October 23, 2012

New Direction: Co-founders Address the “What-If” Scenario

In late spring 2008 Fred Hacker, then the managing partner of Central Ontario’s Hacker Gignac Rice, had a very important announcement to make. Sitting with his 15 fellow lawyers in the boardroom of the firm he co-founded in 1981, he cleared his throat, took a deep breath and said, “I have bad news for you all. I’m terminally ill.”

Several tense, silent seconds passed until Hacker added, “Actually, I’m not. But what if I were? Nobody wants to talk about this but if I had a stroke or heart attack or if something dramatic happened in our lives to prevent us from carrying on, we wouldn’t want the firm to come apart. We have no succession process.”

And with that proclamation, the firm—which at the time had only two partners—embarked on a major transformation in the structure and operations of HGR. It was the first official move to prepare the firm for the day neither Hacker nor the one other HGR partner, co-founder John Gignac, would be with the firm for whatever reason. Co-founder Greg Rice had previously decided to become one of the firm’s 14 associates, in what constituted an atypical law firm composition.

“Our leverage was out of whack,” Hacker says. “And we were exposed. Our principal concerns were our clients and our staff. We had to consider what would happen if one of us had a serious health problem or if John and I were in a car together and, well, you know.”

However, Hacker and Gignac, both in their early 60s, had been thinking about succession plans for a while before that dramatic what-if announcement. “We had [previously] talked to the associates about becoming partners,” Hacker says, “and they always said that we were treating them so well why should they take the additional responsibility of being partners. How would that be better?”

So the two partners persuasively pushed change upon their colleagues with a well-structured succession process. They used a formula called “naked-in/naked-out,” by which the associates who would join the partnership ranks would not put up any capital to become a shareholder, nor would they expect any capital when they eventually left.

“John and I decided that in order to have as few obstacles as possible we wouldn’t require anyone to pay anything coming in,” says Hacker. So he and Gignac kept the accounts receivable and the work in process at the time and, on January 1, 2010—with eight partners and eight associates in place—HGR re-launched as a new limited liability partnership, with a new set of books, no work in process and no one putting up any money. They did, however, take out a large line of credit.

What’s more, Hacker’s no longer running the firm and, instead, a management committee of three leads the partnership, with partner Ron Crane serving as managing partner, a function he had performed for a large Detroit firm before he joined HGR. “That was a way to divide the tasks between the three of them,” Hacker says. “One did financial management and marketing, another was responsible for practice management-related issues, and another handled staff relations.”

Hacker says at least two key elements helped the transition go smoothly. First, the attorneys realized this was a major overhaul so they gave themselves plenty of time, 18 months, to accomplish it. Second, they hired an experienced outside facilitator to guide the associates and advise on succession planning and execution. As he puts it, “The facilitator acted as a buffer.”

The soft-spoken Hacker says the change has probably hit him the hardest. “I jokingly refer to the new decision-making process as ‘death-by-democracy’ because things take longer,” he says. “And I understand that. But I’m not a patient person, and I was used to making decisions quickly.”

Nonetheless, he adds, the succession has been a success: “It’s worked out quite well. There’s a good sense of camaraderie and a healthy sense of the future-is-ours-to-control, which is very positive and very important to us all.”