The perfect partnership
24 January 2005
The organisation and regulation of the legal profession is facing unprecedented change. The long-anticipated Clementi report was published just before Christmas (19 December 2004), heralding not only a new regime for regulation and complaints-handling, but also the introduction of the hotly debated ‘alternative business structures’ for law firms. If implemented in its current form, the Legal Disciplinary Partnership will mark a revolution not only in terms of who is allowed to provide legal services, but also in terms of the management and ownership of legal organisations, paving the way for outside ownership for the first time.
In parallel with this development, in the past two years we have seen the law firm LLP come into vogue, bringing the traditional legal partnership structure much closer to the corporate model. The number of firms converting to the limited-liability partnership (LLP) status during the past two years has been well documented in the news pages of The Lawyer.
Today, as we await the implementation of the Clementi recommendations – and as many are pointing out, the devil will of course be in the detail – this is an interesting point at which to pause and take stock. How far has law firm management evolved over the past decade and a half? Given the current mode for LLP status, are we on a set course to adopt the corporate model by another name and wave goodbye to partnerships as we know them? Moreover, what have we learned from observing the corporate world’s own evolution in management and governance over the same period? And are we applying what we have learned in any event?
Partnerships today are often referred to by commentators as ‘outmoded’ forms through which to run large businesses. However, in the legal sector, the truth is that the large law firms moved away some time ago from management that involved every partner participating in all decision-making; today, the delegation of powers to some form of management board, with the other partners still retaining certain key powers, is the norm. This mirrors the corporate model in the sense of the shareholders’ ability to vote on significant matters affecting the company, but otherwise delegating powers to a board of directors and executive managers.
Corporate and partnership structures differ in one important aspect – in the case of partnerships, the senior executive managers of the firm are generally partners, not employees, although there are some notable exceptions. For a long time the profession has persisted in preferring ‘lawyer managers’ over ‘non-lawyer professionals’ for the key management roles, on the premise that it is better to have a partnership insider in roles of influence. Whereas in the corporate world, key managers and directors usually spend years working their way through various management disciplines – finance, operations, marketing or IT – lawyer managers have more typically devoted their careers to practising some esoteric area of law. They may have had some part-time managerial responsibility of a general, often mainly administrative nature, but usually there is a significant skills gap as they step into key management roles. For a modern law firm to flourish, having appropriately skilled and highly motivated individuals in the key management roles is crucial, and even more so if Sir David Clementi’s vision becomes reality, with law firms competing directly against banks and other business-smart corporates for business.
However, in judging our progress by comparison and contrast with corporates, we should not forget that the corporate world has undergone a major revolution over this same period as well. The first corporate governance review in the UK came with the Cadbury Committee in 1991, which addressed the need for tighter financial reporting in response to a number of corporate scandals, notably Polly Peck, BCCI and Maxwell. Just four years later, a succession of major fat cat scandals resulted in the next review – The Greenbury Report (1995), which focused on director remuneration. The Hampel Committee then reviewed the implementation of both Cadbury’s and Greenbury’s findings – its response in 1998 was the original Combined Code. On top of all these reports, in 1998 the Government launched a company law review, reporting in 2002. After this we had the Myners Report looking at investment decision-making; then the Higgs Review in 2003, looking at boardroom roles, particularly distinctions between execs and non-execs, in response to another corporate fiasco, Enron; the Smith Report on audit committees; then a new Combined Code; and the story continues.
The corporate governance debate continues to rage and all the old topics and issues are still on the agenda: how to avoid more high-profile corporate failures; auditor independence and conflicts; fat cats; effectiveness and accountability of executives and particularly non-executives; issues around increasingly active investment; the plethora of legislation relating to all of the above.
There is a certain irony that, just as Clementi is opening up the possibility for external investment in law firms for the first time, the journey that the corporate world is on to find an appropriate model for management and governance makes continual reference to unscrupulous behaviour by some corporates in relation to their various stakeholders and the need to stamp this out. It is perhaps here where we can see the real distinction between corporates and professional partnerships.
In a true partnership the senior lawyer managers remain stakeholders in the same way as their practising partners. As a result, they retain their values, share their risks and, most importantly, share their profits. The need for corporate protections recited above therefore should only be necessary in law firms if there is a move away from the more traditional partnership models, which would require some protection of outside investors.
Law firms face some interesting decisions. Do they retain their existing culture and structures either through traditional partnerships and LLPs, or do they move to models with external investors and greater governance along corporate lines? If the latter route is chosen, will there remain a role for lawyer managers or will the external investors see law firms as just another investment opportunity and demand non-legal managers? Undoubtedly, this would mean a real challenge to the traditional values of partnership with a law firm and will give cause for even greater reflection than the choice between partnership and LLP. A sobering thought indeed.
On a more positive note, the record of law firms in recent years shows that they can match the best companies in terms of performance. To continue achieving this level of success, law firms need to be mindful of the key differences with professional practices and establish a structure that balances the ability to grasp future business opportunities with appropriate protections, checks and balances. The structure need to makes the best use of the skills of all those involved in the management and delivery of the firm’s business.
Robin Bloom is the senior partner at Dickinson Dees