By Dan DiPietro, Chair of Citi Private Bank’s Law Firm Group
My unwavering answer: yes - in good times, in volatile times and in bad times. Culture matters.
Recently, I spoke at a Penn Law School symposium entitled “The Business of (Big) Law.” A number of managing partners of large firms were among the other panelists. I was struck by how frequently maintaining a strong culture was mentioned regardless of the topic. Culture was highlighted as both a key driver of a successful merger and a major reason why firms fail. Underlying the comments was the concern that law firms are inherently fragile institutions, even more so in these volatile times.
Some insights were compelling:
- Culture is like pornography: hard to define but you know it when you see it.
- Cohesion at law firms has always been fragile; more so now given all the lateral movement of partners.
- If money is what holds a firm together, it has no culture.
- Culture should not be an excuse for tolerating poor performance or resisting change.
Managing partners do indeed lose a lot of sleep over this issue.
Any discussion of culture should start with a definition. Here’s mine: culture equals the values, beliefs and behaviors partners share in common. It doesn’t mean partners always agree; it doesn’t mean they share the same political views; but it does mean they agree on the basics: the hierarchy of values, what is really important, how we treat one another.
Early in my 26-year career at Citi, I experienced two polar opposite examples of why culture matters.
What a Family Would Do.
Firm A was faced with a life threatening event risk: at the height of the S&L crisis, regulators were out for blood and targeted A. The potential liability of the partners was well above what the firm’s insurance policy could cover. Word on the street was the firm was set to implode. Headhunters were circling in the skies. But, the partners thought otherwise. They hung together, ponied up considerable money, negotiated a settlement, restructured their debt with us and are a stronger firm today. Years later, I asked the managing partner what motivated the partners to circle the wagons. He said: “We grew up together, enjoyed our working relationships and didn’t want to see that destroyed. Isn’t that what a family would do?”
Firm A survived a near death experience. Firm B did not.
A Cautionary Tale.
B was a go-go firm during the tech boom. They were a 900 lawyer firm and took on significant debt to finance the space they needed to grow to 1200 lawyers. The tech bubble burst and B found itself a 600 lawyer firm with space for double that number. B’s leadership told the partners they would restructure their debt and renegotiate the firm’s leases with the goal of becoming an attractive merger partner. The planets appeared to align: we restructured the debt taking the firm out of default and the landlords all cooperated. Merger discussions proceeded at an encouraging pace. And then, the firm experienced the defection of a significant group of partners. Merger discussions ceased and the firm went into bankruptcy. Two very salient facts: the defecting group had not been with B for very long; B’s core partners, who had grown up together, almost all went to one firm where they’ve stayed and enjoyed successful careers.
B’s case was a powerful cautionary tale. Regardless of how viable a firm looks on paper, it is only as strong as the collective will of the partners to tough out the hard times. This is much more likely to occur where the bulk of the partners share a history together.
The Pay Factor.
Let’s now discuss the factor with arguably the most significant influence on culture: compensation. How partners are paid has a profound impact on behavior, a critical component of our definition of culture. At its extreme, eat what you kill can inhibit teamwork and collegiality. Most firms, thankfully, create a series of criteria that help determine compensation and they include factors that positively impact culture. There is much debate about the efficacy of closed compensation systems. Most of the comments I hear fall into the “it hurts the culture” column. I may hold the minority view here but the relative handful of firms with closed comp systems seem to have strong cohesion.
There are two trends in compensation that are concerning: a widening of the range between highest and lowest paid partners and the use of long term guarantees. Our data shows a widening in the highest to lowest range and we hear anecdotally that guarantees have reappeared although not to the levels of a few years ago.
Much has been written about the impact these factors had on recent law firm failures. I’m in total agreement with this view. The former factor can lead to a fraying of the fabric of a culture. When combined with the latter, there isn’t enough camphor in the universe to avoid an attack of killer moths.
There is much more that can be said about law firm culture and its importance. My hope is this is the start of a dialogue.Gretta Rusanow, Senior Client Advisor, Citi Private Bank Law Firm Group, contributed to this article.
This is being provided for informational purposes only. All opinions are subject to change without notice. Opinions expressed herein may differ from the opinions expressed by other businesses of Citigroup Inc., are not intended to be a forecast of future events or a guarantee of future results. Although information in this document has been obtained from sources believed to be reliable, Citigroup Inc. and its affiliates do not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from its use.
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