Will the UK’s famed Magic Circle firms ever list? Yes (Source: Getty)
On Monday, Gateley will become the first UK law firm to list as a public company
. It should serve as a wake-up call for the entire industry and more firms should follow suit. For some lawyers, moving away from the partnership model will be terrifying – but it’s an essential evolution, not just for the success of individual firms but for the legal sector as a whole.
The current partnership model promotes short-termism that harms clients, partners, associates and firms’ culture. The shift from a partnership structure – in which partners can remain owners only for so long as they are employees – to a more conventional corporate form with permanent equity has the power to transform loose associations of economically-motivated free agents, who seemingly just happen to practice law under the same roof, into holistic entities.
Two years ago, the UK’s world-leading legal industry was calculated to be worth £21bn to the economy. Yet remaining reliant on an antiquated business model could hinder its future success.
I wrote about the need for US law firms to move away from the partnership model in the Southern California Law Review earlier this year. I argued that abandoning the structure is crucial for long-term value creation by firms.
This is because the partnership structure is fundamentally flawed, confusing ownership and employment to the point that undue emphasis falls on maximising billable hours in the short term and undervaluing client service, employee wellbeing and firm profitability in the long term. Law firms cling to the billable hour model, seeking to maximise current profits, and in doing so they leave clients feeling overcharged, and junior lawyers feeling overworked and undervalued.
Under the partnership model, law firms are unwilling to give up the billable hour for the sake of long-term value creation, as this would be perceived as a pay cut for current partners. It is very difficult for an organisation to ask its employees – as opposed to investors – to sacrifice current compensation in the hope of increased future compensation, especially when the organisation cannot offer the employees any mechanism to ensure that they capture the resulting long-term value.
It’s unsustainable. Client surveys of FTSE-listed companies by legal journals regularly evidence dissatisfaction with hourly billing, and propose revamped billing structures.
The decision to float on the stock market could signify a shift towards long-termism. When law firms have permanent equity, individual lawyers have an incentive to maximise their firms’ long-term value and, in so doing, maximise the value of their equity shares in the firm.
Any firm that decides to list as a public company will undergo intense scrutiny. Some UK accountancy firms similarly decided to move from partnership structures to more corporate forms by floating on the stock market at the turn of the millennium. The fact that the decision was fatal for two of the four that listed (Vantis and Numerica) gives law firms reason to be cautious.
Caution, however, should not mean settling for the status quo. Aside from the benefits cited above, the corporate model would also enable mid-market firms to consider opportunities to expand, thereby creating value in the business and for shareholders. And should more law firms float, those looking for new investors, be they institutional or retail, would see a new, healthy market develop.
Will the UK’s famed Magic Circle firms ever list? Yes – although it may take a few years. And when they do, they will become FTSE 100 companies.
The move to list as a public company should be seen as for the good of the industry, and a leap to be followed not feared. The UK legal market should take pride in leading a trend that the rest of the world will soon follow.