Diversity Takes A Bold Step At Microsoft

Editor: Brad, we welcome you back to our pages following your earlier interview with us in the January, 2004 issue of this newspaper. At that time you addressed the issue of corporate social responsibility. In the meantime we have read about the various charitable works done by Microsoft throughout the world. Just recently, the company launched a novel approach to promoting diversity in the legal profession. Could you tell our readers about the genesis of the program? How will it push new methods of rewarding diversity to the forefront in corporate America?

Smith : This program evolved out of a conviction that the time is right for companies and law firms to take new steps to be more creative in promoting diversity in the legal profession. Over the last decade, firms and companies have increasingly become more active, yet diversity results in the legal profession are still far from stellar. The National Association for Law Placement recently estimated that only 18 percent of the partners in large law firms are women and only 5.4 percent are minorities. These statistics stand in contrast to increases in the percentage of diverse attorneys graduating from the nation's law schools over the last couple of decades.

We're hoping to increase diversity in the legal profession by better aligning economic incentives with opportunities. We've created a bonus element in our legal fee structure for the 17 law firms that are in our Premier Preferred Provider Program with whom we spend about $150 million a year on legal fees. The program will give these firms a two percent bonus in our new fiscal year that started July 1 if they improve diversity in measurable ways. They can achieve the bonus under one of two formulas, and they can choose which formula to apply in advance. The first formula pays a bonus of two percent if the firm achieves a two percentage point increase in the diverse representation of attorneys working on Microsoft matters. The second formula pays the two percent bonus if the firm achieves a half-point increase in the percentage of all diverse lawyers in all of its U.S. offices. This is a purely voluntary program that is designed to set clear goals and create an incentive for firms to enhance diversity.

Editor: The two-pronged system works out to almost the same reward, doesn't it?

Smith: Yes. Any firm could elect one or the other formula. Whichever formula they elect will be applied over the entire year and then they can elect either to have this goal measured on a quarter-by-quarter basis or for the year as a whole. It's really their determination as to which formula to apply and whether to apply this each quarter or just once for the whole year.

Editor: What if a firm achieves more than a two percent increase in diversity results?

Smith: That will be great news, but they still only get a two percent bonus. This program provides a two percent incentive, making the reward payable for progress in diversity. The bonus is no less than two percent and no more than two percent.

Editor: My understanding is that the non-Preferred Provider Firms will receive up to a four percent rate increase while the Preferred Provider firms receive up to three percent increase. Does this not do an injustice to the Preferred Provider firms if they do not make their goal of two percent for the year?

Smith: First, our rate structure for our new fiscal year makes the non-Preferred firms eligible for a rate increase of up to four percent, and the Preferred firms in the first instance are eligible for a rate increase of up to three percent. In both instances the firms have to justify the rate increase based on their own cost increases.

Your question is still relevant, however - what this program does is create a risk-reward scenario for the Preferred Firms. If they don't enhance diversity, they may see their revenue from Microsoft rise proportionately at a lower rate than that of the non-Preferred firms. But if they do achieve progress in diversity, they are going to see their revenue rise proportionately greater than the non-Preferred firms. That strikes us and the law firms with which we consulted as the right balance - there ought to be an opportunity for rewards while at the same time there should be some risk.

Editor: What has the reaction been when you have placed this in front of the Premier Preferred Provider firms?

Smith: We had extensive conversations over two months with the 17 law firms that are our Premier Preferred Providers. We started our discussions talking about this incentive at a meeting in May, we shared a draft proposal in early June, we then asked for their written feedback online in an anonymous way in mid-June, and we then made our final decision at the beginning of July. We found the firms to be very collaborative and very professional. We asked them to help us make this something that would work effectively for everyone involved. They provided us with a tremendous amount of input that we then incorporated in structuring this new plan. They provided input about the types of formulas that should be used, including the ability for firms to elect one formula versus another. They gave us good feedback about the definitions that should be used, the way that reporting should be structured and the like. We spent a lot of time trying to get the details right. Without their help, we would not have come close to this concept - they were extremely constructive and responsive in the dialog.

Editor: Have you gotten firm commitments from any of them yet?

Smith: We have set a date of August 15 for each firm to notify us as to whether it wishes to participate and which of the two formulas each wishes to apply. We requested a preliminary indication from the firms in the anonymous online feedback we solicited in June, so we have a sense from this that there will be very broad participation, but we will not know until August 15 which option they will choose.

Editor: Please explain the reward system for Microsoft's in-house senior leadership team.

Smith: We wanted to get alignment between our internal incentives and the incentives given to the firms. One reason for this is if a firm wants to increase diverse representation on Microsoft matters, typically it is not something they can do by themselves. When decisions are made about staffing matters, those decisions are often made by lawyers at the law firms and lawyers at Microsoft in consultation with each other. For that reason, we adjusted the existing annual bonus structure for our most senior leaders, including myself, and we decided that a year from now the final five percent of our annual bonus will be payable only if three-quarters of the firms who have elected the formula focused on diverse representation on Microsoft matters are successful. If so, then our final five percent bonus will be paid as well. So it gives us an economic interest to work together around a set of common goals.

Editor: Are these 17 Preferred Provider Firms ones who've been with you for quite awhile or do you change them from time-to-time?

Smith: We change them from time-to-time, but we believe in the value of long-term partnerships with these firms, and as a result most of these 17 firms have been doing work with us for an extended period of time. Some firms have been doing work for us literally for a couple of decades. Other firms have been doing significant work for a couple of years. Every year there is a little bit of a change, but much of the group has remained constant.

Editor: As I understand the DuPont system, they reward their diversity points based on whether a minority lawyer takes a lead position in a case, but there is nothing in your formula like that, is there?

Smith: There is nothing in the bonus formula that focuses on whether a diverse attorney takes a lead position. We are, however, taking a number of other steps to try to enhance opportunities for diverse attorneys at law firms to play leadership roles. One example is the Advocacy Academy that we hold every couple of years in the litigation area with our Premier firms. This is a week-long intensive session that brings together litigators at these law firms together with our in-house litigation group and other very experienced people in the litigation field, such as former judges, consultants, and other experts. We work together on enhancing litigation skills, especially trial skills. This next year we're going to focus the Advocacy Academy on diverse attorneys at these firms. That should create an opportunity for us to better know lawyers who come from a diverse perspective and are ready to play a leadership role.

Editor: How many Microsoft lawyers constitute the senior leadership team, the group that is eligible for the bonus?

Smith: This is a group of 15 people in total, including myself.

Editor: Would you define the categories of minorities who will be included in the calculation for making awards?

Smith: In the documentation for the program we focus on U.S. attorneys in the following categories: (1) Racial Minority: Black/African American, Latino/Hispanic, Asian, Native Hawaiian/Other Pacific Islander, American Indian/Alaska Native, or Multi-Racial; (2) Gender: Female; and (3) Sexual Orientation: Openly Gay, Lesbian or Bisexual. For legal reasons the inclusion of openly gay, lesbian or bisexual attorneys in a firm's calculations is optional per the firm's internal policies and legal obligations.

Editor: Will bonuses be paid only on fees charged at an hourly rate? What about paralegals and contract attorneys?

Smith: The bonus will be paid on all legal fees regardless of whether the fees were generated on the basis of hourly billings or an alternative billing arrangement. In calculating whether a firm has earned the bonus under either of the two formulas, one looks only to firm attorneys, such as partners, of counsel, and associates. Paralegals and contract lawyers are not included.

Editor: Is this program only a test run or does Microsoft plan to embellish the program over the first year or two and continue to grow it?

Smith: We are pursuing this with a long-term commitment - meaning that we want to do something important to continue to enhance diversity. It seems likely that we'll refine this particular program over time. We'll have the opportunity to learn a good deal over the course of the next year. We therefore have incorporated into the program an annual review, the first of which will take place next spring. Together with our law firms we will take stock of how it's working and make further adjustments, if any, at that time.

Editor: Have there been other programs similar to this one in design where both the outside attorneys and those in-house are incentivized in this matter?

Smith: We're not aware of any similar program that has created economic incentives along these lines for both in-house and outside attorneys. Initiatives such as the Call to Action, however, have been making important strides for a number of years in promoting diversity within the legal profession. In fact, law firm and legal department leaders met in April to explore opportunities to build on the Call to Action and take it farther, and we are very supportive of that effort. A number of other individuals, companies, and associations are spearheading important diversity steps, and we have both learned and benefitted from their trail-blazing efforts.

Editor: In selecting the 17 Preferred Provider firms initially, was there an implicit acceptance by these firms to use minority lawyers at the time of their engagement by Microsoft?

Smith: When we select our Premier firms, we focus on a range of criteria. One aspect of the criteria is the enhancement of diversity at the firms and in the legal profession, so in this way we have already been focusing on how firms are doing with respect to diversity.

Editor: Why are diversity and the culture of inclusion so important to Microsoft?

Smith: Diversity in our legal teams is a business necessity. We have an incredibly diverse group of stakeholders, from employees and customers to business partners, competitors, and regulators. Microsoft has subsidiaries in over 110 countries. We have employees in the U.S. alone from over 130 countries. Our employees, customers, and other stakeholders represent every background in the country and on the planet.

Microsoft needs a legal and corporate affairs team that reflects the diversity of these groups. Otherwise I believe we'll fail to appreciate fully how other people are thinking about us and the legal questions at issue. And as we've learned from experience, sometimes even painfully, if we cannot understand how other people are thinking, there's a greater likelihood that we'll fail to address their needs or persuade them of our position. In this sense, diversity is not simply something that would be nice for us to have; it's a prerequisite for our success.