November 01, 2018

Managing

Shareholder Criteria for a New Generation

Thomas C. Grella

In 2001 I became managing shareholder of my law firm. At that time we were 14 lawyers. For many years the firm had hired based on perceived temporary need and promoted to shareholder based on objective longevity in practice. There was very little input from members of the shareholder board of directors on more comprehensive determinations of value that the proposed shareholder had already made and would make in the future. Basically, the main rite of passage for an associate was achieving a certain number of years in practice.

One of my first initiatives was to memorialize in writing a set of criteria that our shareholders should commit to consider before agreeing to admit a new shareholder. The criteria we agreed on included specific hourly and collection goals, longevity in the term of years in practice (differentiating between new bar members and lateral hires) and subjective criteria related to the progress of the lawyer in the ability to handle complex legal matters and client relationships without supervision. This set of criteria worked well for the generation, and the compensation system, it was created for. Times have changed, however, and the type of culture leading to success with a new generation has shifted. It’s therefore crucial that law firms striving for sustainability and success in the future consider whether changes need to be made to the criteria used in considering firm ownership.

Tied to Values

The overriding theme of any set of criteria (or guidelines) must be consistency with firm values—not necessarily those espoused, but those that firm members truly live by. For my firm, before recently considering changes to the shareholder criteria we created in 2001, we first established a values statement, one that we could all commit to as a firm. Without this overriding consistency, a firm wastes time in creating criteria and might even be producing confusion in those you desire to raise up to ownership. Based upon my anecdotal review of the missions or visions espoused by so many law firms, and considering the Millennial values that I have written about previously, I have a few suggestions that firm owners might consider when it comes to ownership criteria.

Experience Tied to Individual Development

Historically, most law firms have had objective longevity criteria; lawyers would not even be considered until they had worked a certain number of years. As with most medical practices, the younger person must make a sufficient amount of money for the owners before they qualify. In my experience with firm management, I have come to the conclusion that the number of years one practices is not any indication of professional development. Larger firms have historically handled this issue by pitting young lawyers against each other and weeding out those who do not develop by promoting only a few from a large “associate class.”

There are obvious advantages to this tactic, which gives management an easy way out of confronting difficult issues, but I would argue this is very unfair to a young lawyer who has committed sufficient time and effort to a law firm during such important years of professional life. Criteria tied to clearly stated values, supported by a commitment to personal and professional development—one that progressively increases leadership responsibility as a result of satisfactory development—is an alternative that law firms interested in developing a Millennial generation of lawyers might consider. Regarding “experience,” a firm might consider the following guidelines:

  1. Have the shareholders had sufficient time to carefully evaluate the attorney as a person, a lawyer and a potential business partner?
  2. Has the attorney demonstrated a consistent desire and ability to meet the firm’s value standards?

Quality Tied to Relationship

Criteria for both hiring and shareholder status has for years, in most law firms, focused on law school ranking, technical skill such as the ability to write, and success in the courtroom. All are seemingly important things, but they basically do not emphasize the development of the lawyer in the areas of delivery of client service, social skills, self-awareness and leadership. Law firms desiring to be poised for a successful future have already begun to adopt value systems that emphasize these new definitional standards for quality. To experience this espoused value for the long term, firms will need to gauge their shareholder candidates on quality standards that are consistent with these values.

Simply put, a law firm is a business. Success as a business is not guaranteed by what school your lawyer members attended, what grades they achieved, or whether or not they are found, through popular vote, to be “super” or “of distinction” by other lawyers or the businesses that create lists that cater to ego. The legal monopoly is diminishing, and competition from nonlawyer legal service providers is increasing. Success in this new age of competition will be determined on a standard that should have applied all along—client experience.

In the area of “quality,” a firm might consider the following guidelines:

  1. Would every shareholder be comfortable with the attorney handling a complex legal matter in his or her area of practice for one of the firm’s valuable clients, considering both technical expertise and client experience?
  2. Would every shareholder trust the attorney to service independently the firm’s most valued clients in such a manner that the client receives the highest exemplary service consistent with agreed-upon firm values?

Comprehensive Financial Considerations

Law firm shareholder considerations of the past have largely mirrored the importance of objective financial results in compensation systems. These systems contained a heavy emphasis on hour and dollar (usually collections) goals and only paid lip service to the types of subjective considerations that actually result in the long-term financial success of a firm.

Many law firms have expressed a desire to plan for succession and to have long-term organizational viability. In many cases these expressions are memorialized in strategic plans, on the web and in shared values statements. Financial shareholder criteria need to be consistent with these published commitments of the firm. Inevitably this means that specific numerical goals as minimum thresholds should probably be eliminated and replaced with more subjective considerations that reflect upon commitment and contribution to the long-term financial success of the individual’s practice, practice group and the whole firm.

In considering the financial contribution and development of a candidate, a firm might contemplate the following guidelines:

  1. Has the attorney, through all of his or her efforts, demonstrated full engagement in client, firm, community and professional service?
  2. Has the attorney consistently handled matters efficiently and given value to clients?
  3. Has the attorney established a record of sustained profitability for the firm?

I have concluded that it is not necessarily wrong for a law firm to continue to have shareholder criteria tied to short-term financials and other objective data. That is a choice. I personally think that choice is detrimental to the long-term viability of the organization, but it is not wrong to choose that route. Notwithstanding that most organizations are legally perpetual, some owners do not intend for their firms to live on forever. What I do think is wrong, however, is to have shareholder criteria that give the wrong impression. Don’t fool those in your firm with shareholder criteria that imply long-term values when the underlying actual incentives and conduct say otherwise.

Thomas C. Grella

Thomas C. Grella is a writer and speaker on practice management topics and a past chair of the ABA Law Practice Division. He practices law with McGuire, Wood & Bissette, PA in Asheville, North Carolina, and is a former managing partner, having served in that position for 12 years. Email him.

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