Wanna Buy the Brooklyn Bridge? No? How About a Law Firm?
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In 2007, May, Slater & Gordon, a large Australian personal injury law firm, made history by becoming the first law firm to sell stock to the public. United Kingdom law firms are not far behind. To my knowledge, no U.S. law firm has done the same, and, except for the District of Columbia, a non-lawyer is banned from holding equity (under the widely adopted American Bar Association Model Rule 5.4) by state bar associations in all 50 states.
When it comes to law firms selling stock, Law Practice Magazine points out:
“The first reaction from many people is to question why anyone would invest in, or buy stock in, a law firm . . . The most frequently raised objection is that it could influence lawyers to put financial considerations ahead of the needs of the clients. Some opponents also believe that it will raise even more ethics issues.”
The Georgetown Law Center for the Study of the Legal Profession has published a thoughtful series of letters on this subject. The letters note the widely held U.S. fear that law firm partners, to please their outside shareholders, would make decisions that would hurt their clients but provide better short term results, referred to as “practicing to share price.”
Additionally, some fear that lack of outside investment means a talent drain for law firms. In the Georgetown letters, Bruce MacEwen (the blogging force behind Adam Smith, Esq.) notes:
“This state of affairs leaves law firms at a competitive disadvantage when it comes to recruiting and retaining talent. Lawyers can be lured by private equity, hedge funds, investment banks, management consulting, and even plain old corporate clients offering stock options. Also, “C-suite” executives in law firms cannot be compensated at levels equivalent to their peers at similarly-sized corporations. Last and most obvious, ordinary income receives the most onerous tax treatment of all forms of potential compensation.”
To me, I think this risk of losing lawyers to companies should not be the reason to open up law firms to outside investment. After all, in-house lawyers in corporate America actually make less, even with stock compensation, than most lawyers at top law firms. And the enormous compensation of top executives is often due to incestuous relationships with consulting firms that tell boards of directors to pay officers handsomely so that the officers will in turn give the consulting firms more business. Runaway compensation levels caused by conflicts of interest need to be redressed, not equaled. Moreover, because law firms are so poorly run, it is hard to imagine a non-law firm wanting to poach a top equity partner and pay her better than her current compensation.
Believe it or not, I’m not against outside investment in law firms (and neither is MacEwen). And I agree that there is a serious ethical concern here. But that concern is not that lawyers will compromise their clients needs. Instead, outside investment would force firms to do a better job of serving their clients. Law firms defy economic rationality: in what other industry do the best companies pay everyone exactly the same, embrace massive annual attrition, and often do nothing to hold on to their best performers? Knowledge management is used ineffectively (if at all), and there’s hardly anyone using Six Sigma, Lean and other proven methods to provide superior service at cheaper rates. With savvy investors behind the scenes, we would start seeing more firms come under pressure to respond to widespread client complaints, associate complaints, and general unhappiness with the legal profession. An effective response would give a firm a huge competitive advantage in the marketplace. Despite most lawyers thinking the opposite, I think outside equity will be the ultimate intersection of the profit motive and ethics.
And the fear of lawyers “practicing to share price?” It already goes on. Most major law firms report their “Profits Per Partner” publicly. Firms do everything they can to keep that number from dropping, for fear that equity partners will quit in the face of falling profits and take their clients to a firm where profits are higher. So whenever there’s a down period, key practice support departments like knowledge management are cut (a point we’ve made before here). You’ll also see some of the best and brightest associates, of counsel, and non-equity partners shown the door. The quality of legal work suffers, and the client is left holding the bag. When the economy bounces back and work picks up again, the attorneys that are still around are usually overwhelmed. The firm quickly hires attorneys who are “good enough,” and the client receives work rife with shortcuts from non-top notch talent.
Buying stock in a law firm might seem bizarre and objectionable. But it might also make us much better lawyers.
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