Publicly Traded Law Firms: The Starter's Pistol Has Fired

When the Financial Times speaks, people listen, so try this on for size:

"The old model of partnership between lawyers alone has its drawbacks for large law firms, which are complex businesses - the biggest are multinationals in their own right. Yet management is often weak. Compared with the best companies, they are often bad at marketing, customer relations, innovation, use of information technology and process management.

"Law firms need to compete for the best managers, finance directors, marketing experts, technology officers and human resources professionals. Such people may be unwilling to join firms where they are second-class citizens."

Now that firms in the UK can, at least in principle, be publicly owned (and traded) entities, what are the implications?  How about a firm with a market cap of £5-billion?  Not unreasonable, given comparables. The chorus of "not so fast"'s has already arisen:

• "Law is a special case."  Yes, and investment banking was a special case before Morgan Stanley, Goldman, et al., went public.
• "Being public would put too much focus on profits."  Vs. precisely what eleemosynary attitude today?
• "Being public would force us to put profit ahead of ethics."  Sure, and the heads of Arthur Andersen, Enron, and WorldCom are available for interviews confirming the sagacity of that counsel. 
• Lastly, and perhaps briefed at the greatest length and with at least superficial plausibility:

  "In the US, a conflict of interest arises if an attorney's duties to a third person could materially harm the interests of that attorney's client. Furthermore, under the so-called "rule of imputation", this conflict is imputed to the entire firm, not just the affected lawyer.
  
  "Under corporate law, however, corporate officers and directors have a fiduciary relationship with the corporation's shareholders. As a result, a managing attorney or an attorney who is serving as an inside director in a hypothetical publicly traded law firm would owe duties to both the firm's shareholders and the firm's clients. Furthermore, the fiduciary relationship owed to the firm's shareholders could potentially conflict with the professional duties that the firm's attorneys owe to their clients, and vice-versa."

There are (at least) three come-backs to this reservation.  First, if ownership of the public law firm is widely dispersed, as is all but universally the case with listed companies (the exceptions are usually family-controlled dynasties that have emasculated minority public ownership), no single shareholder would have a "material" interest in the firm which could remotely approach the interest of a client; in other words, the conflict would remain purely hypothetical.  Second, the precise contours of the "conflict" are difficult to discern.  I hypothesized earlier that if Goldman-Sachs bought a large stake in (the future-ly public) Shearman & Sterling, Morgan Stanley might object since S&S is their "go-to" firm.  Short of such outright buy-off's, I would assume, and economic theory would confirm, that all a shareholder really "wants" out of an investment is superior performance—and under the classic corporate separation-of-ownership-from-control model, the shareholder should leave management alone.

Third is the possible case where the conflict is real and unavoidable.  In that case all one needs do is address it with the familiar toolset for dealing with conflicts:  Resign the representation, obtain knowing and informed waivers, etc.  In other words, we can deal with this, children, if we really see advantage in being public.

 Finally, the always cheeky and entertaining Gerry Riskin ("Amazing Firms, Amazing Practices") plays out a dynamic analysis scenario that has firms going public, senior partners cashing out for points offshore, the remaining loyalists finding their take-home profits diminished by the new demands of an investor class for actual results, and the public firm imploding as rainmakers desert for private competitors.  Read the whole deeply amusing thing.

But would this really happen?  Would it really happen more than once?  I suspect wannabe-public firms would learn a lesson promptly and put restrictions on capital extraction, as well as set the expectations of investors for fast-cash-out suitably underwater.

At last we come to the final question:  What on earth do law firms need all this capital for anyway? 

One word:  Innovation.  With capital available, what sums might firms not invest in everything from expert systems to ever-more transparent client communications, to proprietary knowledge bases?  After all, we all know that one of the most robust objections to investing in technology today is that it would deprive the partners of this year's new Mercedes.  Maybe, in future, it won't have to.