The Death of the Law Firm Partnership Vote?

“There's increasing recognition that partnership agreements, a lot of them, fundamentally are obsolete, in the sense that they were written for a different time and place,” Bruce MacEwen of Adam Smith Esq. says. “Notions that it takes some super-majority … to de-equitize a partner, you can't run a firm that way.”

More Senior Authority = Fewer Votes

It used to be that everything from a lateral hire to new leases to major capital expenditures on new laptops for lawyers would require a vote, says Frank D'Amore of Attorney Career Catalysts, who handles lateral and group moves as well as mergers. But those days are fading.

“You could do it in 1950, but it's a heck of a lot harder in 2018,” D'Amore says of holding partner votes on most initiatives.

And firm partnership agreements are changing as a result.

“The trend is definitely to have fewer votes and to give more authority to the leader of the firm and/or the senior management team, depending on how the firm is run,” D'Amore says.

Clifford Chance, for example, revised its management system in 2015 to do just that, putting more power into the hands of a centralized management team while bringing in more business professionals to run certain operations, all with an eye toward being more efficient and cost-effective.

Avoiding the lag time that comes with a partnership vote can also mean beating out other firms in the talent wars when those firms' processes simply take too long.

“Firms have lost out on laterals because of a partner vote,” D'Amore says. “Whether it requires a vote or not, the more bureaucratic, process-driven firms are — particularly with lateral recruiting, where it is a hot lateral or a hot group — firms that take a very long time … have lost out.”

MacEwen warns of firms allowing the partnership to get out in front of management on an issue.

“I can't tell you how many times we've seen firms make the mistake of the managing partner or executive committee … frankly being afraid of their partners,” MacEwen says.

The ability of a firm to move away from partnership votes depends a lot on its culture and the lawyers who are looking to join. There can be a tension between wanting to centralize management, on one hand, and partners feeling like they should be treated like owners, on the other, Janet Stanton of Adam Smith Esq. says. D'Amore notes that some partners, however, don't want to be bothered with management decisions and are happy to have someone else take care of it.

Regardless of whether a firm holds votes on everything or next to nothing, consultants and firm leaders agree that consensus is key.

Cozen O'Connor president & CEO Michael Heller has never held a partnership vote at his firm — because his firm isn't a partnership. As a professional corporation, Cozen O'Connor is ahead of the trend to move away from votes (yes, the firm's shareholders vote on some things). His firm is unencumbered by traditional partnership structures, and he sees that as an advantage over LLPs.

Heller says he gets the sense that more and more firms are moving toward a corporate model of governance and away from a classic partnership model. But regardless of whether a firm is a PC or an LLP, they should all try to build consensus among partners before management takes any kind of major step, he says.

“That said, our structure gives us the flexibility and nimbleness to move quickly without having to have shareholder votes on all matters that affect the law firm,” Heller says, citing the second-generation firm's entrepreneurial spirit.

Some Votes Required

There are still areas so sacred within a law firm that partners continue to weigh in. Any transformative merger requires a partnership vote, although the percentage required to approve the deal can vary. The promotion of existing attorneys into partnership also remains sacrosanct, with most firms requiring votes, consultants say. The same is true at Cozen O'Connor, Heller says, noting the shareholders vote to promote attorneys to their ranks and vote on any transformative acquisition or merger.

The shareholders are also responsible for electing the majority of Cozen O'Connor's 20-plus-member board of directors. The board then has significant authority within the firm to approve major transactions and all strategic issues facing the firm, he says. Acquisitions below a certain threshold can be approved by the smaller management committee, which handles day-to-day issues such as associate compensation, real estate decisions, paralegals and pro bono policies, as examples. The management committee is elected by the CEO.

The downside to such a centralized system, Heller says, could arise if leadership isn't in constant communication and being transparent with its partnership. Heller holds shareholder calls every month on which he discusses lateral acquisitions, financial decisions and other firm-related news.

“Nothing we do is a surprise to our shareholders,” Heller says.

Laterals who have joined the firm have described their prior firms as holding “rubber-stamp votes” that the laterals say felt predetermined and a waste of their time, Heller notes. Another reason for the move away from partner votes is the increased sophistication and openness of firms' financial systems. Partners have more access to firm financial data than they ever have, D'Amore says.

To be sure, not all firms have swapped out their partnership votes for a streamlined process, with some firms of hundreds to thousands of lawyers requiring partners to vote on — or meet — all lateral partner candidates, for example.

“The partnership vote and partnership democracy are alive and well at Paul Weiss,” chairman Brad Karp says.

In many respects, Paul, Weiss, Rifkind, Wharton & Garrison is operating the way it and its fellow white-shoe New York firms always have. The further up the Am Law 100 firms are, D'Amore notes, the more likely they are to operate like a corporation. That is except for the “anomalous New York firms,” he says. By being ranked 20th on the Am Law 100 and finding the bulk of its lawyers in New York, Paul Weiss fits into that exception.

While Karp sees other firms moving away from a partnership model to a more corporate structure, he says he still aims to build consensus with most decisions impacting the firm. And that is something he can easily do, he says, given that 85% of the partnership is within a few floors of him at the firm's midtown Manhattan headquarters.

“If something really matters, I'll just walk the halls and we can get something done,” Karp says. “I'm not aware of us missing an opportunity. We know how to be nimble.”

The fact that Paul Weiss has all potential hires meet with as many of the firm's partners as possible before extending an offer didn't seem to slow down the firm's ability to get the highly sought-after M&A partner Scott Barshay from Cravath, Swaine & Moore in 2016. Nor did it appear to affect the firm's ability to offer him approximately $10 million — reportedly toward the top end of the firm's modified lockstep model.

Karp wouldn't comment on Barshay's hire specifically, instead simply noting that the firm's hiring process works. He says partnership votes on incoming laterals are “a big deal.”

“Every partner meets with or has the opportunity to meet with every lateral partner candidate who comes through the door,” Karp says. “The expectation that every single partner at Paul Weiss will spend time with every lateral candidate before a vote is taken, that has never prevented us from securing any lateral partner we tried to recruit.”

The firm's partnership doesn't just vote on laterals. The list of what requires a vote is extensive and includes approving internal partnership candidates, changing the mandatory retirement age for a partner, changing a compensation arrangement for a partner, the selection and composition of the compensation committee and the election of the management committee.

“We always err in favor of more process,” Karp says.

D'Amore says that even as the trend moves away from partnership votes, most law firms are still driven by consensus. If they get to a point where more than a pro forma vote is needed on a specific measure, they often decide against moving forward on the initiative.

At Paul Weiss, the management committee meets every Thursday morning and the entire partnership has lunch every Thursday afternoon, at which Karp reports on what's happening at the firm. He says it helps that the firm only has about 140 partners, the majority of whom are in New York.

Paul Weiss and its ilk may be outliers, however.

Stanton notes that no matter what country she refers to, one theme persists among the upper echelon, the top 5% to 10% of law firms that are consistently pulling away from their peers: They are run more like businesses and have business professionals with a seat at the table. That seems to hold true, with the exception, of course, of those “anomalous New York firms.”

As Karp notes, Paul Weiss is “one of the most profitable firms in the world.”

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Gina Passarella Cipriani is Editor-in-Chief of our ALM sibling The American Lawyer, in which this article also appeared. She has covered the business of law for her entire career, first as a reporter and special projects editor with The Legal Intelligencer in Pennsylvania and then as senior editor for business of law in ALM's global newsroom.