Compulsory retirement of partners: problems and opportunities

Guest post from Ivor Adair, a partner at City firm Fox & Partners

Adair: Valuable insights

The leadership teams of partnerships face tough choices as they evaluate performance over an unprecedented period and review the composition of the partnership body.

Inevitably underperforming partners will be targeted for compulsory retirement. There is a right way to handle what is a difficult situation for all.

Significant cultural and organisational problems that management are not aware of may be exposed in this process. Partner exits can offer a unique opportunity to gather information and then adopt new strategies aimed to improve the firm’s culture and its approach to the evaluation of performance.

Doing so may reduce the risk of exits, attrition or conflict further on down the line.

Getting compulsory retirement right

Management first ought to be sure that the individual they are dealing with is a true partner and not an employee with enhanced employment rights. This requires an examination of the facts informing the partner’s status.

The fixed-share partners who do not participate in management should be carefully scrutinised, particularly in the light of the Supreme Court’s judgment in Uber BV v Aslam.

The next step is to review the partnership agreement. This is likely to provide an expulsion power (for serious breach of the agreement or misbehaviour akin to gross misconduct) and a compulsory retirement power (usually on notice).

If there are legitimate performance concerns, the partner should be spoken to and given an opportunity and support to improve. If there are no improvements, then a word with the partner before deciding to serve notice can go a long way to avoid a dispute.

This approach can start a dialogue where both sides might be willing to give on things that cost them nothing, such as agreed messaging.

In exchange for entering into a retirement deed waiving all claims, concessions can be considered. Removing covenants, varying the retirement date, expediting repayment of capital or undistributed profits, agreeing a reference, retaining a mobile phone number and outplacement support could be considered.

If a deal cannot be reached, then the firm will need to consider its compulsory retirement powers.

It is usually sensible to offer the partner an opportunity to respond to the performance concerns. Not doing so can send a damaging message to new and junior partners. Management may even wish to provide the partner with a copy of the information on which the decision will be made and invite responses.

Firms ought to be mindful that a partner can challenge compulsory retirement, alleging that the decision was made in bad faith, or that it is an act of discrimination or, in the case of an LLP member, retaliation for whistleblowing.

Depending on the terms of the partnership agreement, a challenge to compulsory retirement might also be possible where the decision-maker has taken into account irrelevant factors, or disregarded relevant factors, or made a decision so unreasonable that no reasonable decision-maker could ever have come to it.

The absence of case law on this duty of rationality in the context of partnerships and LLPs means management ought to be prepared for challenges along these lines.

Reimagining careers and performance management

Gaining the partner’s perspective in the context of performance issues being raised could yield valuable insights and should be viewed as an opportunity for management.

This will be very difficult to do where the partner and the firm is in conflict. Listening to the partner’s concerns carefully in a confidential setting and making contemporaneous notes of the discussion is vital. This should be done at an early stage and handled carefully by a senior figure within the partnership.

Management should be mindful that a disenchanted partner can very quickly become alienated from the partnership in this context, even hostile. Showing respect and insight will be important. An exit interview is likely to be less helpful to the firm.

Management may well learn from the partner that they have struggled with nebulous, ill-defined, or non-existent performance criteria, or have faced challenges with under-performing associates, or an unsupportive leadership team.

Professed cultural and or organisational barriers to performance may provide the firm with the most valuable insights.

A progressive partnership may take an opportunity, where a partners’ performance has gone off the boil, to reflect and develop diverse career models tailored to individual strengths.

Identifying behaviours and competencies that contribute to the longer-term success and profitability of the firm such as innovation, in operations, mentoring or client relationship building are key. Progressive firms will adopt systems to measure and reward those particular behaviours and competencies that make the firm a success.

With the growth in new-model firms, particularly in the legal profession and a fast-changing world, a diverse and tailored approach to careers is more likely to attract and retain talent. Differing values and changing attitudes towards the world of work between generations, should also be acknowledged and taken on board.

Doing so against the backdrop of a partner exit and what can be learned from that may help management persuade the partnership body that more significant changes ought to be adopted for the benefit of the firm as a whole.

The outcome may involve change to constitutional documentation, policies and procedures, new systems devised to measure performance and diverse and flexible career options. There is much to gain from gathering information that would otherwise not be available and turning it to the firm’s advantage.

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