Editor’s Note:This post is authored by a strategic consultant to law firms.
It was only a couple of years ago that Slater & Gordon was enjoying worldwide acclaim as the poster child for law firm innovation. Today, and probably for many years to come, the Australian personal injury firm is and will be regarded as law firm innovation’s ultimate cautionary tale.
Slater & Gordon was a renowned plaintiff-side personal injury firm based in Melbourne when, in 2007, it took advantage of changes to Australia’s legal regulations and became the first law firm anywhere to go public and float shares on the stock market, using the cash raised to embark on a nationwide law firm acquisition spree. As England & Wales followed Australia’s liberalizing lead in 2012 and authorized non-lawyer ownership of law firms, Slater & Gordon established a British beachhead and soon commenced a similar, even larger expansion effort there.
For advocates of innovation in law firm ownership and management (very much including me), Slater & Gordon was an exemplar of what could be achieved by thinking and acting differently in the legal services space. For detractors of such efforts, Slater & Gordon represented a fundamental threat to lawyers’ professionalism and consumers’ interests.
If you’d like to know which of these opposing positions is currently enjoying its day in the sun, you can read LegalWeek’s recent report that Slater & Gordon is expecting losses of more than US$760 million for its 2015-16 fiscal year, a figure that includes “a significant level of goodwill impairment, non-recurring expenditure, and refinancing costs.” For deeper background, you can review this in-depth investigation by the Sydney Morning Herald from June.
Slater & Gordon’s full story is yet to be written — any conclusions we might draw today about the firm and its future prospects may be no more reliable than what we would have said about the firm 18 months ago. But it might be time to make some observations about whether it’s wise to allow law firms to declare IPOs and invite public shareholders.
As the Herald article points out, few Australian firms followed Slater & Gordon’s lead into the stock market, and fewer of those still survive. In England & Wales, only full-service law firm Gateley is publicly listed, although it has been filing positive reports to date. The possibility of non-lawyer ownership of law firms in the US is dead in the water. So it seems fair to say that we aren’t poised for a wave of publicly traded law firms sweeping the globe.
But should we be? For all that Slater & Gordon’s skeptics are crowing about its downfall, few market observers blame the firm’s failures on its stock market listing. There’s been no indication that the firm’s treatment of its clients was compromised in any way by its ownership status: Slater & Gordon’s IPO famously warned potential investors that their financial interests were tertiary, behind the firm’s statutory duties to the court and its professional duties to its clients.
Few market observers blame the firm’s failures on its stock market listing. In a perceptive analysis, Legal Futures editor Neil Rose points out that Slater & Gordon’s downfall can be traced to a series of factors, including unexpected changes in British personal injury laws, a deeply questionable purchase of a troubled firm called Quindell, and perhaps an expansionary appetite that exceeded the firm’s ability to digest its meals properly. “S&G was a successful firm that appears to have made a monumentally bad business decision,” he wrote. “That has nothing to do with being an ABS, except that it was able to raise some of the cash for the deal from shareholders.”
There’s a lot of truth in that assessment. Law firms do not need to be publicly listed to make boneheaded decisions. I hardly need recite for you the roster of lawyer-owned firms in the United States that have collapsed or been dissolved through acquisition in the past few years, none of which are in the Strategic Decision-Making Hall of Fame. The criminality and unethical behaviour that ran rampant at Dewey & LeBoeuf was accomplished with 100% lawyer shareholders. Just as Dewey is no automatic rebuttal to lawyer ownership, neither is Slater & Gordon an automatic rebuttal to public ownership.
And yet. One effect of public ownership was indeed that Slater & Gordon was able to access financing for its acquisitions faster and more easily than, say, a cash call to partners or an expanded line of credit would have required. Maybe a little more time for reflection and internal debate wouldn’t have been the worst thing in the world.
In addition, shares of publicly traded companies rise and fall not on the company’s current performance, but on what the market believes the company will do next, and that creates a perverse incentive structure for legal and non-legal enterprises alike. I believe that Slater & Gordon kept its promise to put the court and its clients ahead of its shareholders. But once you do have public shareholders, it’s very hard to pretend they’re not there, standing over your shoulders, watching.
Law firms are going to require much deeper pools of equity than they can currently access.For what it’s worth, I still think a law firm should be allowed to choose a public listing as an ownership structure if it so chooses. Whether or not I’d personally want public shareholders of my firm is beside the point: if law firms can continue to ethically prioritize courts and clients above shareholders (and there’s no indication Slater & Gordon failed to do this), then they should have that option, and let their lawyers, their clients, and the market make of it what they will.
Because the fact is, law firms are going to require much deeper pools of equity than they can currently access through existing rules. Massive global service providers and technology companies are going to enter the legal market and invest heavily in new service and delivery options, and not even the world’s biggest law firms have anything like the war chests needed to compete with that. Self-financed large law firms worked fine in the 20th century; I don’t see how they can manage in the 21st.
The issue, ultimately, will prove to be not whether law firms should be allowed to operate as publicly listed companies. The issue will be how they can do so sensibly, ethically, and competitively. We won’t learn how to do that by banning public ownership; we can learn how to do it by studying more examples like Slater & Gordon.
Jordan Furlong is a leading analyst of the global legal market and forecaster of its future development. Law firms and legal organizations consult him to better understand why the legal services environment is undergoing radical change, and they retain him to advise their lawyers how to build sustainable and competitive legal enterprises that can dominate the new market for legal services. You can find him at http://law21.ca and contact him at firstname.lastname@example.org.