Is the Focus on Shareholder Value Hurting Law Firm Performance?
ByIntriguing post up today by Robert Sawhney, who asks here:
“[W]ho said that shareholder value was the primary objective of any firm? The well known and outspoken economist Milton Friedman was a vocal supporter of shareholder value as the primary objective of any firm. He claimed ‘the social responsibility of business is to increase profits’. That may be so and I am not here to argue the ins and outs of economics, but surely the objective of any business is to enhance client value and create economic value through innovation. Not only that, but economic value should be based on innovation and not destruction. Within the law firm environment and professional service firms in general, we are sorely lacking an alternative view of capitalism.”
I certainly agree with Robert that the leveraged law firm model is an entrenched system that does not do a very good job of creating economic value through innovation.
I would take issue with the comment regarding Milton Friedman, as I don’t think he would have ever said that creating value for customers through innovation is in opposition to shareholder value. Friedman’s core message was quite the opposite, mainly, that focusing on shareholder value pushes firms to compete to provide the best possible products at the most affordable prices, and they do this by innovating under competitive pressure. However, I think Robert does a strong job of pointing out how law firm path dependence creates a big problem for Friedman’s supposition, because law firms’ laser-like focus on profits per partner leads to poor, short term oriented decision making and worse allocations of resources which result in unnecessarily costly services that are often not provided with optimum performance.
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