Stakeholder Capitalism: Challenges And Opportunities For Big Law

·     8.4% demand growth

·     14.5% inventory growth

·     7.6% productivity growth

The Economist published a similarly bullish article on the state of large corporate firms. Equity partners at AmLaw100 firms now take home an average $2.5m- rainmakers, of course, make substantially more. Those eye-popping numbers pale in comparison to a handful of “superstar firms”— Kirkland, Dentons, Latham, Wachtel, and a handful of others. Kirkland, for example has doubled its income since 2015. Wachtel’s profit-per-partner is an astronomical $7.5m.

The superstar firms are continuing to pull away from the pack. In 2020, three firms accounted for nearly 10% of the gross billings of the top 100 global firms—up from 8% five years earlier. This points to ongoing market consolidation.

The Economist opines that the good times will continue to roll for Big Law, especially the superstar firms. It cites several reasons: increasing demand for legal work emanating from changes in multinational taxation, regulatory complexity, mergers and acquisitions, and renewed US interest in antitrust prosecution and general litigation. Profits for the top firms are swelling from a concentration of premium work, the ability to attract big-book laterals, and “ancillary source” consulting services. Dentons, for example, has collaborated with the Albright Stonebridge Group, founded by Madeline Albright, the former US Secretary of State. Such tie-ups are not only additional revenue streams but also firm expansion beyond pure-play legal work.

With all this good news for Big Law, what are its threats? A representative list includes:

·     a “talent war” that includes lateral partners in search of higher PPP;

·     high workforce turnover and burnout;

·     high mental, physical, social, and dependency issues;

·     lack of purpose among a wide swath of the legal workforce;

·     the growing divergence between the expectations of and by corporate (in-house) legal teams and law firms;

·     the sustainability of the partnership model and its culture;

·     Absence of teamwork;

the changing expecations of clients and the workforce—especially Millennials and Gen Z;

·     the specter of re-regulation;

·     The steady advance of law companies (a/k/a ALSP’s)

·     Big Tech and other “wild card” market entrants;

·     Clients flexing their muscle and exerting more pressure on firms to adhere to the same business expectations they confront;

·     Data-backed performance evaluation replacing pedigree and puffery

·     Cyber risks

Big Law’s financial success has richly rewarded its partner stakeholders. It has come at a price. The most valuable assets of business are its workforce and clients. Firms are misaligned with both. For many Big Law workers, salary increases alone do not compensate for a lack of purpose (“Is this what I went to law school for?”) and a culture that remains insular, non-diverse, averse to experimentation (innovation), and hierarchical. For clients, there is a growing digital divide between the mindset, metrics, and multidisciplinary approach of corporate legal teams and their law firm counterparts. This comes at a time when the two must function as a team to meet the rising expectations of business.

Stakeholder capitalism poses a new challenge—and opportunity—for Big Law to change and to have a more positive impact upon employees, clients, communities, societies, and even the planet.

Stakeholder Capitalism: Doing Good, Doing Well, And Advancing Sustainability  

“Stakeholder capitalism” is a widely-used term in search of a common meaning. That’s because it is multidimensional, nuanced, and a corporate response to a complex web of macroeconomic and geopolitical challenges. A partial list includes:

·     digital transformation;

·     the climate crisis;

·      implosion of nation states and mass migration;

·     the tension between an inter-connected, inter-dependent global economy and the cultural, political, ideological, military, and economic tensions between East and West;

·     widening income and wealth disparity;

·     racial and social injustice;

·     human trafficking;

·     unfair labor practices

Stakeholder capitalism is an expansion of corporate management fealty beyond shareholders to include the workforce, supply chain, customers, communities, societies, and the environment. It is a social compact designed not only to align and promote the interests of an expanded stakeholder group but also to collectively and meaningfully respond to the pressing social and environmental challenges listed above.

Stakeholder capitalism had its coming-out party in August, 2019 when the Business Roundtable released a new “Statement on the Purpose of a Corporation.” The Statement, signed by 181 CEO’s of leading companies, redefined the purpose of a corporation and established a “modern standard for corporate responsibility.” The signatories pledged to lead their companies for the benefit of all stakeholders—customers, employees, suppliers, communities, and shareholders. The Statement reads like a new corporate Constitution.

Stakeholder capitalism takes the long-term view that stakeholder value is enhanced by a diverse, purpose-driven workforce; more balanced income and wealth distribution; elevated social responsibility; and enhanced planetary stewardship. Sustainability-in the holistic sense of the term- is achieved by alignment, not by a zero-sum, short-term mindset. Stakeholder capitalism not only has intrinsic moral and social value but it also rewards shareholders if the right balance is achieved. The interests of shareholders are served when business also advances the objectives of a wider stakeholder group. The new bottom line of business is to do well by doing good for a broader stakeholder group that includes the environment.

A focus on environmental, social and governance (ESG) considerations is one way for corporations to operationalize the concept of stakeholder capitalism. The rise of ESG is indicative of a profound shift how corporations view themselves, their purpose and their role in society.

ESG is a broad concept that includes several threads—diversity, equity and inclusion (DEI), climate change considerations, reputation management, sustainability issues, supply chain management, governance, reporting and compliance, among others. These elements are often viewed individually, and this obfuscates their purpose and context. The elements of ESG are interconnected, part of a fast-changing human mosaic in which corporations are playing an increasingly important role.

Companies are not only charged with internal adherence to these tenets but they are also expected to be vigilant to insure their supply chains do the same. Law firms may be a relatively small cog in the corporate supply chain, but they are high-profile. That’s why firm clients/customer have elevated data-backed firm DEI performance to an engagement criterion. This will soon be expanded to include other areas that may, for example, include a firm’s roster of clients. Activist investors will put pressure on the C-Suite and Boards not to engage law firms that represent big polluters, big tobacco, and other ESG laggards.

Regulators, rule makers, and other governmental instrumentalities, likewise, are providing additional teeth to ESG, diversity, equity and inclusion, and other elements of a the wider corporate social compact. The European Union has implemented the Non-Financial Reporting Directive, requiring companies to report how they manage social and environmental challenges.  The Securities and Exchange Commission (SEC) has started to evaluate ESG measures in the United States. Investors care. So do Millennials, Gen Z, and a growing swath of the population.

Big Law will not be immune to regulatory, workforce, client, and societal pressures to adhere to the corporate social compact entered into by its customers/clients. It is not the practice of law that will be challenged but a legacy firm business structure, economic model, and culture misaligned with clients, the workforce, and society.

Big Law’s rigidity, structure, shareholder primacy, and narrow view of talent contribute to its dismal DEI report card. Stakeholder capitalism will cause firms to confront the underlying causes of this failure and to take meaningful steps to correct it.

Stakeholder Capitalism And Law Firms

Stakeholder capitalism may be a blessing in disguise for Big Law. Left to their own devices, most firms have demonstrated little inclination to make material changes in their structure, economic model, and culture. Stakeholder capitalism will galvanize firms to initiate and/or accelerate material changes that will have long-term salutary effects upon their sustainability, profitability, and alignment with clients, society, and the environment. Here is a representative list of those changes.

1.   Redefine “talent”  and where to look for it. This applies to licensed attorneys and allied professionals. Hire for potential, initiative, imagination, teamwork, and other “soft” skills—not just good test takers and grads of elite schools.

2.   Exert pressure on law schools to modernize their curricula, provide more experiential learning, hire more faculty with practice/business experience, and train grads to be market ready. Cost-reduction and skills-based licensure are also warranted.

3.   Expand efforts to hire, manage, and retain talent from diverse socio-economic backgrounds and create a more inclusive, welcoming environment that respects and values a diverse workforce.

4.   Soften firms’ hierarchical structure and be more receptive to input and management representation from a wider swath of the workforce.

5.   Create and deploy agile teams (both licensed attorneys and allied legal professionals) to solve customer/client challenges.

6.   Mine and use data—not subjective assessment— as the primary method of performance evaluation. Create metrics that capture and measure various areas of contribution, both internal and client-facing.

7.   Offer more flexible working arrangements to widen the talent pool and elevate retention.

8.   Reverse-engineer firm organizational structure, economic model, culture, and the talent management lifecycle to create an environment that appeals to a creative, energized, innovative, diverse, productive workforce with a sense of purpose. This will be attractive to workers and customers alike. It is also likely to produce greater social awareness and contribution.

9.   Embrace ESG and DEI not because clients insist upon it but because it produces a more purpose-driven, multidimensional team that shares client values and mirrors the diversity of society.

10.PPP has long been the Holy Grail of firm metrics. It remains important

beyond greed and bragging rights; it is a magnet for rainmakers and

golden handcuffs for would-be laterals. But it can no longer be firms’

sine qua non. Instead, alignment between and among equity

  partners and the rest of the firm, with clients, and the firm’s

commitment to society-at-large and the environment are the foundations

for sustained success.

11.Firms—like the businesses they represent—must strike a balance

satisfying stakeholders (partners) and a wider stakeholder group.

This involves, among other things, adopting a longer-term strategy.

12.Most firms are loosely integrated partner fiefdoms—“tents in a bazaar.”

They must operate more collectively, collaboratively, cohesively, and

selflessly towards a common goal. They must see that goal extending

far beyond their legal work product, revenue generation, and PPP.

Conclusion

The 2019 Business Roundtable “Statement on the Purpose of a Corporation” applies not only to corporate legal teams but equally to law firms, their principal supply chain source for legal services. It is time, as my friend and Digital Legal Exchange colleague Isabel Parker suggests in her recent book, for law firms to collectively draft and execute a “Statement on the Purpose of a Law Firm.”

Law firms that proactively align with a broader stakeholder group will be “doing the right thing” and laying the groundwork for their continued financial success.

Article originally posted on Forbes.