Let’s engage in a thought experiment. Suppose, just for a moment, that law firms were allowed to grant equity to individuals or entities other than lawyers.
I know that might be a grotesque prospect for some of you. But just for the purposes of this column, let’s imagine that your law firm was allowed to receive a significant capital injection from, say, a benevolent and highly ethical trust fund that sought only market-average annual returns on its investment and pledged never to intervene in the firm’s operations.
In other words, imagine your firm possesses a solid, reliable capital base to fund operations, cover expenses and so forth and has no need to seek equity investments by the lawyers who work there. Here’s my question: Would you still invite lawyers to invest equity and become partners? Would your firm still have “partners” at all?
The purpose of this thought experiment isn’t to make the case for “non-lawyer” investments in law firms; soon enough, the legal profession will be making that case itself. My purpose here is to have you examine closely the purpose and function of “partnership” in law firms. What’s it there for? What does it give the firm and what does it take away?
The reasons for partnership
I’ve come to believe that, most of the time, law firms invite lawyers to become partners for one of two reasons: out of sheer habit or because the firm needs money.
The majority of partners are in the first camp: They served their time in the billable trenches, they were acceptably good at what they did, they’d outgrown associate status and they expected the firm to render a verdict on their many years of labour. In law firms, the unbreakable rule of lawyer advancement is “up or out.” The firm saw no reason to push them out. So up they went. So long as they don’t tick both the “floater” box and the “jerk” box, they’re good to go.
In less successful or not-so-admirable firms, you’ll find some partners in the second camp: They were invited into the equity circle not because they’re so great but because the firm over-distributed profits to powerful senior partners or cash flow stalled out for one reason or another and the firm needed to strengthen its capital position. I suspect this scenario is more common than you might think.
The problem is these are mediocre rationales for approving someone’s admission into a powerful and important position. Partnership gives a lawyer a real sense of power within the firm and a significant degree of prestige outside it. In some firms, partnership bestows upon a lawyer the ability to affect or even block important decisions; in all firms, it bestows upon a lawyer a sense of entitlement to that kind of influence. Partnership, once granted, is not easily withdrawn. Firing an associate is a breeze; firing a partner — although it’s becoming more common — is still frequently difficult and traumatic.
I’ve been saying for several years now that law firms have too many partners. And, in fact, there are reports suggesting firms have slowed their rates of partner admission — though I suspect this is primarily because, in a time of falling revenue, those with a seat at the profit table aren’t interested in putting out more place settings. I don’t get the impression many firms have thoughtfully reconsidered, on a systematic basis, which lawyers they want to become partners in the firm and why.
If your firm hasn’t yet undertaken such a reconsideration, I think it’s time it did. For one thing, the commitment a firm makes by an invitation to partnership — granting partial ownership of the firm for anywhere from 25 to 35 years — is so massive that it’s irresponsible to do so without conducting a deep, long-range assessment of whether the firm will be well served by making this commitment. Will you want this person to be a partner in 2027? How about 2037 — or later?
But there are other factors at play here. Every indication is that the millennial lawyers now entering the partner admission zone are not as interested in the brass ring as were their boomer or even gen-x predecessors. As the pool of potential partners shrinks, so will the quality of the people you’ll be choosing from — and the greater the chance your matter-of-course partnership invitation will turn into a serious mistake.
And then there’s the problem at the other end of the demographic tunnel: the impending loss of the boomer generation of partners. We don’t have numbers for Canada, but in the United States, 16 per cent of current partners will retire in the next five years and 38 per cent will do so in the next 10 years, according to the Major, Lindsey & Africa 2016 Partner Compensation Survey. With fewer partners will come less capital and a corresponding equity crunch that will heighten the risk that firms promote unworthy partners because they need the money.
So the time to reassess the purpose and function of partners in your law firm is today, before circumstances force the issue upon you. If the process of granting partnership has in any way become routine in your firm over the last several years, break that habit now.
Take a look at all the partners in your law firm (if it’s a big firm, you might have to pull the camera back some distance). How many of them are utterly indispensable to the firm — brilliant rainmakers, exceptional managers or truly expert practitioners? Consider each current partner in your firm, as well as each potential partner coming up the pipeline, and ask yourself:
1. If this lawyer left your firm to join a rival, would it be a serious blow or a manageable inconvenience? Why?
2. If this lawyer was at a rival firm and you had the opportunity to recruit them at some expense, would you jump at the chance or would you hesitate? Why?
Then think about the power you want partners to have. When you extend partnership, are you giving out “voting shares” with the ability to direct the firm and shape its decisions or “non-voting shares” with the ability to receive dividends but nothing more? Which do you want to give out? Which do your partners think they’re receiving? If there’s a disconnect on any of these points, you need to address it pronto.
The day will come when your firm’s need for equity investment will be inversely proportional to the interest of your lawyers in providing it. Before that day arrives, your firm and its lawyers need to have complete clarity around the purpose of partnership in your firm — its benefits and drawbacks, its rewards and obligations.
And should your firm’s need for capital some day outstrip the funds available from the pool of interested would-be partners, well, maybe your firm will be among those lobbying to change the rules around non-lawyer equity investment in law firms and turning the hypothetical above into reality.
Jordan Furlong of Ottawa is an internationally recognized speaker, author and legal market analyst who forecasts the impact of changing market conditions on lawyers and law firms. He has spoken to law firms, law societies, courts and legal associations throughout North America and worldwide. His newest book, Law Is A Buyer’s Market: Building a Client-First Law Firm, addresses the foregoing issue and many others, and it is available now at http://law21.ca/books.