When a law firm restructures, the picture is markedly different. This is because law firms are partnerships, not corporations. In healthy and profitable firms, the partnership structure is attractive to lawyers as it offers personal autonomy, partner collegiality, professional independence and other benefits. In a firm that must restructure, however, the odds are that these same attributes will make the mission improbable, if not impossible.
Over the past decade, I have had the opportunity to work closely with the managing partners of three large, well-run law firms. This has involved countless meetings of partners, executive committees and management groups. Fortunately, almost all of this activity has been devoted to strategic and operational matters, as opposed to restructuring in any significant way. But having experienced the challenges of law firm management in good times, I can envision the Herculean struggle that would confront law firm leaders in times of distress, let alone when significant restructuring is necessary.
One must remember that managing partners are "first among equals" in relation to their fellow partners. This applies to members of the executive committee as well. Managing partners are not selected by independent boards of directors, but are elected by the partnership at large in most firms. In theory, at least, they will return someday to the trenches of full-time practice, shoulder to shoulder with their colleagues. Given the interdependent nature of this relationship, managing partners may find it difficult to engage in the mission of law firm restructuring, even when the need is urgent. Alternatively, when they do take action, they may be inclined to limit the exercise to associate lawyers or support staff.
Look also at the scope of formal authority for managing partners. Typically, they are given overall responsibility to manage the day-to-day business of their firms. However, when it comes to fundamental change, which is the hallmark of restructuring, managing partners do not have unfettered authority to take critical steps to put the firm on a stable footing. Instead, the governance structure compels them to campaign for the support of internal stakeholders, including those who may be most affected by a proposed reorganization. There's no doubt that exasperated managing partners look longingly to the powers of corporate executives, whose hands are not so similarly bound.
When companies restructure, the hierarchical reporting lines enable the CEO to "clean house" and recruit new talent. As noted above, managing partners do not have the ability to transition underperforming partners or eliminate redundant practice areas with the stroke of a pen. They must perform their duties according to the partnership agreement and the unwritten expectations of partners. These obligations often lead to protracted discussion and due process in decision-making. The resulting delay can be particularly frustrating for managing partners when attempting to realign a partnership and maintain the viability of their firms.
A delicate balancing act occurs when managing partners respond to those who see the failure to effect key changes as diminishing the value of their investment in the firm. In a public company, poor performance is usually reflected in a declining share price, which can trigger a run on the shares. In the law firm context, there is potential for a different and more damaging situation-a run on the assets-as lawyers become frustrated with management and "vote with their feet". A crisis of confidence among the firm's most influential partners will be the death knell for any firm that is already in trouble.
We often hear of lawyers who mourn the loss of the old-fashioned partnership, where decisions were made around the boardroom table and every partner had a voice. Yet, today's lawyers still enjoy a greater level of internal democracy than do their corporate clients. In most law firms, matters of high-level policy, strategic or operational importance are considered by the partnership. To facilitate the building of consensus, the managing partner needs to provide partners with relevant information, consult broadly, and at times debate vigorously. Proposals must be reshaped to address the concerns of the partnership, or it is highly unlikely that they will be approved. While participatory governance is desirable, it has the potential to become unwieldy and ultimately contrary to the restructuring firm's best interests.
Partners want to participate in the running of their firms because they are their firms. Partners are not just the owners; they are also the lenders, managers and workers-as well as the "product"! In the corporate world, executives are less constrained by the history, traditions and culture of the organizations they lead. In restructuring, they can be dispassionate as they pursue the goal of profit maximization. In the law firm, the goals are more diffuse (although profitability is certainly important) and the management task is more complex.
Corporations select their leaders from local, national or even global networks. Where restructuring is required, they frequently hire a turnaround specialist, with experience in all aspects of business reorganization and recovery. Law firms, on the other hand, must draw their managers from the ranks of the partnership. It is often said that leadership is the most important quality that is missing in law firms. In the context of law firm restructuring, strong leadership is crucial and the pool of talent is very limited, even in the largest of Canadian law firms.
Improbable as it may seem, there have been instances of successful law firm restructuring. But when one reflects on the nuances of management, governance and culture in law firms, it is easy to see why the odds are against the mission. The essential ingredients for the success of any firm-including leadership, vision and the collective will of the partners-are even more important in a restructuring. Sadly, as the legal landscape continues to evolve, many law firms will fail to rise to the occasion. "To rule is easy, to govern difficult." Goethe
Kevin Munro, a former corporate lawyer, is director of administration at Miller Thomson LLP. Mr. Munro was formerly director and secretary to the executive committee of a major U.S.-Canadian business law firm, and director, partner services of an international commercial law firm, based in Australia and the Asia-Pacific region.