Complicating tax communication with sustainability

Tax transparency remains a conundrum for companies and their stakeholders in understanding what it means for their business and how to navigate the complexity of messaging. Weaver says he advises his clients to craft a communications strategy using both qualitative and quantitative components. Going exclusively with a qualitative or a quantitative approach is insufficient and carries too much exposure, he adds.

“Stakeholders are skeptical on stories because there is an assumption that the story is there to make the company look good,” he explains. “This is where the data plays a key role in backing the story up.” Likewise, the intent of the message by just using data, without the story, can be misunderstood.

To help organizations get started in their journey, Weaver uses the global standard for public reporting on tax from the Global Reporting Initiative (GRI) to outline basic standards because GRI requires disclosure of the company’s tax risk management policy, the red-line around tax that the company will not cross, the controls that are in place around how tax decisions are made, and the mechanism to ensure there is transparent reporting to the board and the C-Suite.

The GRI standard and others like it are just the starting point for analyzing the right mix of sharing quantitative and qualitative information in the tax story, however. For example, Weaver also advises focusing on the story first and weaving the data into the narrative. Key ingredients to incorporate in this communication include:

• • • stating what the organization is doing around sustainability and why;
    • outlining how the company is putting capital, both human and monetary, behind the initiatives for the benefit of the planet and the local communities in which the company operates;
    • building trust in the fundamental belief that partnering with governments to make progress in mutually beneficial investments is necessary (indeed, governments typically cannot accomplish these planet- and people-related transcendent goals without private sector capital);
    • summarizing the impact of these investments on the company’s stakeholders to include how the tax revenue that the company pays benefits the local communities in which it operates; and
    • then, reporting the effective tax rate as the results of the company’s investments, partnerships, and joint funding.

It is critical for companies to put context around the tax data through a well-crafted narrative that explains the strategy in laymen’s terms on what the company is accomplishing and then link the tax strategy from there. Only then can the company ensure it is effectively communicating its tax strategy and mitigating the risk of tax data misinterpretation.

While 81% of state and county/municipal courts professionals say their courts are still holding some form of virtual hearings, those numbers are down, according to the Thomson Reuters Institute’s recent 2023 State of the Courts Report. Compared to one year earlier, in which 89% reported using virtual hearings, resulting in an 8-percentage-point drop. That drop is even more steep on the county/municipal court level, resulting in a 12-percentage-point drop over the past year.

Some access-to-justice advocates worry how a shift away from virtual hearings may impact efforts to improve court access to all citizens, particularly as those hearings have been touted as a potential path to opening up availability for underrepresented populations. As the State of the Courts Report suggests, however, the future may ultimately be a mix of in-person and virtual hearings. This, of course, will result in an increased focus on how to truly open up virtual hearings to all, as both constitutional and technology access barriers remain to full acceptance of such hearings.

The mix of the future

The move to go back in-person hearings doesn’t surprise retired Judge Ronald Hedges. Following a 20-plus year career as a Magistrate Judge in U.S. District Court for the District of New Jersey, Judge Hedges now is principal of his own firm, Ronald J. Hedges LLC, and chairs the American Bar Association (ABA) judicial division’s court technology committee. In conversations with courts around the country, Hedges says he has found a large appetite to start going in-person once again.

However, what he ultimately sees as the end result of the return to courtrooms is not fully in-person or remote — the answer may lie somewhere in between. “You’re going to be seeing a mix of proceedings,” he explained. “You’re going to be seeing live proceedings, there will still be some remote proceedings, and there are also going to be hybrid proceedings.”

Hedges points to potential constitutional issues that could come out of virtual jury trials, such as effective cross examination and 6th Amendment issues like the right to confrontation in criminal cases. However,  there are other hearings throughout a matter that could lend themselves more towards virtual proceedings, such as initial appearances in a criminal case, which would then make it unnecessary to transport a defendant to the courthouse for a short appearance.

Indeed, in the State of the Courts Report, litigants’ first or initial appearances and motion hearings were the top hearing types being conducted virtually for criminal cases, while motion hearings were the top hearing type conducted virtually for civil cases.

This tracks, Hedges notes, as a version of virtual hearings were already in use for some types of early proceedings even before the pandemic. Virtual hearings are primarily used as a matter of convenience, while still affording due rights. “Before I left the bench, we started doing telephone conferences” for multi-district litigation, Judge Hedges says. “Because frankly, it didn’t make much sense to me to make 30 lawyers or so truck into Newark, N.J., from across the country for a half-hour program.”

The lingering tech access issue

Many believe that a move towards more of these virtual hearings may help close the access to justice gap. The State of the Courts Report found that more than three-quarters of respondents (76%) believed virtual hearings would improve access to justice, an increase from 55% just one year prior.

Hedges acknowledges this change, but also reserved some skepticism. “There is a caveat to this and that is technology, and whether or not courts still have the technology to do what we were talking about.”

The report also reflected this worry. Access for people with lower-levels of digital literacy ranked as the top challenge for those conducting and participating in virtual hearings, with 42% of court professionals ranking it as a top challenge. Access to technical support (34%), access to broadband networks (26%), and access to technology needed to participate (26%) also were tanked within the top five challenges, the report shows.

For Hedges, these challenges need to be addressed before virtual hearings can truly take hold. “If courts are going to allow remote proceedings, then I think there has to be something done to ensure that every population has each equal access to that,” he says.

One possible solution that’s been discussed is giving courts budget increases to allow them to supply technology to parties so they will be able to participate. But Hedges is skeptical of the economic realities of attempting that method. “It’s like everything else when you’re talking about resources like this, it’s where’s the money going to come from?” he explained. “If someone is in a rural area… and they don’t have reliable broadband access or 5G access or the like, I don’t see them being given computers so that they can access online court proceedings. That’s just not going to happen.”

Until these constitutional issues are resolved, there may be an upper limit on the effectiveness of virtual hearings, as courts continue to use them for more administrative and procedural proceedings rather than actual trials. There are some lessons that courts have taken from the pandemic, with what type of proceedings will work virtually chief among them, says Hedges.

“At the end of the day, people saw all of this as being something we had to do at the time, because we didn’t have another way to get trials done,” Hedges explains. “And now there’s a big move to do trials, but I really don’t see much of an interest anywhere in having remote trials. I just don’t — and I think that’s unfortunate. But I appreciate why it’s done, and I can certainly understand that there just may not be an opportunity to do as much remote anymore.”

For further insight, you can download a full copy of the 2023 State of the Courts Report, here.

This placed added pressure on firm profitability, and as we close the books on 2022 it has left us wondering: Was it worth it?

To help answer that question we evaluated the reasons for, and impact of, such fast compensation increases.

As law firms grappled with the need to reduce the high levels of turnover that many firms experience in 2021, raising the level of associate compensation was one clear weapon in firms’ arsenal. Since 2014, firms had never experienced associate turnover above 20.0%, but by the end of 2021 that figure had risen as high as 24.0%.

Looking at the chart above, we can see that, overall, there has been a notable decrease in turnover since that peak in 2021. Unfortunately, the results of 2022 were still poor compared with most years, and while retention improved, it may have been bolstered by factors outside of firms’ efforts in the area. For example, as the environment became more economically uncertain and legal demand for law firms decreased on average, many associates may not have had the leverage to make a move to a new firm.

What we want to know, specifically, is whether firms that made aggressive pushes in associate compensation growth saw significant improvements in turnover rates, and whether they outperformed more conservative firms.

To begin this analysis, we identified the segments of law firms in which we were interested:

• • • High-growth law firms — those in the top 25% of fastest associate compensation growth; and
    • Low-growth law firms — those in the bottom 25% slowest associate compensation growth.

We found that the high-growth firms had a statistically significant improvement in turnover rates, down 2.8 percentage points to 18.4% turnover in November 2022, compared to an average of 21.2% turnover in November 2021. When we looked at the low-growth firms, although there was an improvement in turnover, we were unable to identify a level of significance great enough to discount the possibility that the results were a product of random chance.

More importantly, we observed that the percentage point gap between the high-growth and low-growth firms in turnover widened from a 2.8 percentage point difference in 2021 to a 3.5 percentage point advantage in 2022. Statistical tests revealed that high-growth firms’ average turnover was significantly better than low-growth firms’ average, which strongly suggests that the results seen in the high-growth firms are not merely a result of the industry’s overall improvements (a case of a low tide lowering all boats), but more likely the result of a concentrated effort.

As stated in last year’s 2022 Report on the State of the Legal Market — which analyzed law firm data from January 2021 to November 2021 — increased salaries are not the only reason why associates choose to stay at a firm. Broader market conditions, and other factors such as firm culture, future development prospects, and rewarding work are all pieces of the puzzle that contribute to a firm’s general stickiness. The results of this analysis, however, show that in 2022 pay was an especially vital piece of the puzzle.

While the high-growth firms’ retention in 2022 was strong relative to the rest of the industry, another key reason firms see compensation growth is because they need to increase headcount in order to meet growing demand. In 2021, firms scrambled to add associates to meet an explosion in demand growth; but in 2022 firms saw that demand growth slip away. Despite this, many firms opted to continue growing their associate ranks regardless of the reversal in demand, a strategy that has increasingly squeezed firm productivity and thus profits.

High-growth law firms, however, seems to have adjusted their associate growth strategy to current market conditions, as they only grew their associate ranks by 2.1% in 2022, far less than the average law firm. Low-growth firms, conversely, pushed for 6.4% associate growth, far greater than high-growth firms and the industry average. This could suggest that the firms which grew associate compensation the most grew compensation for associates they already had rather than simply expanding the ranks. If true, this could mean that high-growth firms appear to have rewarded the work done by their known associates, while low-growth firms may have focused on adding unknown and potentially untested new hires or mid-tier laterals.

Eventually, low-growth firms’ combination of higher associate headcount growth and minimal average demand growth (0.9%) tanked their average associate’s productivity by 5.0%, while high-growth firms saw productivity contract by only 1.3%. Additionally, the average high-growth firm’s productivity grew by 3.9% in 2021, so the slight contraction experienced in 2022 has not dropped high-growth firms below their pre-pandemic levels.

On an hour-per-lawyer basis, we saw that high-growth firms’ associates worked on average 122 more hours per year than associates in low-growth firms. This wouldn’t be particularly surprising if high-growth firms did, in fact, focus on retaining more experienced lawyers, while low-growth firms added fresh faces that are typically less productive while they are being trained in their first years.

Overall, it’s clear that high-growth firms managed the productivity of their associates far better than low-growth firms. At the end of the day, however, it’s firm’s bottom lines that are what matter most. Thus, the question, Did rapid increases in associate compensation hurt profitability? must be asked.

Well, relative to how the rest of the market performed, the resounding answer to that question is… No, rapid increases of associate compensation did not necessarily hurt profitability (or at least no more than did the overall souring environment in the legal market). On a profit per lawyer basis (PPL) the average firm saw declines of 6.7% in 2022, while low-growth firms saw steep declines of 14.5%. High-growth firms only saw a PPL contraction of 2.3%, a much easier decline to swallow.

Obviously PPL is a key metric, but law firms also need to think about the long-term goals of delivering the highest quality service to their clients, which is directly connected to the caliber of associates that firms hire and retain. In 2022, if it was truly high-growth firms’ strategy to retain their more experienced associates, that could pay long-term dividends. But even in the short term, we certainly saw high-growth firms reap the rewards of this strategy relative to low-growth firms and the rest of the overall market.

The new disclosure rules would require listed companies to not only disclose risks that are “reasonably likely to have a material impact on their business, results of operations, or financial condition,” but also “to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2),” as well as certain types of GHG emissions “from upstream and downstream activities in its value chain (Scope 3).”

The 490-page SEC proposal was originally published with a target deadline of October 2022 for final rules. Following debates about aspects of the proposal such as the Scope 3 disclosures and the definition of materiality, as well as the fall-out from the Supreme Court’s June decision in West Virginia v. EPA that limited federal regulation of power plant emissions, the timeline for final rules have been pushed back.

However, given that most investors support the core tenets of the new disclosure rules, many expect that 2023 will see the rules finalized and an implementation process started. And in preparation for when that happens, ESG experts say, there are a number of steps that companies should take right now to make sure their data warehouses are in order and they’re reporting accurate figures when the new rules go into effect.

The time is now

Currently, there is a split between how companies are approaching the upcoming SEC rules, says Mark Evans, Director of Business Development, Sustainability Consulting at Sphera, an ESG solutions software firm. Some of the companies with whom Evans works have been tracking Scope 3 emissions for some time, he says, adding that those companies feel confident that they won’t have to change their procedures too much to fit with any potential regulations. “The proposed rules are more about transparency and disclosure than setting reduction targets,” Evans explains. “Many companies are already transparent around their scope 3 emissions.”

However, that feeling isn’t universal. Even if other companies may have the data siloed within their organizations, they don’t necessarily have the internal infrastructure to report efficiently or effectively. Evans notes. “They’re saying, this is completely overwhelming. We don’t have a team of experts who can just drop into this and pick it up overnight. So we have to invest in this: How do we start? What’s the simplest way, and where do we begin?”

R Mukund, CEO of Benchmark Digital Partners, suggests that the simplest way for many companies to address this challenge may not be to tackle the problem as a whole at all, but to “take this elephant, and break it into some component parts.” Mukund adds that companies “could do a lot of it through purchasing data, spend data certainly, and publicly available information” and should actively look to capture as much of their own data as they can before reaching out externally.

“You can do a bunch of stuff before you have to do that really heavy lift, because that last lift is a heavy lift,” Mukund says. “You can’t minimize how significant that lift is, to go out and reach out to suppliers, because you’re also being contacted for that same information if you are in the supply chain.”

Data standardization decisions

It also doesn’t help that much of ESG data remains unstandardized or in different styles or formats, although some manufacturing-heavy industries may be working on this solution already. During the pandemic, Mukund said he worked with his industry clients to formulate a pandemic-exposure tracking module for similarly situated companies. Evans also pointed to the chemicals industry’s Together for Sustainability initiative, launched in 2011, which recommends utilizing product carbon footprint data, from life-cycle assessments (LCAs), as the preferred method for calculating Category 1 purchased goods and services for Scope 3.

“But for many other sectors, there isn’t a common approach,” Sphera’s Evans observes. “And that in and of itself is a challenge, because the greenhouse gas protocol allows different calculation methods.”

Indeed, many companies use online calculators to generate a traditional input/output spend model that tracks emissions based on materials used, Evans explains, adding that, for example, a company that purchases X amount of steel for Y dollar figure, can determine a certain quantity of carbon dioxide output equivalent released.

“But the challenge here is that the spend-based calculation methodology is highly aggregated,” he says. “It’s the data behind the calculations that provides the value. I’ve seen datasets that are six years old, which is quite out of date given how electricity mixes are becoming greener, for example.” As such, it has limited business value, and “if you want to set a decarbonization pathway for your company, other than reducing your procurement spend, what else do you have left?” It can be a bit of a dead end, Evans notes.

“Supplier surveys are also hard to scale,” he says. “And any data you do receive is unlikely to represent complete cradle-to-gate emissions.” Companies should utilize LCA data wherever possible, which is far more granular, scalable, and actionable than these other approaches, he adds.

Reactive vs. proactive technology

For many companies, compiling these calculations will go hand-in-hand with adoption and utilization of technology. And certainly, the simplest way to track this sort of data — and the one many companies use — is simple spreadsheets. But Mukund believes those who rely on spreadsheets are acting more reactively to potential regulations than using proper proactive planning.

“When you’re reactive, the spreadsheet is the solution that appears to suit all objectives, because you pull out a spreadsheet, it sounds great,” Mukund says. “That is literally the most reactive response and approach you can have.” Unfortunately, spreadsheets become more like a blunt instrument that is used because it’s all you have, and you’re going to just try and beat the problem into submission, he adds.

More forward-thinking companies, however, aren’t relying on technology as their final solution at all, Mukund adds. Instead, ESG data should be thought of as a larger strategy — one that includes technology, but also a framework component for how to use the technology, as well as a people component to make sure the ESG data framework is being followed.

“Put together a framework and a strategy that says, here’s what my ESG program is trying to accomplish,” he explains, noting that the strategy should include the items that stakeholders and management care most about and how leaders are going engage their workforce and internal group, because ultimately this is going to be driven by what they accomplish.

That strategy requires forward-thinking, however, and even with delays, a final draft from the SEC may be coming soon. That’s why, even before the new SEC greenhouse gas disclosure rules are finalized, forward-thinking organizations should begin tackling their ESG data strategy now.

Despite a radically more difficult economic environment and declining valuations for tech companies, smart money continues to find its way into Legal Tech. However, the growth and impact of the sector seems to be lagging in Latin America, especially when comparing it to more mature markets in the United States and Europe.

Data is notably scarce and unreliable in the Latin American region, but various attempts at mapping the Legal Tech sphere do give us a sense of where the market is right now. (Some of these attempts include efforts by Global Legal Tech Report; Legaltechies; LegalTech Index; Lemontech Mapa Legaltech; and AB2L Radar.)

The first elephant in the room is Brazil. The country and its legal market play in a league of their own, and Brazil’s Legal Tech market is no different. But as a rather insular economy, with particular regulatory and linguistic barriers, it operates in a separate sphere and does not form part of a broader regional ecosystem that many observers see emerging in the rest of (mostly Spanish-speaking) Latin America.

Based on our own research and when looking into the above-mentioned market research, we estimate there are currently between 200 and 250 Legal Tech initiatives across Latin America (outside of Brazil), of which 70% are located either in Mexico, Argentina, or Colombia. We should add here that because of the relatively high turnover rate, this number is a fast-moving target because publicly available data doesn’t allow us to put any figures on the current size of the market.

When categorizing the various Legal Tech projects, both from the private start-up sector, captive initiatives within law firms, and Legal Tech initiatives promoted by the judiciary or other government institutions (estimated at 15% of all initiatives we were able to identify), we see that about one-third of these initiatives are centered around document management and contract automation, e-signatures solutions, and practice management software.

Analysis of the size, maturity, and health of the various Legal Tech ecosystems in Latin America reveal four key factors that directly affect the potential growth and success of these Legal Tech initiatives:

1. 1. 1. Regulatory framework and quality of the judicial systems;
      2. Availability of digitized of public records;
      3. Market conditions (size and maturity of the legal market); and
      4. Access to funding.

One major obstacle that seems to be holding back the coming of age for Legal Tech in Latin America is the lack of a unified legal system across the region. Latin America is made up of numerous countries, each with their own legal systems, institutions, and regulations. Some regionalization attempts in the main trading blocs such as Mercosur , of the Southern Common Market) and the Pacific Alliance have not yielded the level of legislative harmonization required for easy regional expansion. This can make it difficult for Legal Tech companies to develop products and services that are transferrable across borders, in turn hampering the scalability of their solutions.

This is especially complicated in the Caribbean, where common law legal systems prevail in the English-speaking countries, contrasting with the civil law systems in Spanish-speaking jurisdictions.

Building the foundation for Legal Tech

Apart from these regulatory differences, there are still many countries in Latin America that simply lack specific regulation that is required to have a solid foundation on which Legal Tech solutions can be built. There are notable gaps in terms of privacy and data protection regulation, electronic signatures, e-commerce, and access to public records and information. These laws have been drafted in some countries, but are non-existent in others, and the levels of implementation vary greatly.

For example, the difference between Ecuador, which has drafted and implemented a highly praised data protection law, and other Central American countries, such as Guatemala and El Salvador, that still are waiting to have such laws approved by their congresses. Similar marked differences exist across the other areas of legislation noted previously. And on top of this institutional weaknesses, many countries also lack a culture of legality in social and business relationships.

Finally, the stability (or lack thereof) of the regulatory framework also affects the viability of Legal Tech initiatives. Colombia, for example, is undergoing yet another tax reform process, the 21^st reform the country has had since 1990. Any Legal Tech initiatives focused on that sector need to factor in the volatility that comes with increased politization and political instability that still constrains the region.

Although 70% of Latin American countries have a formal digital transformation and innovation agenda for the public sector, the digitization of the government and judicial institutions lags behind in most countries. Indeed, less than 30% of government procedures can be carried out entirely online in Latin America, and only 7% of citizens performed their last transaction with their government in an online format, according to a study published by the Inter-American Development Bank. And while there is no shortage of plans, a lack of substantial investment and institutional capabilities hamper the execution of this digital agenda.

Understanding the local legal market

These conditions are further exacerbated by an underdeveloped legal market that is still largely dominated by traditional small-scale legal service providers. In the larger economies, international law firms have clearly gained a foothold in the local market, but these firms mostly serve international financial institutions and multinational companies. The lack of strong domestic private sector development, and limited penetration of broadband internet and mobile phone use in Latin America also limits the total addressable market of Legal Tech companies. So even though a market in appearance can be substantial, the actual potential end users of Legal Tech solutions are still limited. Adding to these factors are also cultural barriers. Many people in the region are still hesitant about the use of technology, not only for legal services but for services in general, preferring instead to work with service providers in person.

Finally, another difficulty is the lack of funding for Legal Tech initiatives in the region. Many Legal Tech start-ups in Latin America struggle to find the investment needed to develop and scale their products and services. We have found that most of the appetite of venture capital has gone to financial tech (FinTech) initiatives, often referred to as the big brother of Legal Tech. What is clear is that FinTech is perceived as a better business and has absorbed a lot of the risk capital that ballooned in the region over the last five years. The deluge of investment that poured into late-stage Latin American tech companies in recent years has now dried up, however, and it is likely that access to funding for Legal Tech will suffer as a result.

Still, there are initiatives in the region such as the Global Legal Tech Venture Day held in Bogota and the Magno Foro LegalTech event in Mexico in 2022, that are geared toward the exposure of Legal Tech initiatives to funding. And there is a growing track record of substantial venture capital investment in Legal Tech, such as the headline investment in Chilean company LemonTech by the U.S. investment firm Accel-KKR based out of Silicon Valley.

Indeed, we’ve seen a Cambrian explosion of Legal Tech initiatives in Latin America, but the local context has so far proven much less fertile for these initiatives to flourish and scale up. As of right now, the macroeconomic conditions will likely complicate the access to funding in the short term, and without rapid improvement in the quality of regulatory frameworks, institutional set-up, and market conditions, domestic Legal Tech companies will have a hard time competing with larger consolidated players from outside the region that will be looking to expand their business and tap into new markets.

On the other hand, the democratization of artificial intelligence-based solutions such as ChatGPT, and other tools that make Legal Tech more user friendly and accessible, are going to expand the user base and open the door to applications and solutions not yet seen in the region.

So, despite some of the restraints described above, there is still a great opportunity to spearhead the development of Legal Tech solutions in the virtually untapped Latin American market. And those companies that can successfully time the market and navigate its particular conditions will still benefit from a first-mover advantage — the opportunity is there.

Despite the correlation between ESG investment and overall financial performance, corporate budgets are likely to be an obstacle in the current economy, given the uncertainty of the macro-economic environment in 2023. Indeed, companies need more financial resources and operating model changes to achieve ESG goals and sustain profit growth. In addition, the time and resources it takes to manually process the necessary data to comply with regulations and other requests, such as those from rating agencies and suppliers, adds to the perception that achieving these goals are costly.

Multifaceted complexity enables a reactive approach

It is easy for companies to get bogged down in reaction mode from the inertia of the manual collection and aggregation of ESG information needed to fulfill the current and future regulatory requirements. So, unfortunately, they slog ahead rather than taking an integrated, proactive, and strategic approach to ESG.

“The ESG movement from at least a finance and accounting perspective for the most part has been driven by external reporting rather than an integrated approach throughout an organization,” says Shari Littan, Director of Corporate Reporting Research & Policy at the Institute of Management Accountants (IMA).

Further, more than half of companies still house their ESG data in spreadsheets, according to one survey, and this is perhaps one of the most illustrative elements of an organization taking a reactionary approach in the collection, aggregation, analysis, and reporting of sustainability data.

It is easy for companies to get bogged down in reaction mode from the inertia of the manual collection and aggregation of ESG information needed to fulfill the current and future regulatory requirements.

Additional complicating factors that keep these efforts in low gear include, the how the data sets are siloed throughout the company and the lack of cross-functional transparency in defining the owners of a particular ESG data set. Without this, it is difficult to determine which individuals need to be involved in each phase that the data will have to go through, including collection, aggregation, visualization, and reporting — all with the right level of controls and data governance along the way. The lack of awareness in who or what function ultimately owns the process for each data set increases the complexity of this process as well.

How to avoid allowing the data to manage you

Multiply the aforementioned challenges for one data set by 10, because the materiality assessment identified this number of critical concerns along with the numerous requests for information from rating agencies, suppliers, etc., and it is easy to understand how organizations can become overwhelmed and confused.

Indeed, a panel of experts recently indicated that the industry is still 18 to 36 months away from simplifying and converging around a standardized definitions, data formats, and reporting criteria.

Given that, there still are ways for organizations to help simplify the process and get ahead of the growing requests for data.

Collaborate with industry peers — Another challenge is the lack of focus around how to report ESG data and the process for creating and executing a proactive ESG strategy. This includes how ESG reporting is implemented within organizations and how it is integrated across industries.

Leading efforts to gather industry peers to proactively define sector standards for defining ESG, material issues, and requirements for tools that drive efficiency will short cut the complexity. To assist in clarifying this process, Littan cites IMA’s participation in the Committee of Sponsoring Organizations, which is taking a look at how corporate financial functions can standardize existing internal control guidelines and advise on how to apply sustainable business and ESG principles to existing financial analysis and reporting infrastructure. These efforts include recommendations for how the systems, processes, and oversight structures need to evolve to accommodate the large numbers of ESG data sets and unstructured data moving through the ESG data journey from collection to reporting.

Invest in automation that will evolve with you — The hesitation in investing in technology now is that these tools won’t meet the future state of ESG. This is where a software solutions provider that has endeavored to partner with companies on the leading edge of building out their ESG capabilities can help.

One of the benefits of a technology tool or other solution is that it enables better automation and integration from the first step of defining what issues each stakeholder group cares about and how these issue will be quantified and measured within a given footprint. This is especially important when breaking out data into specific categories (Scopes 1, 2, and 3 for example) or a specific location, according to R Mukund, CEO of Benchmark Digital ESG.

Another way that software tools help is by assigning specific roles to each individual who is participating in the ESG strategy. This allows the people who are “engaged in a particular activity to relate to the ESG strategy because they understand where their role fits in,” says Mukund, adding that such tools also have built-in capabilities for information controls, data governance, and auditability.

The current challenge at the intersection of ESG and the selection of technology tools is the competition for scarce resources across several internal corporate functions, including sustainability, finance, legal, tax & accounting, and other corporate functions. However, Littan argues that the finance and accounting functions are usually the first place where technology investment for sustainability is needed because these functions always have the experience of managing robust oversight of data, understanding internal controls, building systems and processes for oversight, along with the existing infrastructure for analysis and reporting.

Between now and then, the complexity in the ESG ecosystem — due mostly to additional regulatory requirements across jurisdictions and the lack of standardized definitions and reporting — is likely to get worse before it gets better.