Major law firms are anachronisms according to the logic of the cool-headed economists and management theorists. Ever since Berle and Means first preached the division of owners and managers in their seminal work, most shareholders exist separately from management, preferring a passive voice when it comes to directing the actions of their firms, and by proxy, their money.1 With some notable exceptions, there are far fewer Morgans at JPMorgan Chase & Co. or du Ponts at DowDuPont or Daimlers at Daimler-Benz wielding the dual powers of ownership and management to accomplish their economic purposes while guiding their own interests.2
The reasoning behind the separation of the owners and operators of major enterprises is not difficult to guess, particularly with the complications that come with public and institutional ownership of established businesses. A disparate group of shareholders with competing interests, ideas, and skills numbering in the thousands and millions cannot be counted on to run a major operation with efficiency or consensus, presenting a classic collective action problem.3 It would, then, seem irrational to pursue any other course of action for a major enterprise. So why do large law firms resist this structure despite their commercial prominence? What is it about their operations that shirk from the model of other major businesses?
The comparison between and major public company and a major law firm is not as analogous as it first it appears. Law firms operate in a different regulatory world then their corporate brethren. For the most part, the notable exception being Washington, D.C., U.S. Law Firms cannot be owned by non-lawyers, thus limiting the number of shareholders and facilitating a structure congruent to the traditional partnership organization of most major law firms.4
It is not clear if forced closed control of law firms is a positive or negative. Jonathan Molot, a Georgetown law professor that advocates organizing law firms like publicly traded corporations, argues that the current construction disincentives long-term thinking—focusing partners on momentary gain with little interest in future success, an outcome that the traditional corporate structure is partially designed to avoid.5 Molot’s perspective has precedent as some firms in other parts of the world have already pursued IPOs and now exist in forms similar to the traditional corporate structure.6
The American Bar Association, however, is not convinced by Molot’s perspective.7 The Association points to the potential for divided loyalties and the ethical ramifications that may face a publicly owned law firm.8 They are simply not confident that it is possible to serve the proverbial needs of multiple masters, including its employees, owners, and clients, without compromise.9
The American Bar Association’s avoidance of the traditional corporate structure has some support from a purely economic perspective. Enya He and David Sommer argue that agency costs in large organizations increase as the control of owners decline.10 While they studied the insurance industry, which is not perfectly analogous to the legal industry, their research does indirectly explore the intrinsic benefits of the partner-manager firm structure for an industry that requires strict oversight.
By examining several hundred insurance companies with a variety of ownership structures ranging from mutual ownership to manager ownership, He and Sommer found evidence to support that in a heavily regulated industry that must deal sensitively with the public, firms required more outside directors across nearly every measured group as management ownership decreased.11 The implication seems to be that as ownership moves away from management, it becomes necessary to employ more safeguards to prevent agency conflicts (i.e. to ensure that firms are not acting outside of the interests of their constituents).12
This might seem to be a startling obvious conclusion. It simply states that the farther managers are from their owners, the less incentivized they are to act in accordance to the interests of the other stakeholders in the organization.13 Despite this banal realization, there is a certain amount of economic elegance, and a definite applicability to this finding as it relates to the practice of law. He and Sommer’s research whispers that the current structure of owner management may be the appropriate way to align the incentives of the firm and its clients while keeping agency costs from rising.
Regardless of how firms should be owned and managed, it must be noted that Big Law does not seem to be suffering from the throws of incompetent managers and laissez faire owners. If financial statistics are any judge, firms actually seem to be operating in ways that do not telegraph poor management.14 The vast majority of the Am Law 100 has managed to grow in profitability despite relatively stagnant revenue streams on a per lawyer basis, pointing to management skill on the part of partners.15
While the preferable form of major law firms is far from settled, there are still signs of life at the partners’ desk. After all, as every avian creature knows, what is good for the goose may not always be good for the gander. In this regard, waterfowl, traditional corporate structures, and law firms may have more in common than having to deal with the occasional quack.
In fact, as suggested above, law firms and their clients may benefit from the centralization of their management and owners, especially as they seek to keep costs low and interests aligned. Couple this with financial evidence that suggests partners possess the skills and incentives necessary to wring out a healthy (and growing) profit from an apparently cussedly antediluvian structure rooted in the days of Jagger and Wemmick, and suddenly the form does not seem so archaic.16 The form of a firm, then, could simply be the most efficient structure for managing the large, private legal entity.
See Dorothy Shapiro Lund, The Case Against Passive Shareholder Voting, (U. of Chi., Coase-Sandor Working Paper Series in Law and Econ., 2017), 5-7, https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=2515&context=law_and_economics. ↩
See id. ↩
Catherine Ho, A Law firm IPO? Not so fast., Wash. Post (Feb. 16, 2015), https://www.washingtonpost.com/business/capitalbusiness/a-law-firm-ipo-not-so-fast/2015/02/16/d8085ff6-b09b-11e4-827f-93f454140e2b_story.html?noredirect=on&utm_term=.c7bf646ba429. ↩
See id. ↩
Elizabeth Olson, A Call for Law Firms to Go Public, N.Y. Times (Feb. 18, 2015, 8:56 AM), https://dealbook.nytimes.com/2015/02/18/a-call-for-law-firms-to-go-public/. ↩
See id. ↩
Enya He & David W. Sommer, Separation of Ownership and Control: Implications for Board Composition, 77 J. Risk & Ins., 265, 265 (2010). ↩
Id. at 273-89. ↩
Id. at 290. ↩
See Hugh A. Simons & Nicolas Bruch, Success in the Am Law 100 Is Being Driven by Management, Am Law (Apr. 24, 2018), https://www.law.com/americanlawyer/2018/04/24/success-in-the-am-law-100-is-being-driven-by-management/. ↩
See Simons & Bruch, supra note 14. ↩
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