By Frankie Costa, Jr.
Here are three legal concepts I’ve found useful as CEO of a growing business.
There’s a trope that lawyers make poor businesspeople. Risk-averse. Narrow. Gradual. Some studies lend credence to the notion that lawyers may not be best situated to lead companies. Research published in the Harvard Business Review suggests that attorneys tend to be better leaders in industries with high litigation risk—but that lawyer-CEOs reduce value in most other corporate settings.
These critiques have little to do with substantive knowledge of the law. Rather they center on the mental models that guide attorneys’ decisions.
Although I’m a licensed attorney, I didn’t practice before leading a company. My application of legal knowledge in the business world is often conceptual—precisely those mental models that many believe hamstring lawyers-turned-businesspeople. Thinking like a lawyer can undoubtedly create constraints at times, but I have found that many legal principles can help manage the growing pains of small businesses.
Here are three legal concepts that I’ve found useful as the CEO of a growing business.
Due process under the law is rooted in principles of fairness. Simply put, it means providing notice and opportunity to be heard. For example, a person accused of a crime must be made aware of the charges and given the chance to plead a case. More broadly, one might say that we are all entitled to know the rules of the game—say, what actions are prohibited by law—and the chance to defend ourselves.
In business, I might translate the concept as notice and opportunity to perform. Small businesses frequently lack clear job descriptions, performance metrics, or evaluative reviews. This causes confusion about the type of work employees should do and whether they are succeeding. These situations lead employers to act when it’s too late or retain underperformers too long (to the dismay of A players on the team). Employees may sense they are off track but remain unclear about how to course correct. Other employees are blindsided altogether when they are let go. All of this destroys value for the firm and its people.
Occasionally, the lack of process is intentional. I have noticed founders fear that introducing procedure will bureaucratize the business, stifle entrepreneurship, and diminish the family culture. These are all reasonable fears, and if done poorly, process will have those effects. But I’ve also noticed that the refusal to introduce important procedure can be equally harmful: when people are unclear about their roles or performance, they are likelier to feel demotivated, disconnected, and confused. Importantly, what serves very small startups—agility and an “all hands on deck” mentality—can be counterproductive at scale when people need clarity and organization.
Borrow the concept of due process and provide your employees clear notice about job expectations and opportunity to perform or improve. It does not need to be complex, but it needs to be a priority. It will improve results, raise morale, and protect both the firm and the employees.
For the most part, American judges are generalists. They do not specialize in a certain body of law; rather, their courts exercise general subject matter jurisdiction. In turn, the same judge may be called upon to decide cases in distinct areas of the law.
In effect, that is the role of a business leader. CEOs are not functional experts like the heads of accounting or engineering. They are required, however, to make key decisions that concern various functions. In so doing, the CEO must look to specialists without shirking the responsibility to have the final say. This is no easy task. It demands agility and listening. Importantly, it requires the confidence to look unknowledgeable when seeking clarification from functional experts. As someone once told me, the president of a university does not need to be a physicist to hold the head of the physics department accountable for excellence.
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Appeals judges also exercise different standards of review when hearing cases. When reviewing factual conclusions—say, whether a defendant stole the item alleged—appeals judges will review a case with deference to what the lower court has found. The idea is that lower courts are better situated to determine these questions because they reviewed the evidence in detail firsthand. But when reviewing legal conclusions, such as applying legal principles or interpreting a statute, appeals judges will substitute their own judgment without deference to a lower court’s decision. The idea here is that appeals courts are better situated to make these higher-level, principled decisions.
Similarly, the leader of a company should push decisions down closest to the action where appropriate and defer to specialists on technical questions or local leaders on local questions. Those people are better suited because of their expertise or proximity. At the same time, the CEO must retain province over key strategic or capital allocation decisions. And on fundamental questions of vision, policy, or ethics, CEOs cannot buck their duty. These are the toughest decisions—and that is exactly why the CEO must make them.
Borrow the concept of judges as generalists and standards of review in your organization. Be confident enough to make the key decisions with limited information and expertise. Know when to defer to functional or local specialists, but don’t be afraid to assert authority when confronting higher-level questions.
There is a dual mandate when a judge resolves a case. On one hand, the judge must resolve a dispute between two parties by applying the law evenhandedly. At the same time, the judge must appreciate the precedent a decision sets and the signal it sends to future actors.
For example, a bank was sued because its teller refused to pay a small ransom to a robber who had taken one of the bank’s customers hostage. The robber killed the customer, and the suit alleged that the bank acted unreasonably by refusing a small payment to save its customer’s life. The court concluded that paying the ransom may have been the right thing to do, but “for the protection of future” customers, the court sided with the bank. The court reasoned that to rule otherwise would “encourage the use of hostages” in the future because robbers would know banks are required to pay ransom.
Often business leaders make employment decisions in a vacuum. For example, when negotiating compensation, company leaders may view the discussion as a bilateral one—a decision between the individual employee and the company. But employees speak to one another, and the decision will send a signal to others on the team.
Perhaps an exceptional employee merits special treatment, but what message does that send to colleagues? Alternatively, it may make sense to provide concessions to a marquee customer, but consider that others may discover and make similar demands. The business must now justify the disparate treatment.
There have been times in the past two years that I realized my casual remarks to an employee were taken as larger signals of my intent to lead the business in a certain direction. Words, like decisions, telegraph what is to come, and so it is important that a CEO be deliberate in every message sent to the broader organization.
Borrow the concept of precedent and signal to consider that each decision with one employee or customer enunciates a norm for others. Business leaders must understand that no judgment or message occurs in a vacuum when leading a company. Consider the signal sent and the precedent set with each decision.
Lawyers get a bad rap in the business world. Perhaps because seasoned attorneys specialize in one area of the law, many view them as too narrowly focused to lead broad organizations. But I believe that the foundational concepts that every attorney studies can help inform any leadership role.
Business leaders, especially CEOs of scaling companies, can benefit from the organizing principles developed over hundreds of years of jurisprudence.
Frankie J. Costa, Jr., is CEO of Orion Light HVAC, a private equity-backed group of HVAC and refrigeration businesses across the United States. He holds a JD from Yale Law School and an MBA from Harvard Business School. See all his articles and full bio on AllBusiness.com.
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