From Moral Partners to a Moral Firm

In March, The American Lawyer ran a cover story about a prestigious national law firm that found itself mired in legal and ethical problems even as it enjoyed unparalleled growth and economic success. The article asks: Are the firm's great strengths ' enterprise, speed, and daring ' also its great flaw?

Similar articles have been written many times before, but were of less interest to lawyers because the firm in question was usually an accounting firm. It's hard to find a major accounting firm that hasn't experienced explosive growth and outstanding financial performance coupled with scandal. Indeed, defending accounting firms against criminal and quasi-criminal charges and investigations has become a growth industry for law firms.

Now, it seems, law firms are having some of the same problems. As The Wall Street Journal reported in a front-page article on March 30, a major national firm is actually dissolving in conjunction with a settlement to avoid prosecution. More than one top-drawer law firm with a proud past of unquestioned integrity has found itself facing serious accusations of corruption and criminality in the wake of robust growth and financial performance.

Enterprise Model: The Downside

What's going on? Does corruption somehow inhere in success? The American Lawyer points to three hallmarks of success as potential flaws: enterprise, speed, and daring. As the theme of this cautionary tale, I focus on enterprise.

Let's first examine the accounting firms, which chose the enterprise model (and experienced the downside of that model) long before law firms.

Accounting firms, like law firms, were once organized as traditional partnerships. Individual partners enjoyed a high degree of autonomy, functioning as independent contractors. Such firms had no institutional identity independent of their partners. They enhanced efficiency and hedged risk by spreading costs and sharing (to a limited extent) profits, but they did not develop and did not seek to develop corporate identities.

As accounting firms grew, the most successful discarded this model in favor of an integrated enterprise model in which strategy and vision belong to the entity rather than to individual partners. Under strong management, the partners of these firms became more like corporate executives serving the interests of the entity and less like independent contractors serving their own interests. The predilections of individual partners were subordinated to the mission of the firm. The institutional good became paramount. As accounting firms adopted the integrated enterprise model, they grew like Topsy and seemed poised to rule the world. Then came the indictments. More and more large law firms now seem to be going down the same road.

The most successful large law firms have eschewed the traditional partnership model for the integrated enterprise model. For both law firms and their clients, the enterprise model presents multitudinous advantages. To name just a few, the enterprise model permits vigorous and consistent quality control, enables and encourages the integrated delivery of client service, and provides the infrastructure necessary for continuous improvement through the application of best practices.

As law firms have migrated to the enterprise model, they have often failed to appreciate one extraordinary risk inherent in subordinating the individual to the entity.

Niebuhr's Insight

In his magisterial study, 'Moral Man and Immoral Society,' Reinhold Niebuhr examines at book-length the fundamental problem: 'The difference between the attitudes of individuals and those of groups has been frequently alluded to, the thesis being that group relations can never be as ethical as those which characterize individual relations.'

In the traditional partnership model, individual lawyers are responsible for their individual integrity. That is sufficient because the entire model focuses on the individual. In contrast, the entity model exalts the group. As individuals surrender their autonomy to the enterprise, they assume that the entity will take responsibility for determining and enforcing ethical norms. But entities do not have an innate capacity for either adopting or acting in accordance with a moral code.

Under the entity model, as individual attorneys cede decision-making authority to the firm, including authority for decisions regarding professional responsibility and ethical behavior, they tend to renounce (at least implicitly) personal responsibility for moral decision making. Law firms as entities, however, have no inherent mechanism for replacing personal moral responsibility with institutional moral responsibility. In consequence, morality can fall through the cracks, allowing corruption to ooze into the enterprise.

Steps to Create a Moral Firm

This presents the challenge: As business imperatives drive a law firm to the integrated entity model, how does it move beyond moral partners to a moral firm? I propose a twofold strategy. First, even as individual attorneys cede much of their autonomy in the practice of law to the firm, the onus for moral decision making must remain primarily on the individual. In other words, a law firm that operates as an integrated entity must nonetheless force the responsibility for moral behavior back onto the individual lawyers within the firm. In order to do that, a law firm must take three principal steps.

First, the law firm should adopt explicit policies making it clear that the ultimate responsibility for compliance with professional and ethical norms rests on the individual attorney. It doesn't hurt to remind everyone that while corruption may cost a law firm its reputation, individual lawyers risk their law licenses and even their liberty. A well-formed ethics policy has both affirmative and proscriptive elements. Affirmatively, the policy should empower each attorney to uphold the highest ethical standards for the firm. All attorneys must be encouraged, without fear of recrimination, to raise with firm management any ethical issue concerning themselves, others at the firm, or the firm as a whole. Firm management must promptly, transparently, and judiciously resolve all such issues. Proscriptively, the policy should hold accountable individual attorneys both for failure to meet the highest ethical standards and for failure to report ethical issues in a timely fashion. Reporting must be mandatory.

Second, the firm needs to establish a formal educational program to ensure that all attorneys fully understand the ethical standards to which they are expected to adhere by both the firm and the profession. Participation in the program should be mandatory. The best programs are customized to suit the particular needs of attorneys at various levels and in various practice areas. In setting up a program, a firm can draw on both internal and external resources. For example, a firm could ask its in-house counsel to conduct seminars on some issues while arranging for legal ethics experts from academia or government to present on other issues. As a side benefit, a firm's program can be operated so as to satisfy mandatory CLE requirements.

Third, in all personnel decisions ' hiring, firing, promotion, and demotion ' explicit consideration should be given to the individual's performance as an ethical actor. Hiring, advancement, and retention must be dependent on personal and professional integrity. Through its actions, the firm must make clear that ethical conduct will be rewarded and unethical conduct punished. In this context, it is critical that the firm enforce compliance with ethical norms by all attorneys irrespective of their status or other contributions. Senior partners and major rainmakers cannot be allowed impunity.

Putting the onus back on the individual, however, is not enough to give a law firm operating as an integrated entity a moral structure. Created without a conscience, an entity needs a formal compliance mechanism. Public corporations commonly take this approach, and it is an approach law firms can easily adopt. In essence, a corporate compliance mechanism consists of an infrastructure designed to support, encourage, require, and police ethical behavior. While the exact nature of this infrastructure can vary greatly from organization to organization, most successful compliance programs have at least some of the following elements:

An ethics office. There must be some provision within the organizational structure for promulgating ethical norms, resolving issues pertaining to how those norms apply to particular situations, and policing conduct to bring it into conformity with those norms. Most corporations have special ethics or compliance offices for this purpose. Few law firms do, instead relying on various committees. This is a weaker approach because it diffuses responsibility. Law firms that are growing as integrated institutions would be well advised to give serious consideration to taking a centralized approach to compliance.

Reporting mechanisms. Mech- anisms need to be established to facilitate the reporting of ethical issues as they arise. In this context, the more channels of communication, the better. Most organizations have a multiplicity of reporting mechanisms. In a law firm, provision could be made for reports to in-house counsel, to management, to ombudsmen, to compliance officers, to ethics committees, and to committees dealing with special compliance issues ranging from conflicts of interest to sexual harassment. Anonymous reporting through 'hotlines' is an additional option to consider. Of course, a procedure needs to be established so that reports made through any channel are promptly forwarded to firm management for resolution.

Internal review procedures. No compliance program can work without a constant process of self-assessment. Lapses must be studied with an eye toward improving reporting mechanisms, compliance mechanisms, internal regulations, and internal controls. A process of constant self-assessment and self-correction can weave an ethical sensibility into a firm's cultural fabric.

Leadership. The leadership of the firm must encourage ethical behavior by both exhortation and example. A firm's leaders cannot talk too much about their firm's commitment to probity in all its dealings, and nothing should be more important to a firm's leadership than demonstrating their own moral rectitude.

Conclusion

By building up a compliance infrastructure a law firm operating as an integrated entity can develop a sort of conscience. While it may well be the case that no law firm can ever achieve the level of moral reflection and intuition available to an individual, it can at least create an institutional bulwark against the kind of corruption that leads to unfavorable publicity, diminished reputation, and even criminal prosecution.

This article appeared recently as an IN FOCUS essay on Law.com, an ALM affiliate of this newsletter.

Gregory S. Gallopoulos is the managing partner of Jenner & Block LLP (www.jenner.com) and is a member of the litigation department. He is co-chair of the tax controversy practice and a member of the government contracts and tax practices.

In March, The American Lawyer ran a cover story about a prestigious national law firm that found itself mired in legal and ethical problems even as it enjoyed unparalleled growth and economic success. The article asks: Are the firm's great strengths ' enterprise, speed, and daring ' also its great flaw?

Similar articles have been written many times before, but were of less interest to lawyers because the firm in question was usually an accounting firm. It's hard to find a major accounting firm that hasn't experienced explosive growth and outstanding financial performance coupled with scandal. Indeed, defending accounting firms against criminal and quasi-criminal charges and investigations has become a growth industry for law firms.

Now, it seems, law firms are having some of the same problems. As The Wall Street Journal reported in a front-page article on March 30, a major national firm is actually dissolving in conjunction with a settlement to avoid prosecution. More than one top-drawer law firm with a proud past of unquestioned integrity has found itself facing serious accusations of corruption and criminality in the wake of robust growth and financial performance.

Enterprise Model: The Downside

What's going on? Does corruption somehow inhere in success? The American Lawyer points to three hallmarks of success as potential flaws: enterprise, speed, and daring. As the theme of this cautionary tale, I focus on enterprise.

Let's first examine the accounting firms, which chose the enterprise model (and experienced the downside of that model) long before law firms.

Accounting firms, like law firms, were once organized as traditional partnerships. Individual partners enjoyed a high degree of autonomy, functioning as independent contractors. Such firms had no institutional identity independent of their partners. They enhanced efficiency and hedged risk by spreading costs and sharing (to a limited extent) profits, but they did not develop and did not seek to develop corporate identities.

As accounting firms grew, the most successful discarded this model in favor of an integrated enterprise model in which strategy and vision belong to the entity rather than to individual partners. Under strong management, the partners of these firms became more like corporate executives serving the interests of the entity and less like independent contractors serving their own interests. The predilections of individual partners were subordinated to the mission of the firm. The institutional good became paramount. As accounting firms adopted the integrated enterprise model, they grew like Topsy and seemed poised to rule the world. Then came the indictments. More and more large law firms now seem to be going down the same road.

The most successful large law firms have eschewed the traditional partnership model for the integrated enterprise model. For both law firms and their clients, the enterprise model presents multitudinous advantages. To name just a few, the enterprise model permits vigorous and consistent quality control, enables and encourages the integrated delivery of client service, and provides the infrastructure necessary for continuous improvement through the application of best practices.

As law firms have migrated to the enterprise model, they have often failed to appreciate one extraordinary risk inherent in subordinating the individual to the entity.

Niebuhr's Insight

In his magisterial study, 'Moral Man and Immoral Society,' Reinhold Niebuhr examines at book-length the fundamental problem: 'The difference between the attitudes of individuals and those of groups has been frequently alluded to, the thesis being that group relations can never be as ethical as those which characterize individual relations.'

In the traditional partnership model, individual lawyers are responsible for their individual integrity. That is sufficient because the entire model focuses on the individual. In contrast, the entity model exalts the group. As individuals surrender their autonomy to the enterprise, they assume that the entity will take responsibility for determining and enforcing ethical norms. But entities do not have an innate capacity for either adopting or acting in accordance with a moral code.

Under the entity model, as individual attorneys cede decision-making authority to the firm, including authority for decisions regarding professional responsibility and ethical behavior, they tend to renounce (at least implicitly) personal responsibility for moral decision making. Law firms as entities, however, have no inherent mechanism for replacing personal moral responsibility with institutional moral responsibility. In consequence, morality can fall through the cracks, allowing corruption to ooze into the enterprise.

Steps to Create a Moral Firm

This presents the challenge: As business imperatives drive a law firm to the integrated entity model, how does it move beyond moral partners to a moral firm? I propose a twofold strategy. First, even as individual attorneys cede much of their autonomy in the practice of law to the firm, the onus for moral decision making must remain primarily on the individual. In other words, a law firm that operates as an integrated entity must nonetheless force the responsibility for moral behavior back onto the individual lawyers within the firm. In order to do that, a law firm must take three principal steps.

First, the law firm should adopt explicit policies making it clear that the ultimate responsibility for compliance with professional and ethical norms rests on the individual attorney. It doesn't hurt to remind everyone that while corruption may cost a law firm its reputation, individual lawyers risk their law licenses and even their liberty. A well-formed ethics policy has both affirmative and proscriptive elements. Affirmatively, the policy should empower each attorney to uphold the highest ethical standards for the firm. All attorneys must be encouraged, without fear of recrimination, to raise with firm management any ethical issue concerning themselves, others at the firm, or the firm as a whole. Firm management must promptly, transparently, and judiciously resolve all such issues. Proscriptively, the policy should hold accountable individual attorneys both for failure to meet the highest ethical standards and for failure to report ethical issues in a timely fashion. Reporting must be mandatory.

Second, the firm needs to establish a formal educational program to ensure that all attorneys fully understand the ethical standards to which they are expected to adhere by both the firm and the profession. Participation in the program should be mandatory. The best programs are customized to suit the particular needs of attorneys at various levels and in various practice areas. In setting up a program, a firm can draw on both internal and external resources. For example, a firm could ask its in-house counsel to conduct seminars on some issues while arranging for legal ethics experts from academia or government to present on other issues. As a side benefit, a firm's program can be operated so as to satisfy mandatory CLE requirements.

Third, in all personnel decisions ' hiring, firing, promotion, and demotion ' explicit consideration should be given to the individual's performance as an ethical actor. Hiring, advancement, and retention must be dependent on personal and professional integrity. Through its actions, the firm must make clear that ethical conduct will be rewarded and unethical conduct punished. In this context, it is critical that the firm enforce compliance with ethical norms by all attorneys irrespective of their status or other contributions. Senior partners and major rainmakers cannot be allowed impunity.

Putting the onus back on the individual, however, is not enough to give a law firm operating as an integrated entity a moral structure. Created without a conscience, an entity needs a formal compliance mechanism. Public corporations commonly take this approach, and it is an approach law firms can easily adopt. In essence, a corporate compliance mechanism consists of an infrastructure designed to support, encourage, require, and police ethical behavior. While the exact nature of this infrastructure can vary greatly from organization to organization, most successful compliance programs have at least some of the following elements:

An ethics office. There must be some provision within the organizational structure for promulgating ethical norms, resolving issues pertaining to how those norms apply to particular situations, and policing conduct to bring it into conformity with those norms. Most corporations have special ethics or compliance offices for this purpose. Few law firms do, instead relying on various committees. This is a weaker approach because it diffuses responsibility. Law firms that are growing as integrated institutions would be well advised to give serious consideration to taking a centralized approach to compliance.

Reporting mechanisms. Mech- anisms need to be established to facilitate the reporting of ethical issues as they arise. In this context, the more channels of communication, the better. Most organizations have a multiplicity of reporting mechanisms. In a law firm, provision could be made for reports to in-house counsel, to management, to ombudsmen, to compliance officers, to ethics committees, and to committees dealing with special compliance issues ranging from conflicts of interest to sexual harassment. Anonymous reporting through 'hotlines' is an additional option to consider. Of course, a procedure needs to be established so that reports made through any channel are promptly forwarded to firm management for resolution.

Internal review procedures. No compliance program can work without a constant process of self-assessment. Lapses must be studied with an eye toward improving reporting mechanisms, compliance mechanisms, internal regulations, and internal controls. A process of constant self-assessment and self-correction can weave an ethical sensibility into a firm's cultural fabric.

Leadership. The leadership of the firm must encourage ethical behavior by both exhortation and example. A firm's leaders cannot talk too much about their firm's commitment to probity in all its dealings, and nothing should be more important to a firm's leadership than demonstrating their own moral rectitude.

Conclusion

By building up a compliance infrastructure a law firm operating as an integrated entity can develop a sort of conscience. While it may well be the case that no law firm can ever achieve the level of moral reflection and intuition available to an individual, it can at least create an institutional bulwark against the kind of corruption that leads to unfavorable publicity, diminished reputation, and even criminal prosecution.

This article appeared recently as an IN FOCUS essay on Law.com, an ALM affiliate of this newsletter.

Gregory S. Gallopoulos is the managing partner of Jenner & Block LLP (www.jenner.com) and is a member of the litigation department. He is co-chair of the tax controversy practice and a member of the government contracts and tax practices.