3 November 2003
A recent report in The Lawyer (29 September) regarding Clifford Chance's compensation review highlighted just how difficult it can be to require partners to retire or move out of the equity. A number of factors have combined to bring these issues to the top of the agenda for many law firms.
Falling profits have focused attention on partner performance. Performance levels a few years ago regarded as adequate are now seen as falling short; and underperformance, which was tolerated in better times, must now out of necessity be dealt with.
There is pressure on those who run firms to continue to deliver higher partner profits, in order to maintain lifestyles conditioned by better times and to compete in recruiting and retaining the best.
Faced with such pressures, what room for manoeuvre do firms have when many still cling to lockstep structures, which provide little flexibility when trying to fairly match reward to contribution? Often, only involuntary retirement or a move to non-equity status are available options. In this context, it is interesting to analyse partner earnings over the last five years against numbers of equity partners to see if there is a trend towards reducing equity partner numbers in order to maintain earnings. And if that is the case, how long will it continue? Or are some more forward-looking firms consciously taking this opportunity to restructure for the longer term by concentrating ownership in fewer hands? Some might also argue that the numbers in some equity partnerships have grown too large for effective firm management, so that smaller, more manageable partnerships would be a good thing in any event.
If a firm's structure does not lend itself to some flexibility in dealing with performance levels that fall below the standards set by the firm, making it impossible to adequately and fairly match reward to contribution, then the firm may, in the absence of moving a partner to non-equity status, which is often not desirable or appropriate, have no alternative but to retire a partner on an involuntary basis. I say no alternative, because doing nothing should not be an alternative. So how should firms go about this?
The first and most important action, once it is clear a partner is no longer performing as required (and will not improve even with help) is to make a decision to do something about it. How many firms still cannot bring themselves to take action to deal with partners who should have been retired years ago? Profits tables and firms' lack of competitiveness show all too clearly the extent of the problem.
Before embarking on such a course, managing partners also need to ask themselves whether they have the necessary skills to deal with the task in hand. If in any doubt, bring in help from outside to reduce the risk of failure.
Trying to exit a partner by negotiation in the absence of an involuntary retirement clause can at best be difficult, although it is not impossible. Having such a clause in your partnership agreement does not mean you have to use it, but conducting negotiations against the backdrop of the existence of such an enabling provision does ease the process. It is important that the partner understands that there is no alternative but to go and, if push comes to shove, that the clause will be used.
If it becomes necessary to use the clause, ensure you have sufficient support within the partnership to obtain the required majority to retire the partner. However, it can often be difficult persuading other partners to support such a move because of fear for their own positions, or feelings that the management is being unfair, when in fact it is doing what is needed for the good of the firm. Communicating to the partnership what is happening and why is critically important for ensuring a successful outcome.
External communications are as important. A firm that is open about partner retirements and communicates this well will earn respect for doing what has to be done.
Above all, even though emotional issues have to be put aside in the interests of the firm when taking the decision, that decision should be implemented with humanity and compassion.