Many top Chinese firms are confronting their first succession issues as their founders prepare to step down. Can they build the right frameworks to ensure a strong generational transition?
Over the past two years many Chinese law firms have celebrated their 20th anniversaries. King & Wood Mallesons’ (KWM) China arm and Zhong Lun, two of the country’s top-tier firms, celebrated their birthdays last year with the requisite lavish Chinese banquet. And adding to the significance of the event, the pair also launched books.
Zhong Lun’s offering was named The Secrets of Zhong Lun, summing up the lessons learned in the past two decades and the story of the firm’s development amidst China’s economic transformation. KWM, on the other hand, launched the Chinese edition of The Spirit of the Legal Profession, authored by US lawyer Robert Wilkin and translated by the firm’s global chairman Wang Junfeng.
Both books have been popular among lawyers in China, who regard them as useful reference sources for the country’s legal profession, still in its adolescence.
China started permitting private practice law firms in 1988 under a pilot scheme. Since then the number of firms and lawyers has surged. Today there are about 20,000 firms across the country. Most of the established ones were founded in 1992 and 1993, such as KWM, Zhong Lun, Commerce & Finance, Dacheng, DeHeng Law Offices and Jingtian & Gongcheng.
For any 20-year-old, the problem of succession planning might not seem to be too urgent. But for some, their founding partners are approaching retirement, and so leadership changeover is a pressing issue. More broadly, leading firms have started thinking seriously about their future and how to sustain their success and position in the generations to come. As many of these firms’ managing partners would say, they are aspiring to build legacies and dynasties that will last for centuries.
UK magic circle firms such as Clifford Chance and Linklaters are frequently cited as role models. However, being the first generation of firms in a unique market like
China, they have little precedent to draw on and no existing model to adopt. They learn and develop by trial and error.
Founding partner to committee
While small to mid-sized firms are mostly managed and controlled by their founders, large firms with more than 100 lawyers generally have a more sophisticated structure and are overseen by a management committee. In many cases, the chair of the committee and ultimate decision-maker is still one of the founders. However, this is slowly changing.
Jun He, established in 1989 in Beijing, has just completed a key leadership transition.
One of Jun He’s five founding partners, Xiao Wei, stepped down from the managing partner role last year after being at the helm for five consecutive two-year terms. Of the founders, Xiao has served the most terms as managing partner. He is also fundamental to Jun He’s relationship with Slaughter and May, as he worked in the UK firm’s London office on a three-month placement as part of the one-year Lord Chancellor’s Training Scheme for Young Chinese Lawyers in 1995.
Although only 53, Xiao has decided not to stand in the managing partner election, in an attempt to inject fresh ideas and energy into the firm’s management.
At the beginning of 2013, the firm’s 58 full-equity partners, who have the power to vote, elected Shanghai-based banking and finance partner David Liu, who is in his late 40s, as chair of the management committee and managing partner.
“The founding partners are highly respected among all partners and have been trusted to lead the firm,” says Liu. “They are capable and visionary. This has resulted in a stable management team over two decades.”
Liu’s appointment is significant, not only because he is based in Shanghai but also because he joined Jun He in 2004. Prior to that he was a partner at Shanghai banking and finance firm Llinks, which he helped found in 1998.
“Jun He had only 30 partners in 2004 but the number has now jumped to more than 100,” he says. “About two-thirds of the partners were lateral hires and have worked abroad or in international firms. It is an open partnership and has a democratic culture. That makes the leadership election and transition relatively easy.”
Having open-minded founders with the vision to build up a firm is key to a successful generational transition.
Beijing-headquartered national firm DeHeng is another to have put in place a new governance structure as part of its succession planning.
Established in 1993, the firm was headed and managed by founding partner Wang Li, now 58, until last year. She is seen as a key figure pulling everyone together.
Last January DeHeng installed an enlarged management committee consisting of nine partners. Five of these are in their early 40s. At the same time the firm established a new role of executive partner and elected 44-year-old Beijing partner Gavin Sun. Sun has been with the firm since the start, working his way up from junior lawyer to partner. Over the course of 2013 he gradually took over the day-to-day management responsibilities from Wang, who is now serving in a similar role to a senior partner in the UK, setting the strategy for the firm and maintaining key client relationships.
“When it comes to major reform or the overhaul of a firm’s management structure, it’s important to have the founding partners’ support,” says Sun. “They’re still influential in the firm and can help overcome difficult issues, and balance the tensions and power between partners.”
Wang also plays an important role as the ultimate point of resolution for tough issues and difficult decisions. For example, with her authority in the firm and her strong relationship with major clients such as China Three Gorges Corporation, ChinaNational Tobacco Corporation and the Agricultural Bank of China, she is one of the few people who can centrally co-ordinate the resourcing and allocation of partners and lawyers to service big projects and transactions. She is also one of the few with the ability to call the shots on tough decisions, such as taking on loss-making work to gain strategic clients and break into a new practice area.
“How to set up a system under which the firm will continue working effectively and harmoniously when the key person eventually leaves is a big question for us,” says Sun. “Setting up a new management team is just the first step and there are many challenging tasks ahead.”
Back to Beijing basics
Many large firms have indeed transitioned from being managed by the founders to being led by a committee consisting of a mix of younger and older generation partners. However, more needs to be done before their businesses can be regarded as sustainable for generations to come. A lot of this work is to do with the basics, making clear rules and procedures, and implementing these rigorously and consistently.
At Jun He, Liu has initiated many initiatives to improve the firm’s management since taking the helm. For example, after lengthy discussions with his partners he has articulated the criteria that must be fulfilled before associates progress to partner status.
“We’ve been promoting lawyers to partners since the firm’s establishment,” says Liu. “But sometimes exceptions are made for certain promotions and the requirements were a bit blurry. To make career progression more open and fair for all the associates, we need to promote by rules.”
For existing partners, performance will be more closely monitored and measured. Liu has introduced the firm’s first-ever set of minimal performance requirements for partners.
“These requirements are not difficult to meet,” he says. “But it is necessary to have a set of requirements to benchmark an individual’s performance against and raise the consistency and standards of the partnership.
“This initiative won strong support among the partners and the vast majority voted in favour.”
Other things on Liu’s long to-do list include implementing an improved conflict of interest check and resolution mechanism, setting up a more rigorous risk control process and forming six new industry- and sector-focused groups to follow the market more closely.
Zhong Lun is another firm that has recently formalised its promotion criteria for each of the three levels of partners – senior equity, junior equity and salary partners. For a junior equity partner to be promoted to senior equity, the revenue brought in by the candidate partner should be twice the average amount of all equity partners in the previous year. In 2013 the firm reported total revenue of RMB1.03bn (£103m), up 8 per cent on 2012. Last year the average revenue per equity partner was around RMB7.5m, which means a junior partner needs to make RMB15m in 2014 before becoming eligible for promotion.
The rule was finalised last Dec-ember and is effective from the beginning of this year. The same set of calculations is also used to measure each partner’s financial performance. If a partner does not reach the minimal target for two or three consecutive years they face the prospect of being demoted.
“We need to set measurable criteria for partner performance review. In the past the rules were more flexible,” says Qiao Wenjun, Zhong Lun’s Shanghai managing partner. “As the partnership grows we need a formal and transparent management framework to keep everyone together and motivated.”
China’s legal profession has transformed itself over the past decade in terms of power and reach. Now it is aiming to transform itself in terms of organisational culture.
Two views of the future
Shanghai Pudong Law Office is keeping things in the family. The firm’s founder and managing partner Mao Baigen, now 67, wants his son Mao Yijun, a dual-qualified lawyer in China and the US, to take over when he retires.
Although an understandable decision, other partners in the firm deem this discouraging for their career progression. A notable number of partners and lawyers have left the firm since learning of the founder’s intention.
Once a pioneer with 60 lawyers focusing on corporate and foreign investment work, Shanghai Pudong today is a boutique, with seven partners and eight associates.
Meanwhile, another Shanghai firm, City Development – or Jianwei, in Chinese – has opted for a merger on its 20th birthday. The firm’s founding and managing partner Zhu Shuying, 65, has firmly established the firm as a specialist in construction, real estate and infrastructure in the past two decades. Although he has no plans to retire soon, he recognises that for the firm to continue its success into the next few generations, a critical mass and a wider range of offerings are necessary. Better to see the transformation going through while he is still at the helm of the firm, he believes.
Several sources confirm that Jianwei is in the process of finalising a three-way merger with two other mid-sized law firms, one being corporate and foreign investment-focused Shanghai outfit Haworth & Lexon.
“Merger is inevitable if firms want to win big mandates for large corporate clients,” says a veteran Shanghai partner at a national firm. “The market today is vastly different from that of 20 years ago. The legal system is so much more complicated, clients’ needs are more diverse and competition is cut-throat.”