DEWEY: WHEN PARTNERS AREN’T REALLY PARTNERS

Lost in the haze of battle over Dewey & LeBoeuf’s struggle is a remark that former chairman Steven H. Davis made in his March 22 Fortune magazine interview. That was Dewey’s first public relations initiative after it began squandering money on a crisis management/public relations expert. But it offered this kernel of inadvertent insight:

“One fundamental change in the way the firm has operated since the merger is that they moved away from the traditional lockstep compensation approach — where partners are basically paid in terms of tenure — and toward a star system in which the top moneymakers can out-earn their colleagues by a ratio of up to 10-to-1. Davis says the extremes shouldn’t define the system, though, and that the more ‘normal’ band is about 6-to-1. Still, it must chafe to be the guy who’s earning the ‘1’ and knows it. Hard to see oneself as a ‘partner’ of the ‘6s,’ let alone the ’10s.'”

In The Wall Street Journal story that the Manhattan district attorney had opened an investigation into Davis, this sentence offered a poignant flashback to his March 22 interview:

“While some junior partners made as little as $300,000 a year, other partners were pulling down $6 million or $7 million, according to former and current partners.”

That’s a twenty-to-one spread within a so-called partnership. And some of the biggest winners had multi-year guaranteed compensation deals.

There’s an asterisk. According to The American Lawyer‘s definitions, Dewey & LeBoeuf has equity and non-equity partners. Everyone knows that with respect to the internal power dynamics of two-tier firms, management pays no attention to non-equity partners. But the real kicker is that most equity partners don’t have much influence with senior leaders, either.

The growing non-equity partner bubble

Start with the non-equity partners. In January 2000, predecessor firm Dewey Ballantine had 118 equity partners and 21 non-equity partners. At the time, its eventual merger partner, LeBoeuf Lamb, had a similar ratio: 187 equity partners and 33 non-equity partners. Between them, they had 305 equity partners and 54 non-equity partners.

As of January 1, 2012, Dewey & LeBoeuf had 190 equity partners (one-third fewer than the separate firms’ combined total in 2000) and 114 non-equity partners (twice as many as in 2000).

Many firms have adopted and expanded two-tier partnership structures. That has many unfortunate consequences for the firms that create a permanent sub-class of such individuals. But non-equity partners are profit centers and most big law leaders say that ever-increasing profits are necessary to attract and retain top talent.

The equity partner income gap

That leads to a second point. Whether it’s Davis’s earlier “10-to-1” spread, the more recently reported “20-to-1,” or something in between, the income gap within equity partnerships has exploded throughout big law. That’s destabilizing.

The gap results from and reinforces a failing a business model. In the relentless pursuit of high-profile lateral hires, law firms bid up the price. Many laterals never justify their outsized compensation packages; some become serial laterals moving from firm to firm.

Even when the subsequent economic contributions of hot prospects seem to validate their worth on paper, aggressive lateral hiring erodes partnership values. The prevailing business model has no metric for collegiality, a shared sense of purpose, or the willingness to weather tough times. How badly frayed have partnership bonds become when, as at Dewey, some partners ask a district attorney to prosecute the firm’s most recent chairman? That’s the definition of bottoming-out.

It’s easy to identify the ways that Dewey’s problems were unique, such as guaranteeing partner compensation and issuing bonds. Leaders of other firms could benefit from a different exercise: assessing how their own institutions are similar to what Dewey & LeBoeuf became after their 2007 merger. Growing partnership inequality is pervasive and its implications are profound.

Legal consultant Peter Zeughauser told The Wall Street Journal, “It’s not your mother’s legal industry anymore. It’s a tougher business.” Implicit in that observation lies a deeper truth: partnerships aren’t really partnerships anymore.

They’re businesses, only worse. Those at the top of most big law firms function with far greater independence than corporate CEOs who must answer to a board of directors and shareholders. In many big firms, a growing internal wealth gap reinforces the hubris of senior leaders who answer to no one — except each other. With Dewey’s disintegration, we’re seeing where that can lead.

3 thoughts on “DEWEY: WHEN PARTNERS AREN’T REALLY PARTNERS

  1. Mournful and eloquent elegy to the equity partner issue, Steve.
    The great irony here, I would posit, is that there is no financial equity here for “partners” of any status. Equity status has largely devolved to an honorific. It is conferred with some degree of pomp and stripped away as firm de-equitize (is that really a word, let alone a rational economic or financial concept?) with ignominy as the vagaries of AmLaw reporting dictates. Equity status in a law firm cannot be sold, hypothecated or bequeathed, nor does it confer any degree of tenure. Equity status has no market value, save for perhaps in the instance of the division of marital assets. The height of the irony in the instance of this once great and noble law firm is that with a reported $800,000,000 due to banks, lenders and past and former partners, together with several hundreds of millions additionally due to landlords and vendors, there is no equity available to anybody, when measured against a declining revenue base of last year’s reported gross revenues of $780,000,000, a number which will never again be repeated by this firm, which seems destined to join the heap of 43 major firms that have imploded in the last 30 years.

    With the death of a law firm comes years of real pain for the partners that drank at that law firm’s trough (http://kowalskiandassociatesblog.com/2011/02/03/the-financial-and-legal-consequences-of-a-law-firm-dissolution-on-the-partners-of-the-defunct-firm/ ). For whatever it’s worth, those who sit at the left side of that 20:1 ratio, will likely remit a concomitant amount to the estate of this firm in dissolution and bankruptcy. Such is the calculus of pain and pleasure.

  2. Rather than refer their gripes to the D.A.’s office, maybe they should consider law firm partnership interests have become “securities” within the definition in the 33 Act, and consequently, whether some of the lower-end partners are getting the appropriate disclosures about the investment that they are making.

  3. I think part of the law firm growth in recent years was to justify higher compensation for the top lawyer “executives” as though it was a corporation making widgets, when they really weren’t contributing enough to the bottom line to justify it, and the real capital was walking out the door every night.

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