The Chinese Legal Profession

Volume 2 • Issue 6 • September/October 2016
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The Chinese Legal Profession
in the Age of Globalization

A conversation with Fengming Liu

Fengming Liu is general counsel and vice president for government affairs and policy for GE (Greater China & Mongolia). Liu recently sat down with David B. Wilkins, faculty director of the Center on the Legal Profession, for a one-on-one conversation on the evolution of the Chinese legal profession.

David Wilkins: You’re in a unique position to think about the Chinese legal profession―particularly the corporate legal profession―and how it has changed over the past 25 years. You were educated in China, got your JD in the United States, then became partner in a U.S. law firm, and now you are back in China having held a variety of senior roles. With that in mind, what do you think the biggest changes have been and how do you see the profession evolving?

Fengming Liu: I am in some ways sort of unique and fortunate to have been both a witness and a participant of the Chinese legal development story of the past 30 years. I had been general counsel for Microsoft for many years and now I am general counsel for GE for the Greater China Region, as well as head of government affairs. I’ve been involved in the full spectrum of things that a typical GC in the United States would be involved with. But I would say that the GC role in China has historically been different than that in the United States. In the United States, the GC position has evolved into a senior position that is involved in all the decisions of the company―not just a commercial lawyer. He or she is involved in all major strategic debates and discussions of a company. GCs of most Chinese companies, both private and state owned enterprises, have yet to reach that level of corporate power. Obviously it’s a bit different within foreign multinationals, like GE.

Foreign companies, including GE, have begun to work with Chinese law firms directly. There is such a good selection of Chinese law firms foreign law firms have been somewhat marginalized.

In terms of the wider legal profession, over the past 20 plus years, China has had the fastest developing economy of anywhere in the world. Likewise, a relatively complete legal regime fostering market economy was established. This helped created what I view as a Golden Age for the Chinese legal profession. Now, I use the term legal profession somewhat loosely and focus mostly on the corporate side. But if you look at the number of law firms and number of law schools, there have been huge changes. For example, twenty years ago you could count the number of law schools with your two hands. Now, I was recently told that there are more than 660 law schools (law departments) in China producing lawyers by the hundreds of thousands every year. This has made the legal profession one of the hottest professions to be pursued by students graduating from college.

All of this in turn paved the way for the vast growth of Chinese law firms. As recently as two decades ago, large law firms in China would be between 30 and 50 people. Now, we have law firms such as Dacheng and King and Wood that have lawyer counts in the thousands. So there has been a huge change in terms of size.

Perhaps more significant is the type of lawyers in these firms. If you go back 20 or 30 years when I first started as a lawyer, very few lawyers in China were educated outside of the country, able to converse in a foreign language, or had knowledge of other country’s legal systems. As a result, most foreign companies would go to foreign law firms for the simple reason that there were few qualified Chinese lawyers and Chinese firms. That has now changed. Today, many Chinese lawyers have gone to law schools in the United States or Europe and worked for foreign firms and have since come back and become key members of Chinese law firms. Now, when you go to a reputable law firm in Beijing, for example, many of the lawyers will speak a foreign language, mostly English, and many will have been educated and trained in a foreign country.

This has meant that foreign companies, including GE, have begun to work with Chinese law firms directly on a fairly regular basis. Indeed, because there is such a good selection of Chinese law firms who have experience and are well qualified, foreign law firms have been somewhat marginalized. They used to have almost a monopoly on foreign companies’ legal work. Now they have to fight to keep their shares. Now Chinese firms are able to pay at the same (or even more) to attract legal talent. And they are increasingly doing some of the most interesting legal work.

The Chinese government is increasingly promoting a rule-based society as well as a rule-based governance model for corporate and government operations. This provides an opportunity for lawyers and general counsel offices.

Wilkins: You started off by saying there was a big difference between the idea of the GC in a U.S. company, who is a senior member of the leadership team, the head of the legal function, and involved in all important decision making, and in Chinese domestics and SOEs, where the GC often has less strategic influence. Do you see that changing? As your peers become more senior and the companies become more globally important in China, do you see the role of the GC inside Chinese companies moving more towards the U.S. model? Or are there still important differences that are rooted in the differences between, for example, the Chinese and American business and legal cultures?

Liu: I would say the importance of Chinese GCs have been increasing over the years. Just by one measure, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), the SOE regulator, recently issued a directive that requires the largest SOEs to establish a formal GC apparatus within their companies, and that the GC must be regarded as one of the senior executives. In other words, they need to be a member of the leadership group of the company. That is a huge change, because in the past years many GCs of Chinese companies and SOEs in particular would report to a general (supporting) function, like finance. It was very rare for the GC to be regarded as one of the top senior executives. Now, the government, through SASAC, is basically saying the GC has to be a senior leader. The other component is that Chinese companies, both state owned and non-state owned, have seen the importance of legal function vis-à-vis their global dealings. With the SASAC directive, what they were seeing globally is now domestically mandated. Indeed, I would venture to say that among the largest 200-500 companies in China (both state owned and non-state owned), strong GCs positions will be established within a few years.

The SOE regulator recently issued a directive that requires the largest SOEs to establish a formal GC apparatus within their companies, and that the GC must be regarded as one of the senior executives.

Moreover, the way that Chinese companies are evolving as businesses provides an opportunity for the role of GC to expand. In the old days, when the GC was not in the leadership circle, this was in part because the whole system was not setup as a commercial process. In other words, businesses didn’t need processes or rules or frameworks to operate. It was basically individuals whose own views became the operating rhythm. Naturally in this type of system the lawyers’ roles were marginalized. To some extent that’s still true because of the Chinese culture and legal system. For example, the most important decisions are being made by party organizations largely outside a process of rule-based governance covering general public and corporate citizens. For lawyers whose professional competence is most dependent on the process, under this system, lawyers tend to be segmented out from core decision making. As I alluded to earlier, my colleagues that work for Chinese private companies are subject to the personal wishes of the owners since most are still being run by their founders while my colleagues at SOEs are subject to organizational and party policies, including owing their allegiance or loyalty to the party.  I have a somewhat simpler environment within which to do my job as GC for a foreign multinational.

But this is all changing. The Chinese government is increasingly promoting a rule-based society as well as a rule-based governance model for corporate and government operations. This provides an opportunity for lawyers and general counsel offices. For example, we have recently seen rules issued by the government that say that for important business decisions, if the management doesn’t follow the suggestions of the legal counsel, they will be held responsible for the consequences of their decisions. It remains to be seen how this is going to be implemented, but it’s an important starting point where the government has said that CEOs must pay attention to and must consult with lawyers when it comes to major decisions.

Wilkins: Are Chinese lawyers in GC offices pressing for these sorts of reforms? Again, in the United States, one of the things that we’ve seen over the last several years is that GCs have become very active in debates over law reform and issues around everything from rule of law to access to justice. Do you see Chinese GCs getting involved in those debates as well?

Liu: Yes. Chinese GCs have been more and more active in the last few years. It’s very interesting for me to see. I’ve been in this position first for Microsoft and now for GE for more than 20 years, but in the last three or four years, self-organized GC forums have been formed―forums geared towards talking about the role of the GC and the legal profession. I was at a conference in May in Shenzhen attended by a couple hundred people, many of whom were GCs, talking about the evolving nature of the Chinese legal profession and the relative importance of the GC within different models of Chinese enterprises. GCs of different types of businesses wanted to learn from each other and share best practices.

 The Chinese legal profession  sees the need to promote the importance and relevance of lawyers in the corporate circle and society.

It is important to stress that the role of the GC differs based on company type. SOEs tend to follow the government’s directive in terms of how GCs are treated and their role within the company. Chinese private enterprises have their own way of positioning their GCs. I recently saw a social media post about the different roles of GCs divided into different categories along the lines of foreign multi-nationals, SOEs and private enterprises, but also along different verticals like banking, insurance, and finance. This is just one example of how, at least in legal circles, people are increasingly seeing the importance of campaigning for their own cause.

People in China generally agree that everybody is dependent on a legal system that works. But there is also agreement that more work needs to be done to establish the internal rules, processes, and standards that are necessary to uphold best practices. Otherwise, we are no different than any other commercial occupation. I talked to a lot of people over the last few months about the importance of legal ethics and that’s one important tenant of the legal profession. I think people gradually are realizing the importance of that. One thing is clear: the legal profession certainly sees the need to promote the importance and relevance of lawyers in the corporate circle and society.

Wilkins: You mentioned that Chinese companies are now becoming global companies and that Chinese law firms are increasingly becoming global law firms. How do you see the Chinese legal profession, both in-house and law firms, responding to what might be called the outbound pressures of globalization?

Globalization provides a brand new opportunity for Chinese companies and for Chinese legal professions to become more sophisticated in how they’re counseling their clients.

Liu: As Chinese companies go global, they need a competitive edge. Chinese companies and law firms recognize a need to go abroad, but they also realize that in order to be successful outside of China, they need to follow the rules or legal system of the countries where they are doing business. This provides a huge opportunity for in-house lawyers as well as for law firms that can advise them on how to achieve this. There are cases and cases where Chinese companies did not do it right, and it caused huge problems downstream. A few months ago, I joined a panel at the G20 Anti-Corruption Forum and talked with a number of Chinese lawyers who were spending a lot of their time on compliance systems―particularly in the context of the companies doing business outside China. There is no break when their company or clients go to invest in the United States or Europe or other countries. They must follow the rules. That provides a great opportunity for law firms to help the company establish internal process and compliance programs. You don’t just have a compliance program for foreign practices, you have a compliance program for the entire practice throughout the entire company. Globalization provides a brand new opportunity for Chinese companies and for Chinese legal professions to become more sophisticated in how they’re counseling their clients.

Wilkins: What do you see as the future? What are the big issues or challenges facing the Chinese legal profession, particularly in-house counsel and law firms?

Liu: I think as the Chinese legal professional and GC become more mainstream, people will realize that they will need to reform themselves. As a profession, we need to have standards, we need to have processes where we can police ourselves. Unless we can do that, the legal profession will not become a strong organization in society. I think that’s the next thing. It’s not only important for corporate lawyers, but also for legal educators to make sure that lawyers are educated in a way that they understand their obligation towards their client, but also towards society.

The other thing is that law firms and in-house counsels will need to become even more globalized. Chinese lawyers will need to learn foreign cultures, systems, and languages. Also, with the development of the digital world, lawyers, both in-house and private practice, will need to understand digital technology.

And finally, lawyers need to increasingly gain the business acumen, combined with deep legal know-how, that is critical to being a private practice corporate lawyer or an in-house counsel. Competition amongst businesses, but also competition amongst law firms is going to increase, and as it does, the demand for high caliber lawyers will exponentially rise.

 


Fengming Liu is general counsel and vice president for government affairs and policy for GE (Greater China & Mongolia).  

David B. Wilkins is the Lester Kissel Professor of Law, vice dean for Global Initiatives on the Legal Profession, and faculty director of the Center on the Legal Profession at Harvard Law School.

 

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The Chinese Legal Profession Volume 2 • Issue 6 • September/October 2016

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