A Revolution in the Legal World?

By Debra Bruce

A landmark event in the legal world launched in May. This event will ultimately change the course of the practice of law. Or perhaps it is just further evidence of how dramatically the legal world has already changed in the last 10 years.
Australian Law Firm Goes Public

An Australian law firm went public and was listed on the Australian Stock Exchange on May 21, 2007. Australia adopted legislation that permits non-lawyers to invest in the ownership of a law firm, and capital to be raised publicly. The 140-lawyer firm, Slater & Gordon, will initially have shares owned by 42 lawyers and staff, according to a June 1, 2007 article in The American Lawyer. Legislation has also been introduced in the United Kingdom to permit law firms there to sell stock publicly.

Big Partnerships Taking on Corporate Attributes
The expanding global economy has already fueled corporate-like merger and acquisition activity among U.S. mega law firms, as clients seek firms that can meet their needs across the country and around the world. With more than 75 U.S. law firms growing to over 500 attorneys and 20 exceeding 1000 attorneys, the traditional partnership structure has become less and less manageable.

Very large firms have already adopted many aspects of corporate structure with tiered management through practice group leaders, local office managing partners, and regional directors. Most large firms have non-lawyer executive directors, business managers, and human resource directors who report directly to the executive committee, or even sit on the executive committee. The firms also depend on the capability and experience of information technology experts and marketing professionals to keep pace in the legal world, competing with the corporate world for the best providers. Thus a shift in ownership structure authorized under Australian law in many ways merely formalizes the already accomplished transition of the legal profession to a business.

Predictable Impact of Legislation
Although the UK legislation is not without opposition, if it gets adopted it will probably launch a wholesale shift in the legal business. When law firms in two major English-speaking economies have superior access to capital and a mechanism for long-term wealth-building beyond the billable hour, U.S. law firms will find themselves scrambling even more than they already do to compete for talent.

Legions of detractors will resist the change, citing many good reasons for their resistance. They will not be able to stop the wheels of commerce, once set in motion, however. Despite the inevitable lamentations about the “loss of professionalism and the rise of commercialism,” there may be a bright side to publicly held law firms, and this article will mention a few.

The Bright Side
Few would argue that today’s large law firms have a highly desirable culture and working environment. One need only observe the rampant and sometimes crippling associate attrition that most large firms experience, to recognize the dysfunction plaguing their ranks. While I wouldn’t suggest public ownership of law firms as the solution to that problem, such a stunning and revolutionary change may have ancillary benefits that affect the firm culture positively.
Shifting mega-firms away from the traditional partnership structure to a more corporate structure with outside investors may generate significant benefits to the firms and even to the legal profession. As Prof. Milton Regan at the Georgetown University Law Center wrote, “Currently, there is no influential stakeholder whose financial stake in the firm encourages profitable lawyers to curb self-interest for the sake of the firm. Those with the most business are the most mobile, and often the least inclined to make this compromise.”

Self-interested behavior threatens the stability of the firm and would make the firm unattractive to investors. Indeed, allegations in court papers relating to the 2003 demise of the mega-firm Brobeck Phleger & Harrison LLP claimed that self-interested behavior destroyed the firm. It was alleged that partners continued taking large distributions even when economic downturns affected the firm, and then a mass defection triggered a freefall.

Prof. Regan suggests that “firms may decide that a compensation system weighted heavily toward ‘eat what you kill’ is counterproductive in a world in which stability and commitment to the firm are key considerations for investors. This may lead to a more productive balance of cooperative and competitive incentives within the firm, as well as simply a more pleasant and supportive atmosphere.” To read more discussion by Prof. Regan on this and related topics, go to http://www.law.georgetown.edu/legalprofession/documents/firmsethicsequity.pdf.

Bridging the Chasm
As true business managers and marketing experts have the opportunity to share in the profits they generate in a law firm, the great class chasm between lawyers and non-lawyers within the firm may diminish. Firms may develop more balanced methods of valuing the contributions of its employees, as training and mentoring become recognized as being essential to the stability and productivity of the firm. Perhaps even teamwork could become popular. As Prof. Regan puts it, “investor preference for stability thus could temper what some see as excessively individualistic tendencies in modern law practice.”

As financial distinctions between lawyers and other contributors blur, the “up or out” cultures that still exist in many large firms due to the stigma of not making partner, will also transform. Law firms will probably stratify more, with associates, paralegals and staff having the opportunity to share in the profits that their efforts create.

Lawyers who have family or lifestyle reasons for working reduced hours may find a comfortable way to stay with the firm when success or failure is not marked by the bright line of partnership. Stock options and employee stock ownership can provide additional opportunities for all lawyers and other employees to share in the success of the firm as the result of their extraordinary performance, contributing to improved talent retention.

Commoditization of Legal Services
I confess that I have some difficulty imagining how a public law firm would work in the near term. I can imagine the possibility of a serious decline in the professionalism of law practice and the commoditization of many legal services. Largely due to the Internet, we already see the beginning of the commoditization of legal services. I’m not sure that public opinion of lawyers can sink much lower, so the public may welcome lower prices and fail to notice any decline in professionalism.

One result may be that many lawyers will make less money, with most becoming part of the working middle class, instead of the professional elite, and a few becoming ultra-wealthy titans. When we compare the income of lawyers in mega-firms to those in most of the smaller firms, one could say that trend launched a decade ago.

Your Thoughts?
I suspect that my musings may trigger some heart palpitations. I welcome your thoughts on the potential impact of law firms going public.