Little wonder

Joe Flom, the sole surviving name partner at Skadden, has more experience than… well, anyone really.

Joe Flom looks almost offended when I ask him if he is 80. “I’ll be 80 in the summer,” the septuagenarian quickly corrects me in his soft Brooklyn accent.

While insulting the person you are interviewing is probably not the best way to kick-start a conversation, the legendary Skadden Arps Slate Meagher & – of course – Flom partner’s tongue is firmly in his cheek as he feigns outrage at my opening gambit.

It is always slightly unnerving meeting someone about whom so much has already been written. The image that has always stuck in my mind is the description of Flom as ‘gnomelike’. This is how he was portrayed in Barbarians at the Gate, the seminal book that defined the 1980’s corporate excess in its telling of KKR’s tumultuous takeover of RJR Nabisco.

To me, it has always seemed slightly insulting to liken a person to something you might find nestling among the shrubs in your garden. But on meeting him, there is no getting away from it – the man is tiny.

Of course, this only serves to further underline the monumental impact that this one lawyer has had on the course of 20th century corporate law.

‘Aggressive’, ‘a star’, ‘creative’, ‘tough’… The list of adjectives all do him justice. This is the man that takes the credit for dragging a conservative corporate America – and subsequently the rest of the world’s financial centres – into a new and exciting era of deal-doing: that of the hostile takeover.

These days, however, Flom is content to take life at a more leisurely pace, although what he defines as leisurely might not match up with other people’s definitions.

“I try and do four days a week,” he says. “If people have questions, I’m available. I have a long institutional memory so I try and help.”

Long? The man is a walking encyclopaedia of business. And he does stay involved in the firm. He is 15 minutes late for our interview because, I am told, he is spending time talking to some of the partners in the London office.

While Flom may try, intentionally or not, to paint the picture of a cosy grandfather type, he does have his finger on the pulse of current corporate issues. He gets particularly fired up on subjects such as Eliot Spitzer’s investigation into Wall Street (the Spitzer investigation is an issue that strikes very close to home – the New York Attorney-General spent two years as a lawyer at Skadden in the early 1990s). Another of his bugbears is corporate governance. It is more recent events, though, that have really piqued Flom’s interest.

Skadden represented Merrill Lynch, one of a number of US financial institutions at the heart of the Spitzer investigation that in the end agreed to pay a total ‘global fine’ of $1.4bn (£843.2m) after being hit with claims of conflicts of interest between its analyst and investment banking arms.

So does the relationship between analysts and their investment banking colleagues need to be restructured?

“It’s been going on since people started trading under the tree,” reasons Flom. “There’s nothing you can do about analysts being tied into the investment banks.”

But he admits that there are lessons to be learnt.
“Attitudes can change,” he says. “This is coupled with the fact that [the analysts] were spectacularly wrong and…” he pauses, “…email.”

Ah yes, the emails. Merrill Lynch was publicly shamed when emails that privately denigrated stocks (“piece of shit” was one colourful description) came to light. They were sent by, among others, the bank’s star internet analyst Henry Blodget. They were then recommended in public.

“It’s a fascinating thing, email,” says Flom. “Ten years ago they’d have settled these things and it would never have come to light, so nobody would have quite felt the anger they did. But here a person said, ‘I think this is a piece of shit’. Was it a recommendation based on consensus or was he trying to make a point as he went along? Or was there simply ego involved? It’s different in all cases.”

As the conversation strays into corporate governance, I remind Flom of comments he made to London newspaper the Evening Standard in 1993. Then he said: “This business of having non-executive chairmen is nonsense. No one has shown that non-executives perform any better.”

If you think his attitudes will have changed over the intervening 10 years, think again.

“You can’t commit a director to a company and expect him to take a worldwide enterprise and… know what’s going on in every single part of the business. That’s just ridiculous,” he says. “Even if the director was full time, he’s not going to know every inch of the business. Could he visit the plants in a two-year period if he worked two or three days a week?”

Surely there has to be some system in place to ensure that the executive is kept in check? “Something you have to recognise is what’s required of the directors,” says Flom. “Is it that they’re there to decide on policy, to make sure the culture is right or to ask a bunch of questions?”

Aside from the US, where the likes of Enron, WorldCom and the rest of that motley crew has forced corporate governance on to centre stage, the subject is also a hot topic right now in the UK.

In the summer, the Financial Reporting Council completed a revised version of the Combined Code on Corporate Governance, based on the controversial Higgs report (banker Derek Higgs’s new set of UK corporate governance rules, released this month).

While he does not make much comment on changes in the UK, Flom is actually pragmatic when it comes to policing corporates. Boards are more active today, he says, he just feels there should be moderation.

“When I first started practising law, the board members would pick out a chief executive because they were buddies – he was on their board and they were on his,” he says. “I can remember working on a billion-dollar deal – that was a big deal in those days – and a company would approach the chief executive and he’d say, ‘Tell them to get lost’. But he wouldn’t go to his board. That wouldn’t happen today.”

However, having legions of non-execs in place would not, says Flom, suit a $50m (£30.1m) company. “If [executives] were spending all day trying to comply with different committees, it would never get off the ground.”

The real change for Flom has been in shareholder activism, where large institutions have used their muscle to strike out at management decisions. Bulging pay packets are a good example.

“Three or four years ago, heads of large corporations were changed by the boards because of performance. This was driven by investors saying enough is enough,” says Flom.

While there are still plenty of examples of executives taking the proverbial, not all slip through the net, such as former New York Stock Exchange chairman Richard Grasso who was forced to step down over his ludicrous $140m (£84.3m) pay packet.

“I know [Grasso] and I like him,” says Flom. “It just got out of hand.”

Speaking of things getting out of hand, has the Sarbanes-Oxley Act gone far enough to address the scandals that have plagued corporate America?

“There’s a need for reassurance for the public,” he replies. “When there are a series of scandals you do get the feeling that maybe the whole thing needs to be examined. You have to do something.” Flom has practised through numerous waves of corporate excess. “You have legislation, each new wave brings legislation and then the next wave is bigger than the one before,” he says.

But Flom is an old hand at this: in his 55-year career as a lawyer, he has seen more waves than in the New York harbour. From becoming the first associate at the then newly established Skadden Arps & Slate in 1948, the World War II veteran and Harvard Law School graduate found a niche in the proxy fights that really took flight in the 1960s, as the spectre of the conglomerate rose out of the US landscape.

But while this period was important to Flom, it was the early 1970s that really helped mould his reputation.

Flom concedes that hostile bids had occurred before, but it was the involvement of Morgan Stanley in International Nickel Co’s hostile takeover of ESB in 1974 that really changed the tide. Never before had a blue-chip institution gone down the unfriendly takeover route.

Because of Morgan Stanley changing its stance, others soon fell into line. “The banks had to protect their franchise,” explains Flom. “They soon decided that, ‘hey, this isn’t such a bad business’, and began starting up these takeovers. Of course, we had a reputation in doing these kinds of deals, so they kept using us.”

From this springs a number of issues. It is a well-told tale that one of the reasons Skadden started up was because of the white-shoe firms’ prejudicial attitudes towards lawyers’ Jewish backgrounds. Apparently it was the same WASPish attitudes that inspired the formation of New York’s Cahill Gordon & Reindel, which was founded by Irish Catholic attorneys.

Also, because of institutional snobbery, the same white-shoe firms declined to be involved in ‘ungentlemanly’ hostile bids.

Flom parries the subject of anti-Semitism in the early New York legal scene. “They were very good firms,” he says diplomatically, but concedes that “they were built on social connections”.

Certainly, one of the drivers behind Skadden and its subsequent success was and is the ability to move with the times. Flom is proud that his firm reflected “social changes”. “We were the first in terms of employing women,” he says by way of example.

Equally as satisfying is the subject of retainers. This is the one thing that is still guaranteed to reduce any lawyer to a salivating pulp. One partner I met positively glazed over at the sheer ecstasy at the mention of talking to Flom. “Did you ask him about the retainers?” he gurgled.

Basically, Flom became so successful – or more importantly, so feared – that corporations would pay him not to act.

He remembers: “Originally the retainer was $3,000, but it kept getting worse and worse. I kept getting retainers and in the end I didn’t want to be getting paid for doing nothing.”

As a result, Flom parlayed retainers into clients, using the fee to get advice from other areas of the firm. As a result, today, while Skadden still has a sterling reputation in corporate, the firm is a market leader in all areas of law.

It is quite amazing to remember that, from a four-lawyer practice founded in 1948, Skadden in 2003 is a $1.3bn (£783m) business which houses 1,632 lawyers. From that small office in New York, the firm now spans the globe through its 22 branches.

The strategy of Skadden is in marked contrast to Wachtell Lipton Rosen & Katz, the firm with which it is most often associated. Home to Flom’s deal-doing foe Marty Lipton (in reality they are friends), Wachtell is based solely in New York with corporate as its main practice.

But Flom is an advocate of the “different courses for different horses” school of thinking, even when it comes to UK firms’ propensity for mergers. “There are many models that work; there are risks involved with anything,” he says.

As the last surviving name partner of the firm, Flom remains fiercely proud and fearsomely protective of the practice. When I ask what he thinks of the reputation that the firm has of being a “sweatshop”, Flom is visibly rankled.

“That’s totally unfair. Our total billable hours are less than other firms and those firms aren’t called sweatshops,” he asserts. “On any transaction, especially a life-threatening deal, which many transactions are, you may end up spending nights in the office. But at the end of it people are encouraged to take time off.”

These heated, albeit measured, flare-ups are an insight into the kind of professional Flom is – a man who is comfortable standing his ground. I bet there aren’t too many lawyers who can say they “never felt the wrath of Robert Maxwell”, a client the firm advised on the hostile takeover of Macmillan Publishing from KKR and the company’s management in the late 1980s.

That said, even Flom didn’t escape the more eccentric side of Maxwell. He invited the lawyer and his wife to the theatre to see Shakespeare’s The Merchant of Venice during a trip to London. “So we get to dinner, and Maxwell’s sitting there eating this caviar at the top of the Goldman Sachs building,” he remembers. “But, you know, it’s getting late and we’re going to miss the performance, so Maxwell gets them to hold the curtain.

“I can tell you, this was an experience. We sit there, and just before the curtain goes up he says, ‘Oops, I’ve got a phone call’. He leaves – and that was the last I saw of him.”

War stories aside, Flom was at the forefront of shaping the law that corporate lawyers are learning today, and the fact that he is still enthusiastic and interested in what he does should be an inspiration.

And although he makes out like his partners will just not let him go (“over the years I said I’d be delighted to retire [and] I’m not fooling around”), deep down he would not want it any other way.
Joe Flom
Skadden Arps Slate Meagher & Flom