Photo by Chris Ratcliffe/Bloomberg
Photo by Chris Ratcliffe/Bloomberg

Shearman & Sterling: The Best of Times, The Worst of Times

Shearman & Sterling made the headlines this week for advising Wells Fargo’s independent directors in the wake of its unauthorized account scandal, but the lawyers there may have been focused on something else.

With growth flat, the firm is considering de-equitizing some of its 162 equity partners and 26 fixed-share partners, according to the American Lawyer. The firm initially denied the reports that it is considering demoting partners, which would occur at the next compensation period in January, the article said.

It has since issued a statement that the firm regularly reviews “how and where we invest equity and manage headcount.”

Above the Law obtained a memo from Shearman managing partner David J. Beveridge and senior partner Creighton O’M. Condon sent Sept. 23 outlining plans to create a new tier of partnership for junior lawyers, who can initially join on a non-equity basis and “grow into an equity status.”

One loyal Big Law Business reader (and student of the legal industry) sent us his thoughts on the change:

“The non-equity partnership can be a HUGE profit center for the firm if they decide to leverage (i.e., they typically will bill clients at high hourly partner billing rates, but don’t typically compensate non-equity partners as much [as] equity… hence, more profit for the equity partners in addition to the fact that their reported PPP will be higher once they demote several non-performing partners to non-equity.)”

• “What happens to the pension for partners who are demoted to non-equity? I think Shearman & Sterling has a very rich, fully-funded pension plan for its partners when they retire, so do they still provide that to the demoted non-equity partners?”

• “In conjunction with demotions to non-equity, is the firm also going to ‘encourage early retirement’ of certain partners so that they leave the firm all together sooner than later? (Skadden did that years ago, for example).”

Good questions, and not a whole lot of answers, as Shearman’s Condon has declined an interview request with Big Law Business. We’ll keep calling around, but if you have information, please contact us at BigLawBusiness@bna.com.

It’s not the first time that the old line law firm considered cutting off a proverbial limb in the name of profits, as the American Lawyer noted: In 2005, it encouraged some of its less profitable partners to leave, according to a 2005 article in the New York Observer.

The article said more than a dozen partners, from both New York and Europe, were encouraged to leave at that time, and that it marked a cultural rupture at the firm, where until that point, lawyers still clung to the expectation that making partner meant you could stay at Shearman for the rest of your career.

One former Shearman lawyer, quoted anonymously, said: ““It’s amazing … Many years ago, there had been the expectation that you put your time in as an associate and that partnership was for life. And that one had a reasonable expectation — after having worked so hard for eight, 10 years — that this was something that you could count on. This is evidence that that’s not always so anymore.”

Since at least 2007, when Mayer Brown fired or demoted 45 partners, about 10 percent of its equity ownership, such restructurings have become an accepted part of the game. And two-tier partnerships, and lateral moves are the norm although a de-equitization is still going to draw attention.

At Shearman & Sterling, looking at the last decade, the trend has been to shrink: In our analysis of law firm’s gross revenues between 2007 and 2015, it declined from $921 million in 2007 to $860.5 million in 2015.

But there’s a reason why lawyers stay there for life: It gets plum assignments. And this week, the firm is acting as counsel to the special panel of independent directors at Wells Fargo & Co. which is reviewing executive compensation, and possibly whether to restructure the executive management at the giant bank after revelations that branch employees had potentially opened two million customer accounts without authorization.

The bank’s Chairman and CEO John Stumpf, who returns to Washington, D.C. today for a congressional hearing after a rare bipartisan grilling in the Senate last week, has already agreed to forfeit $41 million in unvested stock options.

Usually such clawbacks are only triggered by a financial restatement, which is unlikely to occur as a result of the current scandal. The bank can also claw back performance-based compensation as a result of conduct that causes reputational harm, and Stumpf sent a memo to employees saying his $41 million reflects a return of his compensation back to 2013 based on performance.

Casey Sullivan contributed to this article.

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