Lawyers are pulling up their socks and polishing their grins like never before in an attempt to escape the new scourge of the solicitors’ profession – de-equitisation.
A word that can strike fear into the toughest partner, de-equitisation is a contractual process that lets law firms demote underperforming equity partners so that they receive a smaller share of the profits. In some cases, de-equitised partners can be taken out of the equity scheme altogether and re-employed as salaried partners, with no share of the profits.
As The Lawyer has revealed, firms such as Linklaters and Berwin Leighton Paisner have resorted to de-equitisation in recent weeks and it is rumoured that many more are doing the same on the quiet. Such costcutting measures are thought to have led to the departure of six partners from Berwin Leighton, with another four given the chance to improve their performance.
Meanwhile, it has been claimed that Linklaters has de-equitised several partners in its real estate and construction teams, with up to four more partners looking for new jobs rather than face up to the horrors of de-equitisation.
Some experts believe that de-equitisation is simply a consequence of the current harsh economic climate and think it is something that many more firms will have to come to terms with in the future.
Richard Linsell, a partnership specialist at Mayer Brown Rowe & Maw, says: “In any organisation there has to be change and response to the market and all we are seeing is such change. It’s an obvious function of the present marketplace, which for law firms is very patchy:’
On the face of it, demoting a partner because they are not meeting their billing targets does not sound like such a bad thing – after all, if someone is not pulling their weight, particularly in a bad financial climate, then why should everyone else have to carry them?
“Times are very tough at the moment,” admits Ronnie Fox, a partnership expert and senior partner at Fox Williams. “Firms of all sizes are looking very hard at the ability of partners to make a serious contribution to profits. You need to make up partners who’ll make the size of the cake bigger, not take a slice of it away.
“It’s always interesting when you recruit students and ask them what their long-term career aspirations are, because they always say they want to become partners. When you ask them why, they say because of the money and the fact that they’ll be in control of the firm and their future.
”But what they don’t talk about is liability – the fact that income depends on profit and there’s no God-given right for any law firm to make a profit:’
Under the Solicitors’ Incorporated Practice Rules, lawyers practising as a partnership can only give advice on the understanding that they are wholly and jointly liable for it. This means that if the firm is found to have acted negligently because of one partner’s bad advice, all of their ~ fellow partners are jointly responsible for clearing up any mess and covering the cost of doing so.
Some lawyers fear that many students and young lawyers are not up to spec on the potential pitfalls of achieving partnership.
Nicholas Wright, a partnership lawyer at Wright Son & Pepper, says he deals with a lot of people who have become partners without considering carefully the implications and “have got themselves into the most tremendous mess because they’re liable for both financial and conduct issues. People just don’t think that their bosses could potentially go bankrupt;’ he continues. “But the thing is, once you’re a partner you’re no longer protected, because to the outside world you’re equal:’
This concept of equality is at the very heart of the partnership ethos. Unlike a limited company, where the separation between the rights and duties of its shareholders and those who manage it creates a certain tension, partnerships are often described as ‘motivational’.
Linsell at Mayer Brown says: “This motivation arises from the fact that those working in the organisation wish to strive for the title ‘partner: and because of the way that professional firms are organised, there are many more partners in professional firms than you’d ever find directors in a limited company.
“This powerful motivational force and the flexibility of organisation, coupled to the consensual culture that should be at the heart of a partnership, has made these businesses extremely powerful:’
Differences in partnership structure can lead to varying degrees of job security, as Richard Thrnor, head of Allen & Overy‘s professional partnership group, explains. “At one end of the spectrum there’s the model typically used by US law firms;’ he says. “They have a highly centralised management team, which has the power to hire and fire partners without so much as a by-your-Ieave. These firms may offer very high rewards, but there’s very little job security.
“At the other end is the cosy ‘partnership for life’ model, where nobody can be sacked unless they’ve been grossly negligent. The big City firms tend to adopt a model halfWay between the two, where the management has the ability to sack partners on reasonable notice, but has to persuade the partnership as a whole before it can do so:’
Another major difference between the two styles of partnership structure is the way each pays its lawyers.
City firm Freshfields Bruckhaus Deringer uses a pure lockstep system, within which profits are shared out ~ according to length of service rather than perceived quality of performance, according to Hugh Crisp, the partner in charge of graduate recruitment. “When you start as a partner, you get a certain number of points and then each year you go up a step until you reach the maximum level;’ says Crisp. “The steps are said to be locked because they’re of a set size, specified in the partnership agreement.
“Some firms have local ceilings or gates, where the partners in a particular office can’t be paid above a certain level because the local office isn’t as profitable as others;’ he adds. ‘We just don’t do that and therefore the relationship between our offices and partners is very level:’
At the other extreme is a predatory, performance-related system favoured by US firms, based on the ‘eat what you kill, pay what you bill’ mantra.
“This can produce unhealthy behaviour;’ continues Crisp. “People will tend to be more selfish and won’t share work around and will do work that really should be done by someone else. That kind of behaviour makes the relationship between partners much less collaborative and less fun. If you’re arguing with your partners over money you’ll potentially poison the atmosphere, and that culture will soon spread itself throughout the firm:’
Law firm structures in the UK have traditionally inclined towards a version of the ‘partners for life’ model, because it gives them greater democracy and confidence in how the firm is run, says Thrnor. “Partners are very reluctant to give up their ultimate weapons in favour of the management;’ he states.
Despite some fears that de-equitisation may damage the pure lockstep structure and the growing trend among law firms to convert to limited-liability partnerships (LLP) (a limited company/partnership hybrid), there is no real danger that the legal profession will ever turn its back on the partnership model completely.
As a result, wannabe solicitors are strongly advised to think about what becoming a partner really means before they sign on the dotted line.
“Before anyone can become a partner here, they have to spend a considerable time in the firm’s accounts department so they understand what the risks and liabilities are;’ says Wright at Wright Son & Pepper. “Around 60-70 per cent oflaw students should never want to become partners, because for them there are more risks than rewards:’
But if becoming a partner is still your heart’s desire after you have taken all the pitfalls into account, then be sure to shine in your law firm interview, as that is when many recruiters start searching for the partners of tomorrow.
‘We do look at whether someone has the potential to become a partner when we’re recruiting;’ comments Crisp at Freshfields.
“All of our lawyers here are potential partners, which creates an interesting dynamic, because it means that the only difference between a trainee and the managing partner is that he’s been here longer.”
Somewhere in between the US corporate model and the UK style of traditional partnership lies the structure that UK firm DLA has made its own.
Director of HR Robert Halton describes it as a “meritocracy”, where there are no salaried partners and profits are shared equally right across the firm. “It’s like a corporate model within a partnership;’ Halton says. ‘We don’t have a lockstep system, where partners move up a stage according to the length of time they’ve served. And we don’t have any salaried partners – they’re all equity:’
DLA’s partners are split into three levels – junior fixed share, senior fixed share and full equity.
“Every year we look at the total contribution the person has made to the firm. It’s not just about billable hours, as we look at what they do in terms of marketing or people management or corporate social responsibility;’ Halton adds.
Essentially, this means that someone admitted as a junior fixed share partner could stay that way for the rest of their career in the firm. Added to that is the fact that partners can slide down the ranks, if necessary.
“There’s no automatic move up the lockstep every year,” says Halton. “Instead there’s a promotion process where the remuneration committee hears evidence from other partners, office managers and the executive about why someone should be made up to be an equity partner:’
Lawyers who are not promoted can appeal against the decision, but this happens rarely. “People have faith in the process;’ Halton says proudly.
The day-to-day running of the firm is taken care of by an executive team, which includes directors, like Halton, who report directly to the managing partner.
“Our structure frees up the managers to manage and also frees up the partners to win clients, instead of having to attend partnership meetings all the time;’ he says.
DLA partners have to attend only two formal meetings per year, where they vote on issues such as the firm’s budget, its strategy and how the profits should be shared. Additional meetings could be called to vote on new equity partners or major transactions, says Halton, adding: “It’s quite a refreshing culture. It’s very inclusive:’
A firm’s partnership culture is an important quality for students to look out for when they are applying to firms for training contracts, Halton says. “Make sure it reflects what you want from a firm;’ he suggests.
But he disagrees with the idea that students should set their sights on being a partner from the outset. “It’s quite possible to have a career in the law and not become a partner;’ he says firmly. “If you’re really going to become a successful lawyer, then focus on being a good trainee; at that stage, it’s far more important.”
Out with the new at Clifford Chance
Global giant Clifford Chance has experimented with its partnership structure in the past few years, changing from a traditional set-up to a more corporate style and then back to traditional again.
Back in January 2000, Clifford Chance partners voted to switch to a partnership style that would reflect its recent mergers with German firm Piinder Volhard Weber & Axster and US firm Rogers & Wells.
Clifford Chance executive partner Chris Perrin says: ‘We knew we were creating a very big firm and there was a feeling that to run a firm of that size, we would need more of a command and control structure:’
So the managing partner became known as the chief executive and the senior partner became the chairman.
But cracks began to show a mere 18 months later, when the partners started to voice concerns that the new regime was not serving their best interests.
“Some partners saw that there was a danger that the firm’s leadership was becoming too authoritative;’ Perrin says.
As the firm was about to embark on a corporate governance review, it seemed like an appropriate time to ask the partners if they wanted to rethink the partnership structure again.
As a result, Clifford Chance’s executive was turned back into a management committee, while the board reverted to the partnership council.
Managing partner Peter Cornell was elected to office at around the same time, on a ticket that promised to give the partnership back to the partners.
Now the management committee, headed up by Cornell, deals with the day-to-day issues, while senior partner Stuart Popham sits at the head of the partnership council, which has been described as the “firm’s conscience”.
So are the partners happy with their new old style of partnership?
“People seem much happier,” admits Perrin. “Much of the criticism we had about the management style has largely disappeared. There will be a little mini-review at the end of this year to tweak things if necessary, but the essential structure will be there for some time.”
A partnership does not exist as an independent legal personality, unlike a limited company, which can sue or be sued. Partners all own the firm together, meaning that if the firm is sued, then all of the partners are equally liable. Under an ordinary partnership, partners have to buy into the firm, but if it goes bankrupt then the partners are not only liable for the amount they paid in, but for everything they have got. This means that a partner could theoretically lose their house to wipe out the firm’s debts, even if they are not responsible for the mess.
A partner on a lower rung of the partnership ladder who is paid a fixed salary plus a share of the year’s profits.
A partner at the top level of partnership whose pay is entirely made up of profit. Equity partners often have a greater voice in deciding firm matters than salaried partners.
A system for paying partners according to how long they have been in the partnership. Lawyers in the partnership for three years, for example, will all earn the same, even though they may all bring different amounts of work to the firm.
‘Eat what you kill’/meritocracy
An alternative to lockstep where partners are paid according to how much profit they individually make.
Profits per partner
How to measure a law firm’s profitability. A law firm with more partners is likely to bring in more money than one with fewer partners, but if it does not bring in enough work to make the extra manpower profitable, then the profits per partner will drop.
Limited-liability partnership (LLP) Under an LLP, individual partners can limit their liability to the amount they pay in, unless they are somehow personally responsible for the loss. Partners in an LLP are referred to as ‘members’.
A constitutional document that governs the relationship between partners and the partnership.
Joint and several liability
If two or more people enter into an obligation that is joint or several, their liability for its breach can be enforced against them all by a joint action or against any of them by an individual action.