Thursday 04 April 2019
April’s Management Team Together meeting, hosted by Travers Smith and introduced by Jeremy Horner, was a debate on the future of partnerships. Leadership consultant Ciarán Fenton believes that the writing is on the wall for professional partnerships while William Wastie, partner and head of Addleshaw Goddard’s professional practices group argues that flexibility of the partnership model makes it the ideal platform for professional services to evolve to keep pace with the business and technology ecosystem.
Most attendees had previous or current experience of working within a partnership and were interested and involved in the question: Have partnerships had their day?
Boiling frog syndrome?
Ciarán Fenton believes that the partnership model is suffering from boiling frog syndrome. The water is tepid, the temperature rising, and it will be dead before it realises what’s happening. He finds lawyers frustrating because he considers that their emotional intelligence quotient (EQ) is in inverse proportion to their IQ. The partnership debate centres around EQ, which outstrips IQ in relation to effective leadership.
Fenton’s work facilitating leadership programmes for in-house legal teams and managing partners and executive boards of private practice firms has immersed him in key partnership issues and helped him understand lawyers’ mindsets, which reflect the fact that law is one of the few remaining unreconstructed business sectors.
Lawyers are bright, hard-working, interesting and tend to be readers, thinkers and have opinions on everything, observed Fenton. However, law school force feeds them the adversarial model and makes them value thinking over feeling. The partnership system produces hard workers – billable hours are measured in six-minute units – and requires lawyers to be tough, analytical and fees oriented. To a large extent, they have no incentive to change.
But partnership creates leadership issues. Most managing partners are lawyers who retain the lawyer mindset, although their activities cannot be billed by the hour. The partnership model values legal skills over leadership skills, assuming that there is no case to answer in respect of lawyers’ ability to run businesses. But because lawyers are trained to distance themselves from feelings, they often lack emotional intelligence: empathy, self-awareness and the ability to negotiate needs productively, all of which are essential leadership qualities. While society is calling for emotionally intelligent leaders, law firms are rejecting EQ because they can’t measure it.
EQ is here to stay, so law firms need to change their culture or start planning for the demise of the partnership model. Trust in business is at an all-time low and partnerships are seen as part of the problem, not part of the solution. Business and society will punish lawyers for not protecting them against the excesses of the markets, although the independence of in-house counsel often risks being compromised by business interests. And the partnership culture lacks diversity and puts partners and fee-earners under extreme and unnecessary pressure in terms of performance and productivity. Finally, Fenton quoted an extensive list of luminaries in the legal sphere who join him in predicting that ineffective leadership and changing social and market factors will lead to the demise of professional partnerships.
Or the best of both worlds
William Wastie, partner and partnership lawyer at Addleshaw Goddard, began his defence of the partnership model by quoting the Partnership Act 1890 which defines partnership as ‘the relation which subsists between persons carrying on a business in common with a view of profit’.
Potentially, professions have the best of both worlds, said Wastie, because the inherent strength of partnership is its flexibility. Partnerships’ lack of legal personality (unlike companies) means partners have the flexibility to contract as they wish together with limited liability, making it the ideal structure for many professions as firms grew bigger and more sophisticated and clients became more demanding.
Wastie highlighted the value of maintaining the link between ownership and management in terms of leadership and regulation, although he acknowledged the trend towards incorporation among property surveyors, who needed to raise capital as the property sector marched towards internationalisation. However, he attributed significant failures in the legal market to a failure to recognise ways of retaining profits rather than to any inherent weakness of the partnership model.
The flexibility of the partnership model, which allows goodwill to be passed through generations without triggering cessational rights to tax is another significant strength. While alternative business structures fuelled private equity interest in the legal sector, this is not always easy to manage particularly in light of challenges around the transfer of control and governance.
External investment challenges
An initial public offering (IPO) requires partnerships to cede control to external boards and directors. External investment also transfers profit from partners to shareholders, and the dividend model, which is more effective from a tax perspective, reduces partners’ draws that then depend on fluctuating share prices and investors’ demands. Wastie referred to DWF partners taking a 60% reduction at the time of the firm’s IPO, the accountancy sector’s failure to consolidate in the early 2000s and Slater & Gordon’s disastrous Quindell deal.
Involving external investment requires the business to keep up with competitors and investor’s demands, and Wastie believes that a partnership shouldn’t be jeopardised simply for the sake of enriching the firm’s current owners, as this is not a healthy reason for investment or sale. It will be interesting to see what happens to post-IPO professional services businesses after their lock-in periods expires, he adds.
Another significant benefit of the partnership model is succession – succession of goodwill both in training, engaging with associates and staff as well as retaining longstanding client relationships, which underpin strong successful partnerships.
Wastie countered Fenton’s comments about societal pressures to reject the partnership model by observing that the partnership model itself does not create a lack of diversity or stressful working practices. He believes that that to blame the partnership model for cultural issues is hiding behind the model, as these concerns are the responsibility of all business owners.
Succession and common ownership
Wastie then turned to succession, generational issues and what motivates young professionals – he is not keen on the description ‘millennial’. He believes there is no lack of ambition among law firm associates. He referred to a Law Society debate about young professionals leading more transient lives because they couldn’t afford mortgages, and one solicitor saying that she wished she had a mortgage. Wastie identified her as a future law firm partner, eager and hungry for success – and with ownership aspirations. He believes that common ownership and control is a model and structure that will survive long into the future.
Horner concluded the debate by asking what critical change partnerships should make in order to boost their EQ and create more diverse, balanced and collaborative cultures. Wastie’s response was that diversity, flexibility and work-life balance did not relate to the partnership model itself, as each firm is control of its own culture. Firms will survive only if they ensure succession and this means engaging and developing the next generation of partners. He highlighted two key challenges: equity ownership and organisational culture. Equity ownership, which in many firms is becoming diluted, supports the sense of proprietorship and control that is fundamental to the partnership model. The cultural challenge means adapting to society’s requirements for diversity and opportunity and this means that working models have to change. However, this can be achieved within the partnership model. The debate was followed by questions from the floor.