Feeling like a goalie in a penalty shoot-out?

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28 January 2016

Posted by Nigel Wallis, partner at Legal Futures Associate O’Connors LLP

Wallis: update your firm's governance agreement

Wallis: update your firm’s governance agreement

“I don’t know where I’m going from here, but I promise it won’t be boring” – David Bowie

Do any of us working in the legal sector know where we are going from here? The flood of pronouncements from central government continues unabated and it’s hard not to feel like a goalie in a penalty shoot-out. Should you dive top right or bottom left or just stand still and protect your assets? One thing’s for certain, it’s never boring.

For those privileged to be managing a law firm – and it is a privilege – getting decisions made and implemented is key to stopping balls from hitting the back of the net.

Some leaders base their management style on tolerance and persuasion. On the face of it, this is highly laudable but, to counter-balance it, there needs to be a spirit of co-operation and performance on the part of those being managed. As we all know, this is not always the case.

We continue to come across good firms that are underperforming and a common theme seems to be that their leaders do not have formal authority to take and implement decisions. The result is that problems cannot easily be nipped in the bud and opportunities are not always seized with both hands.

Of course, good leadership is about a lot more than having formal authority but, as Theodore Roosevelt once wrote, diplomacy works best when you speak softly and carry a big stick. In law firms, the ‘big stick’ comes from having a partnership agreement, LLP agreement or shareholders’ agreement (let’s call it a governance agreement) that formally delegates most decision-making to a small handful of people – including decisions about what everyone gets paid.

Delegation of this sort works best when it is time limited so that the chosen few know that one day the boot may be on the other foot. It tends to keep them focused.

Why, then, are so many governance agreements allowed to gather more dust than knick-knacks on a mantelpiece? Most likely it’s because bringing one up-to-date can be a painful process and risks churning up long-buried issues between individuals. Elwyn Brooks White, the author of the childrens’ book Charlotte’s Web (and indeed Stuart Little), once wrote that there is nothing more likely to start a disagreement among people than an agreement. This is a pretty compelling reason to do nothing.

So what are the compelling reasons to do something?

Here are five reasons why we think it is worth taking the time and trouble to review and update your firm’s governance agreement:

  1. Giving voting rights to a dedicated management group is very likely to increase the firm’s responsiveness to changing market conditions, increase its chances of survival and almost certainly lead to greater rewards for all.
  2. There is a growing realisation that some law firms have a capital value. By disconnecting the right to share in profits (and losses) from the right to share in capital value, it is possible to reward more accurately those who work most consistently to enhance the firm’s long-term value.
  3. Having the power to change the make-up of a team without the need for a unanimous or near-unanimous vote can prevent a minority holding negative control over the majority. This power is particularly important in the context of mergers and acquisitions where drag rights (you’re coming with me whether you like it or not) and tag rights (you’re not sailing off into the sunset and leaving me behind with that lot) can be critically important to a leader’s ability to shake hands on a deal.
  4. Nobody should be in business in these turbulent times with unlimited liability. There are still a surprising number who are. Whilst converting a traditional partnership to an LLP or limited company is not a complete solution, it is a positive and sensible step along the road.
  5. Retirement provisions in partnership agreements (both traditional and LLP) tend to be poorly drafted, probably because only those nearing retirement pay much attention to them. But these provisions don’t only affect retirees. If someone gives notice of retirement and your governance agreement requires immediate payment of more money than the firm has in the bank, everyone has a problem.


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