TREATING SYMPTOMS; IGNORING THE DISEASE

On May 22, 2017, The Wall Street Journal ran an article about the legal profession’s enduring problem: psychological distress. For decades, attorneys have led most occupations in the incidence of serious psychological afflictions — depression, substance abuse, even suicide. Now some law firms are “tackling a taboo,” namely, the mental health problems of their lawyers.

Some observers theorize that a special “lawyer personality” is the culprit. In other words, we have only ourselves to blame, so no one should feel sorry for us. Then again, no one ever feels sorry for lawyers anyway. But attorney psychological distress has become a sufficient problem that, as the Journal reports, some big law firms are now “offering on-site psychologists, training staff to spot problems, and incorporating mental health support alongside other wellness initiatives.”

Stated differently, law firms are following the unfortunate path that has become a dominant approach in the medical profession: treating symptoms rather than the disease. Perhaps that’s because law firm leaders know that curing it would cut into their personal annual incomes.

The Facts

Other workers have serious psychological challenges, too. But attorneys seem to suffer in disproportionately high numbers. The Journal article cites a 2016 study of US lawyers finding that 20.6 percent of those surveyed were heavy drinkers (compared to 15.4 percent for members of the American College of Surgeons). Likewise, 28 percent experienced symptoms of depression (compared with eight percent or less for the general population). According to a 2012 CDC study cited in the Journal, attorneys have the 11th-highest suicide rate.

Now add one more data point. According to an ABA survey in 2007, lawyers in big firms are the least satisfied with their jobs. Anyone familiar with the prevailing big firm environment knows that it has deteriorated dramatically since 1985.

The New World

What has changed? For starters, just getting a job at a big law firm is more difficult. Corporate clients have found cost-effective alternatives to young attorneys billing $300 an hour to review documents. At many firms, demand remains soft.

But the real psychological problems begin after a new associate enters the door. For most of them, promotion to equity partner has become a pipe dream. In 1985, 36 percent of all lawyers in The American Lawyer’s first survey of the nation’s fifty largest firms were equity partners. In  2016, the comparable number was under 22 percent. More than 40 percent of all AmLaw 100 partners are now non-equity partners. The leverage ratio of equity partners to all attorneys has doubled. Stated another way, it’s twice as difficult to become an equity partner today as it was in 1985. That’s what’s been happening at the financial pinnacle of the profession.

The Business Model

There is nothing inevitable about the underlying business model that produces these outcomes. It’s a choice. In 1985, average profits per partner for the Am Law 50 was $300,000 — or about $700,000 in 2017 dollars. Today’s it’s $1.7 million. And the gap within most equity partnerships reflects their eat-what-you-kill culture. Instead of 3-to-1 in 1985, the ratio of highest-to-lowest partner compensation within equity partnerships often exceeds 10-to-1. As the rich have become richer, annual equity partner earnings of many millions of dollars has become commonplace.

At what cost? The future. As law firm leaders rely upon short-term metrics — billings, billable hours, and leverage ratios — they’re pulling up the ladder on the next generation. Too many associates; too few equity slots. Let the contest begin!

But rather than revisit the wisdom of the model, some big firm leaders have made what the Journal characterizes as a daring move: bring in a psychologist. It’s better than nothing, but it’s a far cry from dealing with the core problem that starts with the billable hour, moves through metrics that managers use to maximize short-run partner profits, and ends in predictable psychological distress — even for the so-called winners. The Journal notes that a psychologist at one firm was offering this sad advice to its attorneys: Take a cellphone reprieve by turning off all electronic devices between 2:00 am and 6:00 am.

But even such input from mental health professionals seems anathema to some firm leaders. According to the Journal, Dentons’ chairman Joseph Andrew says that his fear of offering an on-site psychologist was that “competitors will say we have crazy lawyers.”

Former Acting Attorney General Sally Yates recently told the New Yorker about her father, an attorney who suffered from depression and committed suicide. “Tragically,” Yates said, “the fear of stigma then associated with depression prevented him from getting the treatment he needed.”

For some firm leaders, “then” is still “now.” And that’s truly crazy.

ANOTHER BIG LAW FIRM STUMBLES

King & Wood Mallesons was never really a law firm. For starters, it was a verein — a structure that allowed three distinct firms to create a branding opportunity — King & Wood in China, Mallesons in Australia, and SJ Berwin in the United Kingdom. As things turned out, when SJ Berwin came on board in 2013, the verein whole quickly became less than the sum of its parts.

As The American Lawyer’s Chris Johnson and Rose Walker put it in their recent article, a verein is “a holding structure that allows member firms to retain their existing form. The structure…enabled the three practices to combine quickly and keep their finances separate.”

But the structure also means that when one member of the verein hits hard times, the others can walk away. For KWM, “the Chinese and Australian partnerships have effectively been able to stand back and watch as the European practice burned.”

Not Just a Verein Problem

To be sure, the verein structure exacerbates SJ Berwin’s current difficulties. But before leaders of big non-verein firms become too self-satisfied, they might consider whether their own firms risk the same dangers now afflicting KWM.

As Johnson and Walker report, the firm’s compensation system produced bad behavior. KWM awarded client credit to the partner who physically signed the invoice. That effectively encouraged partners to refer work to rival firms, rather than other KWM partners.

Think about that last sentence for a minute.

“It was one of the things that killed the firm,” says one former London partner. “If I sent work to other [KWM] partners, it would be out of my numbers at the end of the year. It was better for me to send it to another firm, as I’d then still be the one invoicing the client, so I’d get the credit for everything.”

A Team of One, Not One Team

When it came to cross selling among offices and practice groups, management talked a good game. Indeed, the verein’s 2013 merger tag line was “The Power of Together.” But here, too, behavior followed internal financial incentives. The compensation committee focused on individual partner performance, not the “one team, one firm” sound bite on its “vision and values” website page.

“There was a complete disconnect between what management said we should do and what the remuneration committee would reward us for doing,” says a former partner.

Lessons Not Learned, Again

As KWM’s European arm disintegrates, most law firm leaders will probably draw the wrong conclusions about what went wrong. Emerging narratives include: SJ Berwin had been on shaky ground since the financial crisis hit in 2008; the firm lacked competent management; the principal idea behind the combination — creating a global platform — was sound; only a failure of execution produced the bad outcome.

For students of law firm failures, the list sounds familiar. It certainly echoes narratives that developed to explain the 2012 collapse of Dewey & LeBoeuf. But the plight of KWM — especially the SJ Berwin piece — is best understood as the natural consequence of a partnership that ceased to become a partnership. In that sense, it resembles Dewey & LeBoeuf, too.

The organizational structure through which attorneys practice law together matters. The verein form allows King & Wood and Mallesons to back away from Sj Berwin with limited fear of direct financial exposure. But as SJ Berwin careens toward disaster, fellow verein members will suffer, at a minimum, collateral damage to the KWM brand.

What’s the Future Worth?

The lesson for big law firm leaders seems obvious. Since the demise of Dewey, that lesson has also gone unheeded. A true partnership requires a compensation structure that rewards partner-like behavior — collegially, mentoring, expansion and transition of client relationships to fellow partners, and a consensus to pursue long-term strategies promoting institutional stability rather than maximizing short-term profit metrics.

Firms that encourage attorneys to build individual client silos from which partners eat what they kill risk devastating long-term costs. They’re starving firm of their very futures. Unfortunately, too many big law firm leaders share a common attitude: the long-term will be someone else’s problem.

In a line that stretches back to Finley Kumble and includes Dewey & LeBoeuf, Bingham McCutchen, and a host of others, the names change, but the story remains the same. So does a single word that serves both as those firms’ central operating theme and as their final epitaph: greed.

ASSOCIATE PAY AND PARTNER MALFEASANCE

Cravath, Swaine & Moore raised first-year associate salaries from $160,000 to $180,000 — the first increase since January 2007. As most law firms followed suit, some clients pushed back.

“While we respect the firms’ judgment about what best serves their long-term competitive interests,” wrote a big bank’s global general counsel, “we are aware of no market-driven basis for such an increase and do not expect to bear the costs of the firms’ decisions.”

Corporate clients truly worried about the long-run might want to spend less time obsessing over young associates’ starting salaries and more time focusing on the behavior of older attorneys at their outside firms. In the end, clients will bear the costs of short-term thinking that pervades the ranks of big firm leaders. Some already are.

Historical Perspective

Well-paid lawyers never generate sympathy. Nor should they. All attorneys in big firms earn far more than most American workers. But justice in big law firms is a relative concept.

Back in 2007 when associate salaries first “jumped” to $160,000, average profits per equity partner for the Am Law 100 were $1.3 million. After a slight dip to $1.26 million in 2008, average partner profits rose every year thereafter — even during the Great Recession. In 2015, they were $1.6 million — a 27 percent increase from seven years earlier.

In 2007, only 19 firms had average partner profits exceeding $2 million; in 2015 that group had grown to 29. But the average doesn’t convey the real story. Throughout big law, senior partners have concentrated power and wealth at the top. As a result, the internal compensation spread within most equity partnerships has exploded.

Twenty years ago, the highest-paid equity partner earned four or five times more than those at the bottom. Today, some Am Law 200 partners are making more than 20 times their lowest paid fellow equity partners in the same firm.

It Gets Worse

Meanwhile, through the recent prolonged period of stagnant demand for sophisticated legal services, firm leaders fueled the revolution of partners’ rising profits expectations by boosting hourly rates and doubling leverage ratios. That’s another way of saying that they’ve adhered stubbornly to the billable hours model while making it twice as difficult for young attorneys to become equity partners compared to 25 years ago.

The class of victims becomes the entire next generation of attorneys. Short-term financial success is producing costly long-term casualties. But those injuries won’t land on the leaders making today’s decisions. By then, they’ll be long gone.

So What?

Why should clients concern themselves with the culture of the big firms they hire? For one answer, consider two young attorneys.

Associate A joins a big firm that pays well enough to make a dent in six-figure law school loans. But Associate A understands the billable hour regime and the concept of leverage ratios. Associate attrition after five years will exceed 80 percent. Fewer than ten percent of the starting class will survive to become equity partners. Employment at the firm is an arduous, short-term gig. In return for long-hours that overwhelm any effort to achieve a balanced life, Associate A gets decent money but no realistic opportunity for a career at the firm.

Associate B joins one of the few firms that have responded to clients demanding change away from a system that rewards inefficiency. Because billable hours aren’t the lifeblood of partner profits, the firm can afford to promote more associates to equity partner. Associate B joins with a reasonable expectation of a lengthy career at the same firm. Continuity is valued. Senior partners have a stake in mentoring. The prevailing culture encourages clients to develop confidence in younger lawyers. Intergenerational transitions become seamless.

Associate A tolerates the job as a short-term burden from which escape is the goal; Associate B is an enthusiastic participant for the long haul. If you’re a client, who would you want working on your matter?

The Same Old, Same Old

As clients have talked about refusing to pay for first-year associate time on their matters, big firms’ upward profit trends continue. But the real danger for firms and their clients is a big law business model that collapses under its own weight.

As it has for the past eight years, Altman-Weil’s recently released 2016 “Law Firms In Transition” survey confirms again the failure of leadership at the highest levels of the profession. Responses come from almost half of the largest 350 firms in the country. It’s a significant sample size that provides meaningful insight into the combination of incompetence and cognitive dissonance afflicting those at the top of many big firms.

When asked about the willingness of partners within ten years of retirement to “make long-term investments in the firm that will take five years or more to pay off,” fewer than six percent reported their partners’ “high” willingness to make such investments. But at most firms, partners within ten years of retirement are running the place, so the investments aren’t occurring.

Almost 60 percent of firm leaders reported moderate or high concern about their law firms’ “preparedness to deal with retirement and succession of Baby Boomers.” Meanwhile, they resolve to continue pulling up the ladder, observing that “fewer equity partners will be a permanent trend going forward” as “growth in lawyer headcount’ remains a “requirement for their firms’ success.”

Do law firm leaders think they are losing business to non-traditional sources and that the trend will continue? Survey says yes.

Do law firm leaders think clients will continue to demand fundamental change in the delivery of legal services? Survey says yes. (56 percent)

Do law firm leaders think firms “are serious about changing their legal service delivery model to provide greater value to clients (as opposed to simply reducing rates)”? Survey says no. (66 percent)

Do clients think law firms are responding to demands for change? Survey says most emphatically no! (86 percent)

But do law firm leaders have confidence that their firms are “fully prepared to keep pace with the challenges of the new legal marketplace”? Survey says yes! (77 percent)

If cognitive dissonance describes a person who tries to hold two contradictory thoughts simultaneously, what do you call someone who has three, four or five such irreconcilable notions?

At too many big law firms the answer is managing partner.

BIG LAW’S SHORT-TERMISM PROBLEM

Recently, the New York Times devoted a special section of “Dealbook” to short-termism. Big law firms made a prominent appearance in an article focusing on leadership transition. Citing statistics at the managing partner level, the Times reports that only three percent of law firm managing partners are under age 50. Twelve percent are over 70. Almost half are between 60 and 70.

The Tip of the Graying Iceberg

The core problem of transition runs deeper than a single demographic data point about the age of those at the top of the big law pyramid. The developing crisis goes far beyond the question of who the next managing partner will be.

At most firms, aging partners at all partnership levels are hanging on to clients and billings. For them, it’s a matter of survival. Except for lock-step firms, equity partners “eat what they kill” — that is, their closely guarded silos of clients and billings determine their annual compensation.

In that culture, hoarding becomes essential to preserving annual compensation that partners come to regard as rightfully theirs — and theirs alone. Stated in language that many senior partners use in criticizing today’s young attorneys, these aging lawyers have developed a wrong-headed sense of entitlement.

The fact that they’re making far more than they dreamed of earning in law school doesn’t matter to them. Neither does the fact that they are compromising the future of their firms. But their short-term gains could become the institution’s long run catastrophe.

See the Problem

Surveys confirm that law firm leaders recognize the resulting problem. Seven years ago, Altman Weil issued the first of its annual “Law Firms in Transition” series. Since then, the survey has documented a fundamental failure of leadership on this issue.

For example, in the 2011 survey, Altman Weil asked firm leaders to name the areas in which they had the greatest concerns about their firms’ preparedness for change: “The top issue, identified by 47% of all firms, was the retirement and succession of Baby Boom lawyers in their law firms.”

In the 2012 survey, 70 percent of managing partners had “moderate” or “high” concern about client transition as senior partners retire. On a scale of one (no concern) to ten (extreme concern), the median score was seven.

In the 2013 survey, only 27 percent of managing partners reported that they had a formal succession planning process in place.

Ignore the Problem

How have these leaders responded to what they have identified for years as the most pressing long-term problem facing their firms? Poorly.

The 2015 survey observes, “In 63% of law firms, partners aged 60 or older control at least one quarter of total firm revenue, but only 31% of law firms have a formal succession planning process.”

There’s a reason that law firm leaders balk at meaningful transition planning. It requires them to accept the fact that they won’t run their firms forever. But contemplating one’s own mortality can be unpleasant.

It also requires them to rethink their missions. Leadership is not about maximizing this year’s partner profits or pursuing growth for the sake of growth to create illusory empires over which a dictator can preside. It requires a willingness to create incentive structures that encourage long-term institutional stability.

Toward that end, lofty aspirations are easier to state than to achieve. But here are a few governing principles:

— Client service should be central to everything a law firm does.

— Partner cooperation should trump partner competition.

— Clients and billings should flow seamlessly to the next generation while allowing aging partners to retain a sense of self-worth as firms encourage them to prepare for their “second acts,” whatever they may be.

— The culture of a firm should encourage partners to sacrifice some short-term financial self-interest in the effort to leave the firm better than they found it — just as their mentors did for most of them.

Become the Problem

The most creative leaders understand that all of this means thinking outside the conventional billable hour box that remains central to the short-term growth and profit-maximizing mindset. In that respect, the contrast between the absence of true leadership and clients’ desires is striking.

Since 2009, Altman Weil has done an annual survey of corporate chief legal officers, too. The survey asks the CLOs: “How serious are law firms about changing their legal service delivery model to provide greater value to clients?”

The responses are on a scale of one (not at all serious) to ten (doing everything they can), Every year since the survey began, the median score has been three. Three out of ten. Stated differently, as far as clients are concerned, their outside lawyers have little interest in responding to demands for change.

Likewise, LexisNexis/Counsel Link’s most recent semi-annual report analyzing six key metrics confirms the impact of short-termism:

— Clients want alternative fee arrangements. AFAs account for only seven percent of all billings.

— Clients want relief from high hourly rates. For the trailing 12-month period ending on June 30, 2015, big firms of more than 750 attorneys had a median partner billing rate of $711 an hour — up 6 percent from the period ending on December 31, 2014. (For firms of 501-750 lawyers the median hourly rate during the same period increased by only $5 an hour.)

The Future Is Here

As big firm leaders drag their feet, clients aren’t waiting for them. They have figured out that the biggest of big law premiums isn’t always worth it. An October 2013 study of $10 billion in client fee invoices by LexisNexis/Counsel Link concluded the “large enough” firms of 201-500 lawyers are eating into the market share of firms with more than 750 lawyers.

From 2010 to 2013, the biggest firms saw their market share drop from 26 percent to 22 percent. Meanwhile, the market share of the “large enough” firms increased from 18 to 22 percent. For high-fee matters totaling $1 million or more, the shift was even more dramatic: “large enough” firms increased their market share from 22 to 41 percent.

Anyone believing that most big law firm leaders are long-term thinkers preparing their firms for a challenging future is ignoring the actual behavior of those leaders. Most of them are focused on getting rich today. That’s not a strategy for success tomorrow.

MIZZOU FOOTBALL LESSONS

The legal profession could learn something from the events culminating in Tim Wolfe’s resignation as president of the University of Missouri system. So could all of higher education. But those lessons have little to do with race.

Who is Tim Wolfe?

He’s a businessman.

Wolfe’s family moved to the Columbia, Missouri area when he was in fourth grade. For 30 years, his father was a communications professor at the University of Missouri. Wolfe quarterbacked his high school football team to a state championship. He earned an undergraduate degree from MU in personnel management.

After college, Wolfe became a sales rep for IBM where he worked his way up to vice president and general manager of its global distribution center. After 20 years at IBM, he became executive vice president of a consulting services company. From there, he moved to software maker Novell Americas, where he was president when another company acquired Novell and left him unemployed.

In December 2011, the University of Missouri’s board of curators announced Wolfe’s selection as its 23rd president. His base salary was $459,000.

What Happened? For a While, Not Much

As recently as August 2014, the board of curators thought that Wolfe’s performance had earned him a contract extension from February 2015 through June 2018. A year later, his troubles began.

On September 12, the president of the Missouri Student Association posted a Facebook item about vile racist slurs he’d received. By October 10, a group calling itself Concerned Student 1950 (the year Mizzou first admitted black students) staged a homecoming parade protest. On October 20, the group issued eight demands, including the ouster of Wolfe.

Exactly what he did to make such a shortlist is far from clear. The New York Times and the Wall Street Journal put some blame on his proposal to close the university’s respected press as a cost saving measure. But he withdrew that proposal after hearing from objectors.

The Times and the Journal also implied that Wolfe was responsible for canceling health insurance for graduate students. But that situation is more complicated. As the graduate studies office announced in August, new Affordable Care Act requirements prevented the university from paying those premiums. Instead, the university would provide a one-time stipend to all qualified graduate students. Under the ACA, the university said, it was unable to link the stipend to health insurance or to ask whether recipients needed or planned to purchase a policy. Failure to implement the new IRS regulations would have resulted in fines of $100 per student.

Was It Race?

After a swastika with feces appeared in a campus bathroom on October 24, Concerned Student 1950 met with Wolfe personally. Three days later, one of the protest organizers announced a hunger strike. On November 6, a student posted a video in which protesters asked Wolfe to define systematic oppression.

“I’ll give you an answer, and I’m sure it will be a wrong answer,” he said. “Systematic oppression is because you don’t believe that you have the equal opportunity for success.”

“Did you just blame us for systematic oppression, Tim Wolfe?” shouted a protester. “Did you just blame black students?”

Wolfe’s insensitive comments were unfortunate. But they’re not the sort of thing that costs a university president his job. And they didn’t cost Wolfe his — until the football team weighed in.

And Then…

On Saturday, November 7, the entire Mizzou football team — 84 scholarship players and their coaches — proclaimed unanimous solidarity with the protest movement. Within 36 hours, Wolfe resigned.

Like many universities, the University of Missouri created the monster that can devour it. College football is big business, especially in the Southeastern Conference. The average SEC head football coach makes almost $4 million a year. President Wolfe’s base salary was about one-tenth of what the school pays coach Gary Pinkel. Throughout the country, college football generates enormous revenues that pay for coaches, athletic scholarships, and stunning athletic facilities.

Whether and to what extent this circle of riches makes its way back to support a school’s principal mission — educating young people — isn’t clear. Earlier this year during its dispute over whether college players could unionize, Northwestern University claimed that, considered as a whole with other sports that football subsidized, the athletic programs were money-losers for the school. On November 7, Northwestern broke ground on a new $260 million athletic facility.

Pocketbook Threat

The tipping point for Wolfe came when the football team — with a mediocre record of four wins and five losses — said it would boycott its November 14 game against BYU. That game alone would have cost the university $1 million. But the potential impact could be far greater if the team fails to win the two more games needed to qualify for a postseason bowl appearance.

Now we come to the lesson for big law firms. The internal gap between the highest and lowest paid equity partners at most firms is enormous and growing. Likewise, the frenzy to recruit lateral rainmakers continues unabated. Those trends have produced a “don’t-get-me-angry” group that is analogous to what many college football teams have become. A handful of individuals exerts disproportionate influence over an entire institution, but the resulting culture affects everyone.

Football Cognitive Dissonance

Society is conflicted about football. Every weekend, millions of people watch college games. I’m among them. Our behavior creates market demand that gives college football an outsized influence over higher education.

At the same time, we’ve become uncomfortable with some of the adverse individual consequences that the market doesn’t consider, such as lifelong brain damage from concussions. Economists call these externalities. It’s one reason that half of Americans don’t want their sons playing tackle football. When things get personal, they’re somehow different.

Big Law Cognitive Dissonance

Likewise, most law firm managing partners admit that recruiting high-powered rainmakers doesn’t usually improve their firms’ financial performance. Independent studies confirm that lateral hiring is dubious strategy. Yet the lateral frenzy continues as newly hired partners parachute into the top ranks of many firms.

Unfortunately, short-run disappointment with the financial impact of a lateral hire is the least of the problems associated with aggressive inorganic growth. The strategy can destroy a firm’s cohesion, impair its sense of professional mission, and increase its vulnerability to financial shocks. In the resulting environment, everyone in the institution suffers.

Living through the financial and cultural consequences of lateral hiring failures could have prompted law firm leaders to rethink their strategic plans. But that hasn’t happened. After all, such a reversal would require leaders to overcome their confirmation bias, transcend hubris, and admit mistakes. That’s less likely than a major university relegating football to its proper place in the institution’s broader educational mission.

By the way, Mizzou may also offer a lesson to some law school deans: make friends with your university’s football coach.

DEWEY: 10 LESSONS LOST

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National news organizations began working on stories about the verdicts in the Dewey & LeBoeuf case long before the jury’s deliberations ended.

“What are the lessons?” several reporters asked me.

My initial inclination was to state the obvious: Until the jury renders its decision, who can say? But that would be an unfortunately limited way of viewing the tragedy that befell a once noble law firm. In fact, the trial obscured the most important lessons to be learned from the collapse of Dewey & LeBoeuf.

Lesson #1: You Are What You Eat

During the twelve months prior to the firms’ October 2007 merger, Dewey Ballantine hired 30 lateral partners; LeBoeuf Lamb hired 19. The combined firm continued that trend as Dewey & LeBoeuf became one of the top 10 firms in lateral recruiting. By 2011, 50 percent of the firm’s partners were post-2005 laterals into Dewey & LeBoeuf or its predecessors.

A partnership of relative strangers is not well-positioned to withstand adversity.

Lesson #2: Mind the Gap

To accomplish aggressive lateral hiring often means overpaying for talent and offering multi-year compensation promises. By 2012, Dewey & LeBoeuf’s ratio of highest-to-lowest paid equity partners was 20-to-1.

A lopsided, eat-what-you-kill partnership of haves and have-nots has difficulty adhering to a common mission.

Lesson #3: Not All Partners Are Partners

One corollary to a vast income gap within the equity ranks is the resulting partnership-within-a-partnership. As those at the top focus on the short-term interests of a select few, the long-run health of the institution suffers.

A partnership within a partnership can be a dangerous management structure.

Lesson #4: The Perils of Confirmation Bias

Firm leaders and their fellow partners are vulnerable to the same psychological tendencies that afflict us all. When former Dewey chairman Steven H. Davis held fast to his perennial view that better times were just around the corner, fellow partners wanted to believe him.

Magical thinking is not a business strategy.

Lesson #5: Short-termism Can Be Lethal

Short-term thinking dominates our society, even for people who view themselves as long-term strategists. At Dewey, the need to maximize current year partner profits and distribute cash to some partners overwhelmed any long-term vision that Davis sought to pursue.

In the not-so-long run, a firm can die.

Lesson #6: Behavior Follows Incentive Structures

Most firms hire lateral partners because they will add clients and billings. To prove their worth, laterals build client silos to prevent others from developing relationships with “their clients.” Similarly, there’s no incentive for partners in “eat-what-you-kill” firms to mentor young attorneys or facilitate the smooth intergenerational transition of client relationships.

Over time, the whole can become far less than the sum of its parts.

Lesson #7: Disaster Is Closer Than You Think

When the central feature of a firm’s culture is ever-increasing partner profits, even small dips become magnified. Incomes that are staggering to ordinary workers become insufficient to keep restless partners from finding a new place to work.

Death spirals accelerate.

Lesson #8: Underlings Beware

On cross-examination, some of the prosecution’s witnesses testified that at the time they made various accounting adjustments to Dewey’s books, they didn’t think they’d done anything wrong. But now they are parties to plea agreements that could produce prison time.

Deciding that something isn’t wrong is not always the same as determining that it’s right.

Lesson #9: Greed Governs

Who among the Dewey partners received the $150 million in bond proceeds from the firm’s 2010 bond offering? I posed that question a year ago and we still don’t know the answer. During the first five months of 2012 — as the firm was in its death throes — a small group of 25 partners received $21 million while the firm drew down its bank credit lines. Who masterminded that strategy?

In a November 2012 filing with the Dewey bankruptcy court, Steven Davis explained why Dewey collapsed: “While ‘greed’ is a theme…, the litigation that eventually ensues will address the question of whose greed.” (Docket #654) He was referring to some of his former partners who ignored the role that fortuity had played in creating their personal wealth.

Hubris is a powerfully destructive force.

Lesson #10: Superficial Differences Don’t Change Outcomes

For the three years that Dewey has been in the news, many big law firm leaders have been performing the task at which attorneys excel: distinguishing adverse precedent. In great detail, they explain all of the ways that their firms are nothing like Dewey. But they fail to consider the more significant ways in which their firms are similar.

A walk past the graveyard is easier when you whistle. Louder is better. Extremely loud and running is best.

LABOR DAY

Labor Day marks the end of summer. It’s also a time to reflect on our relationship with work. Lawyers should do that more often. In that regard, some big law leaders will find false comfort in their 2015 Am Law Midlevel Associates Survey ranking.

In a recent New York Times Op-Ed, “Rethinking Work,” Swarthmore College Professor Barry Schwartz suggests that the long-held belief that people “work to live” dates to Adam Smith’s 1776 statement in “Wealth of Nations”: “It is in the interest of every man to live as much at his ease as he can.”

Schwartz notes that Smith’s idea helped to shape the scientific management movement that created systems to minimize the need for skill and judgment. As a result, workers found their jobs less meaningful. Over generations, Smith’s words became a self-fulfilling prophecy as worker disengagement became pervasive.

“Rather than exploiting a fact about human nature,” Schwartz writes, “[Smith and his descendants] were creating a fact about human nature.”

The result has been a world in which managers structure tasks so that most workers will never satisfy aspirations essential for job satisfaction. Widespread workplace disengagement — afflicting more than two-thirds of all workers, according to the most recent Gallup poll — has become an accepted fact of life.

Lawyers Take Note

Schwartz’s observations start with those performing menial tasks: “Maybe you’re a call center employee who wants to help customers solve their problems — but you find out that all that matters is how quickly you terminate each call.”

“Or you’re a teacher who wants to educate kids — but you discover that only their test scores matter,” he continues.

And then he takes us to the legal profession: “Or you’re a corporate lawyer who wants to serve his client with care and professionalism — but you learn that racking up billable hours is all that really counts.”

More than Money

Many Americans — especially lawyers who make decent incomes — have the luxury of thinking beyond how they’ll pay for their next meal. But relative affluence is no excuse to avoid the implications of short-term thinking that has taken the legal profession and other noble pursuits to an unfortunate place.

You might think that short-term profit-maximizing managers would heed the studies demonstrating that worker disengagement has a financial cost. But in most big law firms, that hasn’t happened. There’s a reason: Those at the top of the pyramid make a lot of money on eat-what-you-kill business models. They can’t see beyond their own short-term self-interest — which takes them only to their retirement age.

Maintaining their wealth has also been a straightforward proposition: Pull up the ladder while increasing the income gap within equity partnerships. The doubling of big firm leverage ratios since 1985 means that it’s now twice as difficult to become an equity partner in an Am Law 50 firm. Top-to-bottom compensation spreads within most equity partnerships have exploded from three- or four-to-one in 1990 to more than 10-to-1 today. At some firms, it’s 20-to-1.

What Problem?

Then again, maybe things aren’t so bad after all. The most recent Am Law Survey of mid-level associates reports that overall satisfaction among third- through fifth-level associates is its highest in a decade. But here’s the underlying and problematic truth: Big law associates have adjusted to the new normal.

Thirty-one percent of Am Law Survey respondents said they didn’t know what they’d be doing in five years. Only 14 percent expected to make non-equity partner by then. They see the future and have reconciled themselves to the harsh reality that their firms have no place for them in it.

No one feels sorry for big firm associates earning six-figure incomes, but perhaps someone should. As Professor Schwartz observes, work is about much more than the money. In that respect, he offers suggestions that few large firms will adopt: “giving employees more of a say in how they do their jobs… making sure we offer them opportunities to learn and grow… encouraging them to suggest improvements to the work process and listening to what they say.”

I’ll add one specially applicable to big law firms: Provide meaningful career paths that reward talent and don’t make advancement dependent upon the application of arbitrary short-term metrics, such as leverage ratios, billable hours, and client billings.

What’s the Mission?

Schwartz’s suggestions are a sharp contrast to the way most big law firm partners operate. They exclude their young attorneys from firm decision-making processes (other than recruiting new blood to the ranks of those who will leave within five years of their arrival). Compensation structures reward partners who hoard clients rather than mentor and develop talent for the eventual transition of firm business to the next generation. The behavior of partners and the processes of the firm discourage dissent.

“But most important,” Schwartz concludes, “we need to emphasize the ways in which an employee’s work makes other people’s lives at least a little bit better.”

Compare that to the dominant message that most big law firm leaders convey to their associates and fellow partners: We need to emphasize the ways in which an attorney’s work makes current equity partners wealthier.

Law firm leaders can develop solutions, or they can perpetuate the problem. It all starts from the top.