Adventure of Strategy

There have been two landmark age-discrimination events in the legal profession in the past week or so. West of the Atlantic, Sidley Austin has paid out $27 million to 32 former partners, to end a suit brought by them. In England, courts ruled in favor of magic circle firm Freshfields Bruckhaus Deringer in a another age-discrimination suit brought by a former partner of that firm.

I don’t want to comment on age discrimination or the merits of either case specifically, though. To see what others have written, see here and here and here (Sidley Austin case) and here and here and here (Freshfields case.) Far more interesting, to me, is the wider strategic issue that this debate about law firm partner age discrimination has brought right out into the open.

That is:    Just what does it actually mean to be a partner? Is one really a shareholder and co-owner of the firm? Or just an employee? The Sidley case really hinged on whether partners were employees, or not. It is reported that Sidley “has had to admit” that partners are effectively employees, but it claims it has only done so "for the purposes of resolution of this matter." So, is this really true? Are law firm partners really employees?

Yes! Of course they are! But ... (and it's a very big "but") ... as in other owner-managed-staffed businesses, they are a special case. This, because they are also shareholders and the firm's leaders and managers too. The trick lies in how these roles are balanced.

A partner in a very large law firm with an instantly recognizable name told me not too long ago that he had not voted on any issue in his firm in decades. This particular firm has a very centralized management system and indeed, is an extremely successful firm. So, who's to say they're "wrong?" Other firms, equally prominent and successful, have far more participatory management structures. Who's to say that they're "right?"

To understand what's really at issue here, let’s unpack the three roles that a partner in a typical law firm plays, and how these differ from each other. Here is a short (by no means exhaustive) list:

Employee
- Produce an adequate supply of quality work that can be sold to clients
- Manage / ensure client satisfaction
- Serve the firm diligently in every way

Manager
- Develop and execute strategy
- Maintain corporate governance standards
- Coordinate and manage the operations of the firm
- Ensure an appropriate financial return for the firm's owners

Shareholder
- Exercise rights as owner of the firm
- Require management to produce an acceptable financial return
- Appoint management and allow them to execute their mandate without undue interference

It is quite obvious that these roles are not only different, but sometimes in conflict with each other. For instance: as a shareholder, I may want to maximize my short-term financial return. As a manager, on the other hand, I may want to invest in future growth. As an employee, I want to be rewarded for my contribution and maybe I have lifestyle aspirations too that impact on the level of production that I am prepared to generate.

The key is that it is critical for the three roles to be seen as discrete and separate. In all but the smallest firms, having all partners participate in all management decisions is a recipe for stagnation, if not ongoing conflict. Imagine the shareholders of a major corporation second-guessing the management of that corporation on everyday business decisions! Yet the opposite extreme, where shareholders are entirely passive, often does not sit well either.

Balance needs to be maintained between the three roles. The first step towards this balance is for the owners of the firm to know which hat they are wearing under each given circumstance.  Only then can the roles be properly separated.

The second is to decide what decisions fall within the ambit of management, as opposed to legitimate shareholder issues, and then create structures that allow management to carry on with their work with the minimum of interference. There is no hard-and-fast rule as to the boundary between what management (e.g. an executive committee or even the managing partner herself) and what shareholders (as a whole) need to decide. Every firm needs to craft it's own model. Naturally, the model can and probably should include oversight structures like recourse to a shareholders’ meeting should a significant number of owners deem this necessary.

The third is for the performance focus (in both employee and at manager/leader roles) to be squarely on objective metrics, so that there cannot be any question that performance concerns are being used as a subterfuge to disguise unfair labour practices or, indeed, the denial of a partner's rights as an owner of the firm either.