Wednesday, September 3, 2008

First, Kill All Publicly-Traded Law Firms

Great Britain's law firms will have the option of becoming publicly-traded companies in 2011, according to the latest Economist magazine. That means investors, from individuals to institutional players, could buy stock in the British-based XYZ Law Firm Inc.--or something like that, old chap-- as if it were McDonald's Corp. or Procter & Gamble Co..
Eventually, this is a trend that will make its way across the pond to the United States, home of some of the world's largest and most successful law firms. Yes, it would take some tinkering with laws and regulations, but don't dismiss the possibility of law firms or their subsidiaries being traded one day on the New York Stock Exchange and other exchanges.
Of course just because something can happen doesn't mean it should. I shudder at the thought that law firms, which usually are private partnerships, will convert to publicly-traded entities. I'm not alone, the American Bar Association isn't wild about the idea either and prohibits selling shares in law firms to non lawyers.
There are incentives for going public. Firms can put a value on their partnerships, name and equity partners could cash out with rich paydays, and the stock can be used as currency for merging or acquiring competitors. Naturally, the investment bankers like it because it's a new treasure trove of fees.
However, there's plenty of downside for the law firms, clients and investors.
First and foremost, there's a huge potential for conflict of interest. Remember, a law firm is suppose to exist to represent the interest of its clients (at least that's what they say).
As a publicly-traded concern, a law firm opens itself up to immediate questions over conflict of interest with every significant decision or strategy being called into question. For instance, is the law firm filing a lawsuit strictly in its client's interest or because the legal action promises to generate billings that will boost the law firm's share price?
And even if conflicts are well-managed, there's other inherent problems.
Running a large law firm is akin to herding cats. Compared to even the most dysfunctional publicly-traded concern, large law firms are more difficult to manage, prone to greater in-fighting and a bastion of petty fiefdoms.
More important, many law firms don't have a handle on their expenses. As the Economist points out, few managing partners know their firm's profits per billable hour--even though that's how the money is generated. That is a key ratio.
Cost Control? Forget about it.
For decades, law firms have focused on making money and wooing clients, not cutting costs. And while that's beginning to change, though mergers and cut backs, it's a long way from reaching the discipline required by successful publicly-traded companies.
Indeed, as shareholder-owned companies, law firms would be under greater pressure to contain associate starting salaries, fire under-performing partners, and sell those gleaming glass towers they all like so much.
Can you imagine the sheer joy a professional troublemaker,like shareholder activist Carl Icahn, would have going after some fat cat legal firm and compelling it to count the paper clips?
Despite all this, I'd be for publicly-traded law firms if they'd end up providing better counsel and service to their clients. Unfortunately, that wouldn't be the case.
These days, a publicly-traded company's first concern is increasing shareholder value. Everything else comes in second.
In a few years, that's something the Brits are going to discover.


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