Is The Problem With Partnerships The Partnership?
How permanent equity in firms might change the face of law for the better.
The vast majority of Biglaw firms are structured as limited liability partnerships. Under the LLP structure, firms regularly tally up profit to distribute to their equity partners. A partner’s share of the pie is heavily dependent on the dollars they themselves generated that year and the size of their book of business.
The standard Biglaw model is great for short-term profits but abysmal at facilitating long-term thinking. Say a firm’s IT systems are woefully outdated and need $1 million to bring them up to speed. An associate hoping to spend the next few decades with the firm would want that investment made sooner rather than later. They care about building and maintaining the platform on which they’ll grow their own book of business. But the market pressure to maximize profits per partner might cause many firms to skimp on IT investments in favor of pushing out more cash.
The net result is firms don’t make necessary investments in the future.
The Business Case For AI At Your Law Firm
Share, And Share Alike
It’s for these reasons, and surely many others, that few areas of the larger business world operate like law firms. One prominent academic, Jonathan T. Molot of Georgetown Law, argues law firms ought to follow the lead of the business world and jettison the traditional partnership model.
According to Molot, one way Biglaw is missing the boat is by not offering its lawyers permanent equity. Instead of simply cashing out a percentage of your personal production and book of business, firms would offer equity in the firm itself — equity that would last even after the attorney was no longer working there.
In almost any other field of business, entrepreneurs who build a valuable company can hold the equity in that company permanently and can profit off that equity in perpetuity. If they can train a team to operate the company entirely without the owner’s presence, the owner can sit back and make profit in their sleep. Alternately, they can capitalize on what they’ve built by selling the business to a third party. The more independently the business operates without the owner, the higher a purchasing multiplier that owner can command. Both of those long-term exit scenarios are deeply appealing, but neither is available to an attorney at most law firms today.
Sponsored
Is The Future Of Law Distributed? Lessons From The Tech Adoption Curve
Navigating Financial Success by Avoiding Common Pitfalls and Maximizing Firm Performance
The Business Case For AI At Your Law Firm
Early Adopters Of Legal AI Gaining Competitive Edge In Marketplace
But permanent equity doesn’t just benefit people at the top of the food chain. Employees in the broader business world are routinely awarded equity by their employers in the form of stock and stock options. This can have myriad positive effects on workplace performance and culture. Employees with stock in hand has skin in the game. They’ve been rewarded for their hard work, and now have incentives to grow the company smartly and sustainably to keep that stock value high. Stock options with a vesting period are also a valuable tool for employee retention, as employees who are considering leaving the company knows they’re leaving some portion of what they’ve worked for behind. Everyone has that extra desire to see the company be successful.
Building The Future Today
Historically, the notion of permanent equity in a law firm was impossible under the ethics rules governing fee-sharing and nonattorney ownership of law firms. But those aren’t the problems they used to be. Several jurisdictions, such as Arizona, Florida, and Utah, have either loosened or done away with those ethics rules in recent years, and would make ideal test beds for this kind of new firm structure.
Importing these benefits to a law firm could be revolutionary. Many of the bad incentives of the current model get turned on their head. Whereas our current model pushes senior partners to prefer short-term profits, a law firm offering permanent equity would allow those senior partners to also see the benefits of long-term planning. Attorneys who know they’ll be seeing many years of dividends from the good decisions they make today will be more likely to take a long-term perspective and make needed investments.
Stock and stock options in a law firm could also improve the life of associates. Associate compensation could begin to include either outright equity grants or grants of shares vesting over time. Associates who know they’re literally building equity in a firm are less likely to move laterally in search of a marginally bigger paycheck, while the partners supervising them may be more inclined to treat those associates as the stewards of their long-term investments instead of short-term profit centers. Offering permanent equity blurs the lines between associate and partner — in a good way. It creates both actual and perceived ownership of a company that will improve associate morale as well as retention.
Sponsored
Legal AI: 3 Steps Law Firms Should Take Now
Early Adopters Of Legal AI Gaining Competitive Edge In Marketplace
With outmoded ethics rules no longer stopping us, there’s no reason law firms can’t follow the lead of successful nonlegal businesses. It would take a major shift in thinking, but the rest of the business world has operated on this system for years, and lawyers are smart people. We can figure it out.
Taking Stock
Permanent equity isn’t a magical cure-all for the larger problems of Biglaw, and it certainly has its drawbacks and obstacles. The fact so few states would currently permit the structure stands as an impediment to many of the largest firms experimenting with the model. It would also require a tremendous amount of campaigning to secure the buy-in necessary to effect this change under most partnership agreements.
But for those willing to try it, it might provide a tool to steer away from harmful short-term thinking and toward a mindset of investing appropriately in the future of our firms and in our people. If nothing else, it could give us new ways to build our teams, positively impact culture, and reward our people.
So perhaps it’s time to take stock of where your firm is and the possibilities of permanent equity.
James Goodnow is the CEO and managing partner of NLJ 250 firm Fennemore. At age 36, he became the youngest known chief executive of a large law firm in the U.S. He earned his JD at Harvard Law School and attended Cambridge Business School (UK), where he wrote his master’s thesis on how to use entrepreneurial strategies to infuse innovation in law firms and established businesses. James is the co-author of Motivating Millennials, which hit number one on Amazon in the business management new release category. You can connect with James on LinkedIn, Twitter, or by emailing him at jgoodnow@fennemorelaw.com.
