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Law at Work — February 2014: reasonableness and extent of restrictive covenants did not apply to actions as a minority shareholder
28 February 2014
Talk about an executive decision. Clifford Chance managing partner Peter Cornell's abrupt move to oust executive partner Phillip Palmer and make David Childs his right hand man was taken without reference to the partnership. From a distance, Clifford Chance can sometimes look a little like the House of Atreus, but without the poetry. Few partnerships spend as much internal energy on dissecting the shifting allegiances within the firm. But there are no tragic depths here; the reality is a little more bathetic. If anything, Clifford Chance is the legal profession's nearest equivalent to the Tory Party - the plots, the turf wars, the leadership rumours, the media obsession - but even so, Cornell's move still took many of his own partners by surprise.
Perhaps his partners should have studied Cornell's words a little closer. In the summer, Cornell sent round a position paper entitled 'Achieving Long Term Success'. It made few waves within the firm - perhaps the partners were too busy obsessing about their decreasing profits per point at the time - but it was nevertheless a clarion call. "I don't want us to lose the strong consultation that's at the centre of my view of how to manage the firm," Cornell stated. "But equally, I don't want us to have a reputation as a firm that talks a lot but does little."
Forget giving the partnership back to the partners, as Cornell's election mantra had it. This is the new era; the partnership ethos is nothing without profitability or pride.
'Twere best it were done quickly
It was only on Sunday 11 October, in one of his weekly emails sent from his home in Madrid to the partnership, that Cornell announced his unilateral move to appoint Childs to chief operating officer (COO) - a role Childs will combine with his current one of global head of corporate. Interestingly, Childs was not about to take on extra responsibility without a change in status; he held out for the title of COO, which implies that he may in the medium term give up the corporate job. There is a massive succession issue there, but that is another story. Childs' new title is not a mere detail; over a year ago, Cornell had symbolically done away with corporate titles as part of his electoral commitment to giving the partnership back to the partners.
The move is probably the boldest thing Cornell has yet done. For over a year, he has elaborately deferred to the notion of consultation, but in one fell swoop Cornell has got rid of Palmer, the man he elevated to executive partner, and sidelined fellow executive partner Chris Perrin. Perrin, who has worked closely with Cornell in framing his various thoughts to the partnership, will now have to report to Childs as well as Cornell in what is sure to be a highly sensitive situation.
Many Clifford Chance partners applauded Cornell's move. One senior figure says : "He feels that having Chris responsible for conflicts and regulatory, and Phillip on the operational and finance side, just isn't working. Peter wants someone who's a strong number two. With soft management it's harder to manage the firm."
Both Perrin and Palmer were increasingly becoming the focus of some misplaced bile about non-fee-earning partners. Garth Pollard, the firm's previous COO, now retired, was a hard act to follow. The fall guy was always going to be Palmer, who after running Tokyo for several years and then moving back to be joint head of London finance, had little on that all-important fee-earning CV. In fact, there had been whispers for several weeks that Palmer was on the way out. Meanwhile, Perrin's star had begun to rise slightly. "Perrin's stock was very low," says one partner. "But people
speak very highly of him now. Presentationally he has a poor image, but in terms of sorting stuff out he's done very well."
In any case, Perrin was probably never in any serious danger. Cornell and Perrin see eye to eye on a number of issues, not least the most paranoid initiative within any major law firm. This summer they forced through the requirement that all partners should declare any contact with any reporter from the legal press, and that anyone standing for election should publicly declare all journalistic acquaintances. Despite this, Cornell was prepared to risk disrupting the delicate political balance withinhis own management committee for what he saw as the greater good.
Hence Childs' chance to execute Clifford Chance's new get-tough strategy. He is already regarded as one of the intellectual powerhouses in the management group, and he impressed many with his handling of the partner compensation review process. He had a strong team with him - John Barnard, John Beechey, Mark Campbell, John Carroll, Peter Chaffetz, Larry Cranch, Thomas Gasteyer, David Harkness, Michael Torpey and Yves Wehrli - and the final report, which he drafted, was a masterpiece of rigour and depth.
On one level you can certainly characterise Childs as the bad cop to Cornell's good cop. One lawyer who knows them both well comments: "Pete's skill is very much as a people-handler. He's an affable guy who gets the right answer intuitively. His personality is almost more suited to being a senior partner. Childs is very, very clever and can be tough." Cornell's forte is the intimate Blairite emoting; Childs can only strain towards joviality, but his presence is a lot more intimidating. On paper it looks an effective combination.
But hasn't Cornell overlooked someone?
The brooding presence
The Gordon Brown to Cornell's Tony Blair is London managing partner Peter Charlton. Charlton, who has stood for managing partner twice and lost both times - much to the dismay of his London colleagues - is recognised by most of his partners as someone with an astoundingly fine strategic mind. Charlton is occasionally one for the grand gesture, and he has certainly contributed to Clifford Chance's reputation as a law firm unafraid to take risks. It was his idea to move to Canary Wharf, to raise newly-qualified salaries to a market-leading £50,000 and then had the balls to drop the salary to £48,000 three years later.
But it is not all headline stuff; Charlton has also focused on the nuts and bolts. According to The Lawyer 100, Clifford Chance has the second-highest global costs per lawyer in the magic circle at £239,000, whereas the London operation has the lowest costs per lawyer in the magic circle at £148,000. London's profit margin stands at 38 per cent compared with the global margin of 29 per cent.
Charlton is also underemployed now that the move to Canary Wharf has been accomplished successfully. If ever a man needed a project, that man is Charlton, who is still a fee-earner to boot - a key attribute at Clifford Chance. If Cornell really wanted to tackle issues of profitability and market share, it looks like he has ignored the firm's most proven manager.
But as one partner asks: "There are some difficult issues, but are we going to deal with them with such a blunt instrument as Charlton? Though one of the rules of power is to bring in your enemies close to you, so [appointing] him would have been an obvious thing to do." Charlton's propensity towards political incorrectness (he plays the plain-speaking Geordie to an extreme at times) has marred his relationship with Cornell. But that relationship is not necessarily terminal; Cornell is a man who can win people over.
The odd couple
Indeed, the relationship between Cornell and his new right hand man has foxed a number of their own partners, many of whom had no idea they were close. "The Childs-Cornell dynamic I don't understand," says one London partner in a typical comment. Indeed, during the bruising election for managing partner in 2001, which pitted Charlton against Cornell, Childs was chief cheerleader for Charlton. "Childs ran a very anti-Cornell line at the time," says a source. (Childs and Charlton are understood to be as close as ever.)
Several partners doubt that Childs is the executioner that the firm needs. "Childs isn't an axeman," says one partner who knows him well. "He's a fearsome character, and people are quite intimidated by him, but it's more his size and presence."
And has Childs delivered for the corporate group? Clifford Chance may have come top of the league tables for the first three quarters of 2003, but you would be hard-pushed to find any Clifford Chancecorporate partner who believes the firm is top for European M&A.
The Clifford Chance line is that mainstream M&A is in the ascendancy at the firm and that private equity - traditionally the firm's strong suit as a genuinely outstanding practice - is a mere component of the corporate offering.
This simply doesn't wash. On Childs' watch the global corporate group's turnover has slumped by just under 21 per cent, from £265m to £210m. Of course, Childs is hardly to blame for the worldwide slowdown in M&A, but neither can he be happy with a 10 per cent drop in recovery rates in the group. Equally, average profit per equity partner in corporate was around the £580,000 mark - some £200,000 less than budget, and which compares badly with the firmwide average of £644,000.
The shape of things to come
Some observers say that Clifford Chance is in basically good shape; that all it needs is a period of consolidation. Unfortunately, this is naïve. The last thing Clifford Chance needs is consolidation; it needs a revolution, and the executive is finally beginning to realise it. Global revenue per lawyer is on the slide, and at £337,000 is still lower than Allen & Overy, Freshfields Bruckhaus Deringer and Linklaters (£348,000, £385,000 and £360,000 respectively).
Most Clifford Chance partners will relate joyfully that the US is starting to make decent money again, but the jury is out on whether Tower Snow has been fully integrated into the practice.
Meanwhile, Germany and Asia have become a headache: Germany's revenues actually dropped from £115m to £109m.
"We're at a bit of a crossroads," admits one partner. "If we could wind the clock back 15 years, would we be pursuing this goal of globalisation?" That is precisely the point addressed by Cornell in his strategy paper this summer. That paper, which has been seen by The Lawyer, is a fascinating exercise in plain speaking.
For Cornell, it all boils down to one question: have the mergers been worth it? In an admirable access of candour, Cornell actually admits that Clifford Chance has "failed" to leverage off the mergers to pull away from the competition. (It is an odd quirk that four years ago Cornell, Childs and Charlton were unconvinced that Clifford Chance should do the three-way merger; there may be a certain amount of residual scepticism to be worked through here.) In examining each of the objectives of the firm on its merger - whether it has reached pole position in its chosen markets, whether it is sufficiently integrated, whether service is seamless - Cornell concludes that there is still a long way to go.
If Childs is going to make sure Cornell's strategic thinking gets implemented, then that paper gives him a clear blueprint. More focus on seamless service, higher profitability, no growth spurts, institutionalising client feedback - all of these are achievable goals, so long as the partnership is energised. Still, some might consider it rather alarming that Cornell feels the need to remind his partners to call their clients for a chat now and then, and not just during transactions.
This is not a crisis. If only it were - paradoxically, Clifford Chance is pretty good at handling those. After all, it has had its fair share of them. Cornell is widely praised for handling the mass Italian defections last year, for example, and the management team acted swiftly to defuse the US associate 'Paddinggate' row. The departures last week of the firm's last remaining superpointers in the US, Steve Newborn's Washington DC antitrust team, is less of a blow than outsiders might think. As one source familiar with the firm says: "You spend all this time agonising about breaking lockstep, only for the people that break it to bugger off anyway. There's a lesson there."
But what Cornell and Childs will have to do is tackle something much more insidious: drift. For a partnership weaned on drama, that might be the hardest challenge yet.