ANOTHER COLOSSAL LATERAL MISTAKE

Lateral hires are risky. Even managing partners responding to the Hildebrandt/Citi 2015 Client Advisory’s confidential survey admitted that only about half of their lateral partners are break-even at best — and the respondents had unrestrained discretion to decide what qualified as “break-even.” As Ed Newberry, co-global managing partner of Squire Patton Boggs told Forbes, “[L]ateral acquisitions, which many firms are aggressively pursuing now … is a very dangerous strategy because laterals are extremely expensive and have a very low success rate….”

Beyond the financial perils, wise firm leaders understand that some lateral partners can have an even greater destructive impact on a firm’s culture. In late 2014, former American Lawyer editor-in-chief Aric Press interviewed Latham’s outgoing chairman Bob Dell, who was retiring after a remarkably successful 20-year run at the top of his firm. Dell explained that he walked away from prospective lateral partners who were not a good cultural fit because they stumbled over Latham’s way of doing things.

Press wrote: “Culture, in Dell’s view, is not a code word for soft or emotional skills. ‘We think we have a high-performance culture,’ he says. ‘We work at that. That’s not soft.'”

Under the Radar and Under the Rug

Most lateral hiring mistakes attract little public attention. Firm leaders have no reason to highlight their errors in judgment. Fellow partners are reluctant to tell their emperors any unpleasant truth. If, as the adage goes, doctors bury their mistakes and lawyers settle theirs, then managing partners pretend that their mistakes never happened and then challenge anyone to prove them wrong. The resulting silence within most partnerships is deafening.

Every once in a while, a lateral hire becomes such a spectacular failure that even the press takes note. When that happens, the leaders of the affected law firm have nowhere to hide. Which takes us to James Woolery, about whom I first wrote five years ago.

Without mentioning Woolery specifically, I discussed a May 28, 2010 Wall Street Journal article naming him was one of several Cravath, Swaine & Moore partners in their late-30s and early-40s taking “a more pro-active approach, building new relationships and handling much of the work that historically would have been taken on by partners in their 50s.”

“We’re more aggressive than we used to be,” 41-year-old Cravath partner James Woolery told the Journal. “This is not your grandfather’s Cravath.”

A Serial Lateral

Six months later, it wasn’t Woolery’s Cravath, either. He’d already left to co-head J.P. Morgan Chase’s North American mergers and acquisitions group.

In 2013, only two years after accepting the Chase job, Woolery moved again. With much fanfare, he negotiated a three-year deal guaranteeing him at least eight million dollars annually to join Cadwalader, Wickersham & Taft. How was the cultural fit? The firm’s chairman, Chris White, described him as “the epitome of the Cadwalader lawyer” who deserved the lucrative pay package that made him the firm’s highest paid partner. A new title created especially for Woolery — deputy chairman — also made clear that he was White’s heir apparent.

To no one’s surprise, in 2014 Cadwalader announced that Woolery would take over as chairman in early 2015. As he prepared to assume the reins of leadership, the firm took a dramatic slide. The current issue of The American Lawyer reports that Cadwalader posted the worst 2014 financial results of any New York firm. Woolery’s guarantee deal looked pretty good as his firm’s average partner profits dropped by more than 15 percent. The firm’s profit margin — 26 percent — placed it 87th among Am Law 100 firms.

On January 19, 2015, the firm’s managing partner, Patrick Quinn, convened a conference call with all Cadwalader partners to convey a stunning one-two punch: Woolery would not become chairman, and he was leaving the firm to start a hedge fund. Woolery was not on the call to explain himself.

Unpleasant Press

No law firm wants this kind of attention. No client wants its outside firm to project uncertainty and instability at the top. No one inside the firm wants to hear about someone who has now been “thrust into the role of designated chairman of the firm,” as The American Lawyer described Patrick Quinn.

Woolery is gone, and so is Chris White, the former Cadwalader chairman who sold fellow partners on Woolery and his stunning guaranteed compensation package. White, age 63, left the firm in November to become co-CEO of Phoenix House, the nation’s largest non-profit addiction rehabilitation center.

Meanwhile, newly designated Cadwalader chairman Quinn says that the firm has no plans to change its strategy, including its reliance on lateral partner hiring. Maybe Chris White can use his new job to help Quinn and other managing partners shake their addiction to laterals. Apparently, first-hand experience with failure isn’t enough.

DEWEY’S L. CHARLES LANDGRAF: THE PLIGHT OF THE LOYAL COMPANY MAN

This is the last — for now — in a series profiling Dewey & LeBoeuf’s former leaders, especially its final four-man office of the chairman. L. Charles Landgraf (Rice University, B.A., 1975;  New York University, J.D. 1978) had been a long-time partner at LeBoeuf Lamb when it merged with Dewey Ballantine in October 2007.

In the 1990s, when LeBoeuf Lamb needed someone to bolster its London presence, Landgraf went. When the firm established a Moscow office, he helped. When duty called to the Washington, D.C. office that he was heading in 2012, Charley landed in Dewey & LeBoeuf’s four-man office of the chairman. It quickly became a thankless job.

A partner’s predicament

According to a Wall Street Journal interview, Landgraf helped out after the firm had failed to meet profit targets for several years. Unable to pay everything owed to guaranteed compensation partners, he and Jeffrey Kessler “spearheaded” a plan (according to Martin Bienenstock in that interview). It would have paid off partners who had taken IOUs from the firm by dedicating six percent of partnership earnings from 2014 to 2020.

Always candid, Landgraf said recently that the plan was necessary because “the firm had a lot of built-up tension about the fact that we had a compensation schedule last year that exceeded the actual earnings, and that had been true for a couple of years.” “Built-up tension” is a delicate description of the plight facing a firm that organizes itself around so-called stars whose loyalty extends no deeper than their guaranteed incomes.

Go along to get along?

My hunch is that the plan to deal with this problem wasn’t Landgraf’s idea. He wasn’t among those listed in the “Senior Management” section of the firm’s 2010 private placement memorandum. Nor was he mentioned in April 2012 when Dewey & LeBoeuf identified for Thomson Reuters seven key players essential to the firm’s survival.

He may fit the profile of many big law partners who have spent years — even decades — in the same firm and retain a deep loyalty to something that has actually disappeared from their institutions, namely, a true partnership and all that it entails. Perhaps they defer too willingly to others who are supposed to be smarter, more knowledgeable and/or have superior judgment. But when things get rough, they step up and do what they can to salvage the situation.

Undue deference revealed

From that perspective, Landgraf’s interview for The Wall Street Journal on Saturday, May 12, 2012 was revealing. A day earlier, Dewey & LeBoeuf’s resident bankruptcy expert Martin Bienenstock had announced that he was leaving the firm. By the time the interview appeared, he was already on Proskauer Rose’s attorney roster.

But during The Wall Street Journal interviewLandgraf — who was then the only remaining member of the original Gang of Four comprising the office of the chairman — let his former partner do all of the talking for a firm that was no longer Bienenstock’s. In printed form, the interview transcript fills seven pages. Landgraf’s words barely consume a half-page.

Bienenstock credited Landgraf and Kessler for the plan that committed future partner earnings to pay guaranteed partner IOUs from prior years. Landgraf said that the lateral contracts were “something we’re looking at. Whether all the contracts were the subject of full discussion or simply known as a technique that was used…is still being reviewed.”

His next line suggested that others at the firm may have been a bit too persuasive in selling him a bad idea: “But the technique of using guarantees of all forms, especially in the recruitment of laterals and retention of key business users, is pretty widespread throughout the industry.”

For limited periods involving laterals? Maybe. For four- or six-year deals involving legacy partners? I don’t think so. For 100 members of a 300-partner firm? Not for something that should call itself a partnership.

Two days after that interview appeared, Landgraf was gone, too. As hundreds of remaining Dewey & LeBoeuf lawyers and staff around the world wondered what might come next, one gets the sense that he was trying to be a good partner to the end.

I don’t know if a final caution applies to Landgraf, but it’s an appropriate note on which to conclude this series: a team player serves neither himself nor his institution when he defers to others as they move the team in the wrong direction. It’s time to empower dissenting voices with Aric Press’s “Partner Protection Plan.”

THE AGE-OLD PROBLEM OF AGE

When Kelley Drye recently settled the age discrimination complaint that the EEOC had filed on behalf of a seventy-nine-year old former equity partner, the focus turned to whether law firms could adopt mandatory retirement policies. The conventional wisdom is that they’re a bad idea — maybe even unlawful age discrimination. The policy argument is that people live longer; those who are productive should be able to keep working; everyone should be compensated according to the value added.

The legal defense of mandatory retirement policies is that true partners are employers and, therefore, outside the law’s protections afforded employees. The rebuttal is that most partners in today’s big firms have little say over their fate, so should they get whatever benefits the law provides, including compensation based on their contributions.

As framed, the debate is incomplete.

Definitional confusion

Mandatory retirement is a misnomer. The issue isn’t whether partners can continue practicing law at their firms. Rather, the question is whether they should remain equity partners in a world where achieving that status is increasingly difficult. In other words, the dispute isn’t about any senior attorney’s devotion to the practice of law; it’s about the money he or she should get paid for doing it.

No one told Eugene D’Ablemont that he couldn’t continue working on his client matters. Indeed, he did for more than a decade after reaching Kelley Drye’s equity partner age limit of seventy. He simply wanted compensation appropriate for his economic contribution to the firm.

Salary as a “lifetime partner” (plus a bonus) wasn’t enough for him, even though Kelley Drye reportedly asserted in response to the original complaint that D’Ablemont billed only between 195 and 324 hours a year during the late 2000s. But he’d mustered letters from two clients who said that his personal involvement in their affairs over many years meant that his inability to take the lead on future matters “created a rather difficult situation” for the company.

Ay, there’s the rub.

The problematic dark side

Most big law firms have evolved — or devolved — into short-term bottom-line businesses. An eat-what-you-kill approach to compensation encourages partners to keep client relationships away from others who might claim billing credit when year-end reviews roll around. Likewise, the lateral hiring frenzy makes such behavior even more important to attorneys who want to preserve their options and demonstrate their dollar value.

As a result, aging partners have no reason to institutionalize clients by nurturing relationships with younger lawyers. For those who have little or no desire to confront either their own mortality or the prospect of life after their big firm careers, the incentives of most firms are unambiguous: keep what you have and try to keep anyone else from claiming any part of it.

Who benefits from this system? Equity partners who have already pulled up the ladder on the next generation by promoting fewer lawyers and making them wait longer.

Who suffers? Young attorneys who want opportunities and training. Apart from blockage and embedding economic interests in an aging group that is myopically self-interested, the system offers no reason for senior lawyers to become mentors.

What is collateral damage? The firms themselves. The failure of elders to encourage their clients to trust the firm’s next generation produces long-term institutional instability.

At the heart of the problem is a short-term metrics-driven model that fails to guide aging partners to productive lives after the law. Aric Press suggests ways that firms could do better. Meanwhile, the absence of mandatory retirement rules for equity partners will make existing intergenerational tensions worse as they undermine the fabric of many firms.

Again, no one is saying that such elders can’t continue practicing for as long as they want. But that doesn’t require hanging on to a slice of the equity pie.

As for clients who worry about a “difficult situation” that might result if their long-time counselor will no longer be lead attorney into his or her eighties, consider this: eventually, everyone dies. There’s nothing that even the EEOC can do about that.

INFLATED PPP?

Recently, the Wall Street Journal broke the story, but it’s not new. Five years ago, The American Lawyer‘s then editor-in-chief Aric Press posed this question after hearing about presentations that Citi Private Law Firm Group was making to big firm managers (I’m paraphrasing):

Were law firms providing his magazine with financial information different from what they told their bankers at Citigroup?

In 2006, Press thought not: “The American Lawyer’s report of profits per partner is essentially the same as Citi’s for 47 percent of the firms to which [Citi] has access. For another 22 percent, the difference is 10 percent or less.”

In other words, 69 percent consistency (i.e., within 10 percent) between Am Law and Citi data — and that’s before reconciling their different definitions of equity partner.

On August 22, 2011, the Journal headline read “Law Firms’ Profits Called Inflated” — a supposedly new scandal: “[A]ccording to the person briefed on Citi’s [latest] analysis, in addition to about 22% of the top 50 firms overstating their 2010 profits per partner by more than 20%, an additional 16% inflated their numbers by 10% to 20%. An additional 15% of the firms had profits-per-partner figures that were inflated by 5% to 10%….”

In other words, 62 percent consistency (within 10 percent), again before appropriate reconciliations.

For Citi’s latest sample size of 50, that’s a swing of three law firms.

Of course, no firm should inflate its Am Law PPP, but a few always have. In his 2006 article, Press wondered why. I think it’s because some metrics assume an unsavory life of their own. In that way, Am Law PPP functions similarly to U.S. News law school rankings. Even when the underlying numbers are accurate, relying on the metric to make important decisions can lead to unfortunate behavior.

Pandering to idiotic U.S. News criteria results in dubious practices that discredit the overall result: recruiting previously rejected applicants who went to other schools, but whose LSATs don’t count if they arrive as tuition-paying 2L transfer students; using post-graduation employment rates that don’t distinguish between full- and part-time positions, or jobs requiring a legal degree and those that don’t; awarding first-year scholarships to students with high GPAs and LSATs, only to crush them with mandatory grading curves that impose forfeiture for years two and three.

A similar devotion to misguided metrics dominates many firms. In the 2008 Am Law 100 issue, Press observed: “[P]rofits-per-partner [is] the metric that has turned law firm managers into contortionists…” Maximizing PPP means equity partners squeezing more billables out of everybody, raising rates, and “pulling up the ladder behind them.”

Reliance on misguided metrics isn’t unique to the legal profession. What starts as teaching to a test sometimes culminates in cheating to get higher scores — with middle school instructors at the center of alleged wrongdoing. But catching attorneys in this particular lie is more difficult than finding common erasures for a classroom of standardized test-takers. Like law schools that self-report their information to the ABA (and U.S. News), private law firms submit whatever they want to The American Lawyer. Recipients can’t verify what they get.

However, Citigroup is a lender to law firms and “independently reviews many law firms’ financial performance,” according to the Journal. The WSJ had a story only because Citi entertained an audience of big law chairmen and managing partners with discrepancies between actual law firm profits and what the firms reported for public consumption. I wonder if the bank tried to reconcile its own clients’ apparent discrepancies before highlighting what the WSJ now depicts as a pervasive scandal.

Legal consultant Jerome Kowalski urges firms to stop reporting PPP, as Orrick, Herrington & Sutcliffe LLP announced it would last year. That’s unlikely, but meanwhile, the real travesty is that the liars go unidentified. Inflating profits for Am Law is a hubristic finger in the eyes of a firm’s client.

Maybe clients have no right to care what their lawyers make, as Adam Smith, Esq. argues in a recent blog post. But the unavoidable fact is that many do. From their perspective, the truth would have been bad enough. A few firms goosing their seven-figure PPP averages even higher make all firms look worse, not better.

“LIES, DAMN LIES, AND STATISTICS”

ALM editor-in-chief Aric Press penned a provocative article about Indiana Law Professor Bill Henderson’s for-profit venture on recruiting, retention, and promotion. (http://amlawdaily.typepad.com/amlawdaily/2010/11/pressconventionalwisdom.html) The WSJ law blog and ABA Journal covered it, too. (http://blogs.wsj.com/law/2010/11/15/on-law-firms-and-hiring-is-a-new-paradigm-on-the-way/) Henderson is analyzing why some attorneys succeed in Biglaw and others don’t.

Does anyone else find his project vaguely unsettling?

At first, I thought of the venerable computer programming maxim, “garbage in, garbage out.” That’s because he’s asking Am Law 200 partners to identify values and traits they want in their lawyers — and he’s assuming they’ll tell him the truth. But will they admit to seeking bright, ambitious associates wearing blinders in pursuit of elusive equity partnerships typically awarded to fewer than 10% of large firm entering classes? Or that such low “success” rates inhere in the predominant Biglaw business model that requires attrition and limits equity entrants to preserve staggering profits?

Then I considered Mark Twain’s reflections on the three kinds of falsehoods: “Lies, damn lies, and statistics.” It came to mind because Henderson’s researchers “pour over the resumes and evaluations of associates and partners trying to identify characteristics shared by those who have become ‘franchise players’ and those who haven’t.” Here’s what those resumes and evaluations won’t reveal: the internal politics driving decisions.

Most Biglaw equity partners are talented, but equally deserving candidates fail to advance for reasons unrelated to their abilities. Rather, as the business model incentivizes senior partners to hoard billings that justify personal economic positions, those at the top wield power that makes or breaks young careers — and everybody knows it. Doing a superior job is important, but working for the “right” people is outcome determinative. Merit sometimes loses out to idiosyncrasy that is impervious to Henderson’s data collection methods.

But perhaps the biggest problem with Henderson’s plan is it’s goal: identifying factors correlating with individual success. Does the magic formula include “a few years in the military, a few years in the job force, or a few years as a law review editor?”

If managers warm to Henderson’s conclusions (after paying his company to develop them), they’ll leap from correlation to causation, develop checklists of supposed characteristics common to superstars like themselves, and hire accordingly. Law schools pandering to the Biglaw sliver of the profession (it’s less than 15% of all attorneys) could take such criteria even more seriously. Before long, prospective students will incorporate the acquisition of “success” credentials into their life plans.

The difficulty is that today’s Biglaw partners already favor like-minded proteges. That inhibits diversity as typically measured — gender, race, ethnicity, sexual orientation, and the like — along with equally important diversity of views and a willingness to entertain them. Even today, concerned insiders are reluctant to voice dissent from Biglaw’s prevailing raison d’etre — maximizing short-term profits at the expense competing professional values and longer-term institutional vitality. Won’t meaningful diversity — of backgrounds, life experiences, and resulting attitudes about professional mission — suffer as groupthink makes firms even more insular? Meanwhile, trying to improve overall “success” rates is a futile goal; they won’t budge until the leveraged pyramid disappears.

I don’t fault Henderson, who bypassed Biglaw practice for academia after his 2001 graduation. But Press’s warning is important: “To some extent, it doesn’t matter what Henderson and Co. discover. What matters is that the inquiries have begun…If we’ve learned anything from the last decade, it’s that we can’t predict the consequences of new information beyond acknowledging its power to disrupt.”

Consider two unfortunate examples. The flawed methodology behind U.S. News’ law school rankings hasn’t deterred most students from blindly choosing the highest-rated one that accepts them. (Exorbitant tuition and limited job prospects may be changing that.) Likewise, Biglaw’s transformation from a collegial profession to a short-term bottom-line business accelerated after publication of average partner profits at the nation’s largest firms (then the Am Law 50), beginning in 1985; I just published a legal thriller describing that phenomenon. (http://www.amazon.com/Partnership-Novel-Steven-J-Harper/dp/0984369104)

The most important things that happened to me — in Biglaw and in life — were fortuitous. No statistical model could have predicted them. Still, I hope Henderson’s study answers an important question: Would his likely-to-succeed factors have led any firm to hire me?