The development of internal legal competence as a strategy of organizational domain management

Typescript (photocopy).Organization theorists frequently assume that corporations develop legal departments primarily to assist in managing governmental relations activities. This assumption is not supported by empirical research, however. Previous research suggests that the number of attorneys in the U.S. economic system is most significantly related to the level of general economic activity. This study hypothesizes that organizations develop legal departments in part to assist in managing interorganizational exchanges with customers and suppliers (the vertical organization set). A sample of 103 large industrial corporations was examined to test the validity of this hypothesis. The size of the corporate legal department (excluding patent and trademark attorneys) was found to be significantly and positively correlated with firm size, and a measure of vertical interdependence (Maddigan's Vertical Interconnectedness (VIC) index). In addition the size of the legal department was compared with alternative interorganizational strategies: CEO influence, strategic vertical interlocks on the board of directors, and ownership integration (subsidiaries). The size of the legal department was significantly positively related to the CEO influence measure, and significantly negatively related to the number of strategic vertical interlocks, but not with ownership integration. A regression analysis confirmed the positive, significant relations between law department size and firm size, vertical interdependence, and CEO influence. The negative relation between law department size and strategic vertical interlocks was also replicated, but not at the same level of significance...