Goldman Sachs has been in the news a lot lately. Taken together, several articles suggest parallels to big law. Anyone wondering where many large law firm leaders want to take their institutions — and how they might get there — should look closely at Goldman. As law firms have embraced metrics that maximize short-term partner profits, they’ve moved steadily in Goldman’s direction. If America follows Australia and the UK in permitting non-attorneys to invest in law firms, a tipping point could arrive.

Others ponder this possibility. Professor Mitt Regan, Co-Director of the Georgetown Center for the Study of the Legal Profession, has been thinking, writing, and speaking thoughtfully about non-lawyer investment in law firms for a long time. Understandably, most academic observers focus on the outside — how smaller firms’ access to capital could affect competition, the interaction with attorneys’ ethical obligations, and the like.

Those are important issues, but I’m more interested on the inside. Presumably, the process would involve current equity partners selling ownership interests to investors. Many of those in big law who already take a short-term economic view of their institutions would leap at the opportunity for a one-time payday that discounted future cash flows to today’s dollar. In fact, a big lump sum will tempt every equity partner who worries about next year’s annual review.

Then what? Perhaps Goldman has devised an adaptable mechanism. When it went public in 1999, Goldman Sachs retained a partnership system within a larger corporate structure. As the Times notes, “Goldman’s partners are its highest paid executives and it biggest stars….”

Consider the similarities to big law:

— Management

Traders displaced traditional investment bankers and chairman Lloyd Blankfein surrounded himself with “like-minded executives — ‘Lloyd loyalists,'” according to the Times. Transactional attorneys have similarly risen to lead many big law firms; dissent is not always a cherished value.

— Resulting culture changes

Seeking to represent all sides of a deal, Goldman became adept at managing conflicts rather than avoiding them, a former insider told the Times. Large law firms have developed standard retention letters that maximize their representational flexibility to take on more lucrative matters that might arise.

— Metrics

Goldman’s leverage ratio is stunning: 475 partners out of more than 35,000 employees. As a group, large firms have pulled up ladders, widened the top-to-bottom range within equity partnerships, and doubled attorney-to-equity partner leverage ratios between 1985 and 2010.

— Partner Wealth

Goldman’s partners are famously rich. Many big firm equity partners now enjoy seven-figure incomes previously reserved for media celebrities, professional athletes, and investment bankers.

All of this raises an important question: How well is the model working — and for whom? Maintaining the stability of such a regime presents challenges. Goldman partners maximize their continuing influence as minority shareholders by acting in unison on shareholder votes. But the cast of characters constantly changes. According to the Times, “Every two years, roughly 70 executives leave the club, by choice or because they are no longer pulling their weight. The average tenure is about seven years…Within five years of the IPO, almost 60 percent of the original partners were gone…”

In the end, the environment is problematic for many, as one former Goldman partner told the Times:

“It’s a very Darwinian, survival-of-the-fittest firm.”

It could also be big law’s future. Then again, some firms may already be there.

Here’s a concluding thought: perhaps Goldman Sachs will become a big law outside investor that buys its way into the legal profession. That shouldn’t bother anyone. After all, Lloyd Blankfein graduated from Harvard Law School.


  1. Intriguing observations on a fascinating topic, Steve.

    This topic is likely to continue to galvanize the profession’s attention for some time, as we watch events unfold across the pond.

    There are some quite serious obstacles yet to be adequately addressed, let alone even comprehended.

    As Professor Regan notes, the proceeds of capital infusions by outside investors in large law firms will likely be applied to technology and most particularly knowledge management systems, all with a view of lowering costs to consumers of legal services. The result would be increased commoditization and reduced revenues per lawyer. Thus, the consequence of such investments may well be that unless one creates a Goldman-type leverage ratio, an unlikely result for any law firm, the investor will simply not get the anticipated return.

    The practices which yield the highest return still remain in the plaintiffs’ class action bar and in big stakes high end plaintiffs’ contingency cases. Massive class actions and other high end cases chew up enormous amounts of capital. Law firms which have been active in this world have already amassed substantial capital and have the internal resources to fund these cases. Some still utilize traditional institutional lending from banks at favorable rates. Others utilize litigation funding companies which do tend to charge exorbitant interest rates; but, then again, these funding companies accept all of the risk in making non-recourse loans and at the end of the day, they do not remain partners of the law firm.

    Professor Regan also correctly notes that outside investors in a firms would exert some degree of control within a law firm and the danger he highlights is that such investors will impair the independence of the lawyers’ judgments in directing that efficiency, rather than the clients’ best interests will be a driver in handling a client engagement, all in violation of Rule 1.1 of the Model Rules of Professional Conduct.

    But an added impediment is the preservation of client secrets and confidences. Non lawyer investor participation in law firm management necessarily makes non-lawyers privy to such secrets and confidences, with no mechanism to police the maintenance of such confidentiality by these non-lawyers.

    Quoting our revered sage, Yogi Berra, predictions are hard, particularly about the future, my own humble prediction is that the these models won’t work for traditional Big Law. That’s what I said six months ago at and nothing has yet surfaced to dissuade me.

    Jerry Kowalski

  2. You know, I really enjoy Harper’s viewpoints as he brings both large law firm savvy and experience and a penetrating insight – but it’s usually from the position that there was or remains considerable merit in the older order of things, that the new zeitgeist was arrived at either haphazardly or with greed as its only motivating engine and that many of the mistakes observed by him are deserved. And, I take this article to be a provocation, not a prediction.

    Nonetheless: “On Management” surely he can see that his analogy is exactly wrong – it’s the litigators in the law firm who are most like traders, tempermentally and in other ways, and the corporate types who are like the investment bankers. So this entire paragraph just runs off the nearest cliff. And, litigators enmeshed in their own culture are equally adept at surrounding themselves with yea-sayers.

    On “Resulting Culture Changes” – you don’t have to be Jewish to love Levy’s (bread) and you don’t have to be a Goldman partner to be a whore – all NYC biglaw has been doing this for 20+ years – which is why they’re so surprised when the former client actually sues them for breach of all that’s holy in the lawyer-client relationship for jumping ship when the next pretty face to come along.
    You don’t need to be “Goldman” to do this, you’re already doing it. And it is whoring.

    On leverage ratios, etc.: well, I suppose so, but lawyers tend to be more equitably minded, and it’s too simplistic to use these numbers. Like Jimmy Cagney said (off screen): You’re the talent, without you there’s no movie. Without incoming law grads, there’s no firm. Ditto I suppose for Goldman, but the numbers there, which the form of the law firm won’t change, are so vast that it can get away with it – not law firms I don’t think. But no doubt some will keep trying, and they’ll become ever more unpleasant places to work, until, I predict, they implode.

    On partner wealth – I agree that current partners would salivate at the idea of cashing out, and would even bust their arms patting themselves on the back taking credit for having “created” the firm. And, given the opportunity, they’d do it in a heartbeat. Hopefully, they won’t be given that opportunity. Goldman uses their public position to acquire capital because they USE capital in their business – they’re a bank. No large defense law firm uses capital in that way. Yes, they need money to buy stuff, like computers and etc., but they don’t need “capital”. Another false analogy.

    Other than that, I (Mrs. Lincoln) enjoyed the play. And I agree with Kowalski, the previous commenter, particularly the attention to the lack of likely return for investors in big defense law firms. I know why the partners would like to sell, but why would investors like to buy? A good question I think.

    • Thanks for offering another perspective.

      “On Management,” we certainly agree that litigators can be yea-sayers with the best of their corporate counterparts. My analogy between traders and transactional attorneys has more to do with perspective than temperament. Of course, there are always exceptions, but generally both tend to focus myopically on MBA-type metrics that maximize short-term profits over longer-term considerations. (Far more corporate transactional attorneys have MBAs than their litigation counterparts; that has behavioral and cultural consequences for the institutions.) My evidence about the rise of transactional attorneys in big law is anecdotal and observational, but many big law partners have observed the same phenomenon and the resulting transformation of their firms. Every firm has its own story.

      “On Leverage Ratios,” I’m not sure what “equitably minded” means when it comes to lawyers, but the concentration of equity partner wealth at the top is stunning and increasing.

      Capital needs for big firms are actually quite large — new offices often require enormous long-term lease commitments; annual IT budgets have exploded with technological advance; banks already have major regular roles financing operations. Law firms don’t have the capital needs of an investment bank, but they’re not inconsequential, either.

      Why would investors buy? Big law profit margins are 30% to 40%. That seems pretty attractive. Will it happen? We’ll see.

  3. I think I fall more on B Quinn’s side that in my firm experience it is the litigators who are more prone to misapply the metrics because (a) it is usually the litigators, not the corporate attorneys, who are managing the firm except in a handful of top NY transactional firms, and (b) the actual B-school grads remember a few of those case studies where misapplying metrics led to loss, particularly in human capital businesses, even if they did not have it reinforced through application in business. They are more prone to apply them with judgement (as even, in fariness to the maligned consultants, their consultants probably tell them to do but to closed ears).

    Personally, I’d have a hard time saying no to a big buyout payday like the Alex Brown partners got, but I’d be under no illusions that those who come after me would do as well unless they fought their way into the very top tier of managment thereafter. And I doubt the quality of the legal services provided would improve, or the cost be less.

  4. Jerry: “But an added impediment is the preservation of client secrets and confidences. Non lawyer investor participation in law firm management necessarily makes non-lawyers privy to such secrets and confidences, with no mechanism to police the maintenance of such confidentiality by these non-lawyers. ”

    OTOH, it’s clear that the strategy of G-S in this respect was to consider everybody as a counterparty; for ethical purposes nobody was a client, and there was no fiduciary duty to anybody outside of G-S (regardless of the law).

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