The current CEO of Greenberg Traurig, Richard Rosenbaum, recently gave an interview to the Daily Business Review in which he discussed the firm’s recent capital call (among other subjects). We mentioned the interview in Morning Docket, but because it contains a lot of grist for the mill, it merits a second look.
The subtext of the interview — and, at one point, the explicit text of the interview — could be summarized as, “Look, we are not like Dewey!” The bad news is that such statements should even be necessary. The good news is that they seem to be true (at least based on the information currently available).
Let’s hear what Richard Rosenbaum had to say….
The Daily Business Review’s interview with Rosenbaum is accompanied by a companion piece entitled “Greenberg Traurig: One law firm’s times of trial.” The article, by Julie Kay and John Pacenti, provides background on some of GT’s recent woes. It begins by discussing the sanctions recently imposed on the firm in the Coquina Bank case, then goes on to note:
The embarrassing sanctions were the latest public relations blow to Greenberg Traurig. Over the last decade, the firm has been battered by the prosecutions of lobbyist Jack Abramoff in 2004 and Chicago partner Mark McCombs in 2010; malpractice suits filed by former NFL players, a Jupiter-based bio-tech company, a New York real estate investment firm, an Arizona investor group and the failed law firm Heller Ehrman.
What did Rosenbaum have to say in response? From the interview:
Why have there been so many malpractice cases and scandals involving partners around the country?
I don’t believe that our situation is materially different from other firms. One, we are very large, and we are a big target. Two, we do a lot of work — more than most firms our size — in the real estate industry and with entrepreneurs, and those two areas have been shell-shocked during the financial crisis. When people lose or claim to lose money, they are looking for a deep pocket and they are looking for a firm that has resources and an insurance policy, and many times these suits are brought in an attempt to force a settlement.
Rosenbaum’s “big target” point is, well, right on target. When you have a firm of 1,750 lawyers, it’s inevitable that some of those lawyers are going to get themselves into trouble. Some lawyers may decide that they don’t want to practice at a firm of such size, where it’s impossible to really know a decent number of your partners, and some clients may decide that they’re not comfortable working with such a big firm, where consistency and quality control are sometimes issues. But if you are going to go big — which is a perfectly reasonable choice for many lawyers and clients, especially clients that operate in many markets — then snafus can’t be avoided.
Rosenbaum’s observation about the real estate industry and entrepreneurs, while delicately phrased, is also correct. To fully appreciate its validity, let’s phrase it less delicately: “We work a lot in the real estate industry and with entrepreneurs, and there is a lot of sleaziness in these areas. As the old saying goes, ‘If you lie down with dogs, you will get up with fleas.'”
Because partners have already paid a capital contribution in cash when they became partners, forever after that they expect to receive cash in large sums…. A cash call almost certainly means that the partners are not receiving any special distributions (so they are taking a big pay cut) and now have to shell out more. Grumpiness will abound. Because loyalty is often tenuous at large firms, and the memory of Dewey is fresh, watch for the rainmakers to head for the doors.
According to Rosenbaum, though, the capital call at Greenberg is no big deal:
What prompted the capital call?
In 2012, we will raise $12 million from our shareholders. That is 1 percent of our revenues and 2 percent of all our shareholder compensation. We will do the same thing in 2013. That number is much more significant in a small firm. It’s a very small percentage for a $1 billion-plus law firm.
I don’t think there’s another firm that has had our kind of growth and still had much lower capital than our peers, no debt for most of that time and very minor debt when we have any….
Remember, the average capital that most firms have asked for from partners is 30 to 45 percent.
I’m shocked at how much has been made of this. It’s a small step. Yes, this was the first time the executive committee had approved a capital call for the shareholders in over 10 years. But this was not unplanned or unannounced.
If it is true that GT historically has required less capital from its partners and is now just trying to catch up to industry standards, then this seems unobjectionable. If it’s not true, or if there’s something more going on here, please let us know.
Does GT have plans for capital calls in addition to the two already announced? No, according to Rosenbaum:
We have no present plans to do it again. We recently renewed substantial lines of credit on a long-term basis which have no borrowing on them. They are fully available so we owe no debt, but we have credit lines if we need them. If this were all about cash, I didn’t have to ask for capital, I could have borrowed it. This is a long-term investment in the firm. It’s for a rainy day or for unexpected circumstances. I don’t believe you should rely on debt. We have almost a Depression-era mentality when it comes to debt.
We also have no unfunded pension obligations. What I have seen in the industry is on average, our peer firms are spending 4 to 5 percent of their overhead on retired or former partners. GT is spending zero.
The subtext here sounds very much like “we’re no Dewey” — a firm that was, of course, afflicted with an unfortunate combination of debt, unfunded pension obligations, and partner defections. So it’s reassuring to hear that Greenberg Traurig has renewed its lines on a long-term basis — recall that Dewey, in its dying days, kept on having to push back the date for renewing its revolver — and that the lines right now are untapped.
That’s Dewey as subtext. In the next part of the interview, Dewey emerges into the text itself (apparently not prompted by the interviewer, although we note that the transcript was “edited for clarity and length”):
Many analysts say closed-compensation systems are problematic and transparency is key. Why does Greenberg have a closed-compensation system?
What Dewey & LeBoeuf didn’t have is transparency in how their business is doing. We regularly report in detail on every aspect of our business. I owe that to my shareholders. However, we do not disclose individual shareholder compensation, and that has always been the case at Greenberg.
Why do we have a closed-compensation system? It’s always been closed. This is not something invented for today. We get input from a group of senior shareholders who do reviews of other shareholders and provide us with recommendations. But we do have a system where [executive chairman] Cesar [Alvarez] and I have the ultimate approval. This allows us to run what is a large business in many disparate locations and practices without politics and without visible competition between our shareholders. This has been a major plus in our culture. It allows us to make decisions that make sense to the market.
Once again, at the risk of sounding insufficiently critical, that’s perfectly fair. There is something to be said for a black-box compensation system. For an overview of the pros and cons, see this prior post by Mark Herrmann (who was once a partner at a firm with a black-box system).
Props to the interviewer, Julie Kay, for asking aggressive questions of Rosenbaum. Check out this next exchange:
There’s no question Greenberg’s growth has been remarkable. But some have questioned whether Greenberg has grown too fast and lacks internal controls. What’s your view?
Since we were founded, we have always grown, not only based on the needs of clients and to take advantage of opportunities, but when something was a good fit culturally as well as financially. We did grow very quickly for about 10 years. That was our intensive growth period. We’ve been at the same size for the last five years.
(That’s interesting. I’ve had an anecdotal sense of Greenberg expanding as of late, but perhaps the new hires and offices — e.g., picking up Dewey’s Poland operations — have been offset by defections.)
When you have 1,750 lawyers, it’s impossible to be without an occasional incident. After the Abramoff incident, we made some changes. First of all, we focused much more on the functionality and the integration of our practice groups. Hilarie Bass stepped away from her job as head of litigation to become a global operating shareholder. Her purpose was to focus on all the practice groups, making sure they had training and were integrated. Anyone hired has to meet first with the chair of a different office.
In 2007, we started a commitment-to-excellence program. This is a confidential reporting system where anyone, from the receptionist to a partner, can make a phone call confidentially to report any concerns with quality, ethics or integrity. Within minutes or hours of finding something that concerns us, once we give it a fair review and we know the facts, we act and we report and we do whatever is necessary.
I’d be interested in hearing other people’s perspectives, but this strikes me as not a bad idea (although query whether it creates any problematic paper trails that might have to be turned over later in litigation). The lack of internal candor at some law firms can be surprising. Here at Above the Law, we often receive emails from lawyers or support staffers at a given firm begging us to ask firm management about rumor X or Y — because they are too scared themselves to pose the questions to management directly.
If your firm doesn’t have a comparable hotline, feel free to treat Above the Law as the equivalent. If you have “concerns with quality, ethics or integrity” at your firm, feel free to email us or text us (646-820-8477; texts only, not a voice line), and we will investigate. Thanks.
Greenberg Traurig: One law firm’s times of trial [Daily Business Review]
Greenberg CEO Richard Rosenbaum discusses finances, internal controls and the future [Daily Business Review]