Employee ownership of law firms is an opportunity to get the best young lawyers into early equity and minimise risk, according to a leading CEO.
Neil Kinsella, Slater & Gordon UK’s chief executive, outlined how the sector could respond to the changing legal landscape in a speech to Manchester Law Society’s personal injury conference earlier this week.
Focusing on the “perils of thin capitalisation”, Mr Kinsella suggested options for firms at a strategy crossroads included becoming an alternative business structure (ABS) to attract capital, listing on the AIM, and issuing shares.
He said: “The world is changing. Lots of people coming into the profession have a different view of the world now. Modern equity is not so much about taking equity in partnership or even in an LLP.
“Employee-ownership plans for creating share-ownership within the business is an opportunity for getting people into equity a lot sooner than they might otherwise have done if they were waiting for a full equity partnership. The general feeling certainly when I was practising here in Manchester was that you would generally be 35 to 40 years-old before you made full equity.
“With share-ownership there is an opportunity to get people in sooner, people who you believe might have a future in the business. It is a lot more flexible.”
Legal Futures has featured Edinburgh employment and equality firm Fox & Partners, the first in the UK to embrace full employee-ownership, with founder Carol Fox calling it a “bold new way of working” and an opportunity to cement core values of valuing employees in the workplace.
Its management board now has representatives from every area of the business with legal, admin and support staff all having assay in the direction and strategy.
Mr Kinsella emphasised that “change will be relentless”, but insisted that there was “too much fat in the system” and that it represented “opportunities to run good strategies, not just ABS”.
ABS conversion on its own is not a strategy, it is the means behind a strategy, insisted Mr Kinsella, and it needs to include a costed business plan which is attractive to an investor and committed to generating a return on their capital.
He said investors across the world were looking at the PI sector for “good returns”.
“Capital is important,” he said: “We’ve not understood it for years.”
Mr Kinsella said the employee-ownership model was a more straightforward way of creating genuine stakeholders in the business.
He said: “Shares are nothing new – it is an attitude. Partner ownership is old-fashioned equity. Shares are just a simple way of getting ownership of the business. You may not have total ownership of that business, but again it depends on the actual turnover and what the scale of what you want to create.
“Appetite for risk is a fast-changing world. There are fewer lawyers who fancy the possibility of being made bankrupt as a result of failed strategy or because of the lack of capital. Banks have been reluctant to invest in law firms for some time – they’ve been devising strategies about how to manage when law firms fall over. There’s been a real sense of trying to de-risk their exposure in our sector.
“So we’ve got to try and create a meaningful stake for people, genuine stakeholders.”
Mr Kinsella also acknowledged that exiting the profession was another alternative option, describing the loss of capital as “fatal” and similar to “running out of fuel mid-flight”.
He said for firms which have 12 months of WIP left and a deteriorating product and choose to get out “while their heads are still above water”, that would be a “reasonable strategy”.
Mr Kinsella concluded: “Even businesses with good strategies can go out like a light. It needs a change in mind set. Not everybody’s business will survive, but there is a future. This part of the world is well known for innovation around legal space – there are lots of ways to get the service to clients that they deserve. Just holding back the tide is not good enough.”