Flotations: the good, the bad… and the money

UK law firms may soon list on the stock exchange. If allowed by the Legal Services Bill, flotation provides an attractive source of much-needed capital to firms with ambitious growth plans. But firms need to consider the impact on their people. How will floating affect the career paths of existing employees and what does it mean for future recruitment and retention?

If a firm was to undertake an IPO and list on AIM, it would first need to implement a number of changes. Most notably it would need to be run by a board of directors and move away from the traditional partnership model. Profit and growth targets would become more transparent to satisfy shareholders and the firm would have to comply with more stringent disclosure requirements.

The good news for a fee-earning solicitor is that this might allow greater access to clients at an earlier stage in their career – something difficult to achieve when partners want to nurture client relationships themselves, jealously protecting their ‘fiefdoms’.

There would also be a greater possibility for diverse career paths within a firm, with progression towards goals other than partnership and more transferability between areas of specialisation. Offering internal promotion and job rotation provides new challenges and opportunities, which can give employees greater job satisfaction. The need for visibility within a listed company also means the potential for more openness concerning employee development than with a partnership model.

But while there are obvious advantages, there are also concerns. A solicitor may find problems moving on after working at a listed company. There is the danger that it will be difficult to revert to working in a partnership structure after gaining experience in an environment where the responsibilities, working practices and ethos contrast so significantly.

Meanwhile, a partner joining a listed company would perhaps have less influence on the direction of the business. There is also the risk of reduced annual earnings as dividends will be paid to the shareholders. This is not such a worry for current partners, as the large cash windfall of flotation would most probably cover any long-term inconvenience, but in terms of recruitment and retention, employees may be less inclined to join or remain with a firm without the Holy Grail of shared equity.

Additionally, while greater transparency might facilitate the identification and reward of teams and individuals at every level, less profitable areas of the business would feel heightened pressure and even face the possibility of closure at the request of shareholders. Although greater access to capital would allow a firm to better finance staff retention in the downturns – a real issue in the past – the threat of cuts is far more immediate and aggressive in situations where underperformance is highly visible.

Weighing the positive against the negative illustrates how difficult it is to make accurate predictions. Perhaps the most reliable indicator available to those pondering their next move is to analyse the experience of other professional services that have trodden the same path.

Goldman Sachs was one of the most famous partnerships in the world, with a history of providing impressive wealth to employees through the partnership model. Understandable tension surrounded the years and months leading up to its flotation in 1999, but through consultation with employees and well-structured management of the process the bank successfully converted to a corporate infrastructure and has never looked back. It is worth noting that it was very careful to ‘lock in’ its employees, using a stock incentive as enticement. One might argue that there is a greater chance of achieving partnership at a law firm than there was at Goldman Sachs, so the transition affects more people, but the learning points from their experiences remain invaluable nevertheless.

Ivan Jackson, director, Law Professionals