Say "Clementi Commission" on this side of the Atlantic and draw
blank stares; say it on the other side and it is safe to say you
will launch an immediate fray.
The Commission has proposed, and the government has pledged to support,
legislation that will permit non-lawyers to own law firms,
and even for law firms to go public. Before you start bouncing
off the walls and ceiling, consider the rationale in a nutshell: “I
do not believe that many of the restrictive practices under which
lawyers work can still be justified as being in the public interest.” And
who among us, once we’ve caught our breath, can truly argue with that? (For
the record, some "consumer-protection" style regulation will remain in
place.)
But as I’ve warned you before, this is not a blog about ethics,
it’s a blog about economics, so what might one foresee on that front?
First off, to state the obvious, the Linklater’s, Freshfields’,
and Lovells’ of the world have zero need or desire to go public,
and I’m sure a plethora of small- and mid-sized firms below the UK
100 radar feel precisely the same. As with technological innovation,
just because you can do something does not imply you should.
Second, going public is the extreme end of the bell curve, and will
probably end up being at least two standard deviations beyond the
mean. But at the mean, I would predict firms will offer, or
sell, equity to senior non-legal business managers including those
who would here have titles like Executive Director, CFO, CIO, and
CMO. This could be the genuine beginning of the end of the
caste system where only fee-earning partners really count.
Third, and of surpassing fascination to me, will be to watch how
market forces begin to shape this brave new landscape, applying their
disinterested Darwinian pressure over time. Thus I predict:
- An emerging class of supermarket commodity services firms, providing
relatively generic wills, tax and real estate services, matrimonial
and garden-variety litigation practices, small business "corporate"
work, etc. Some of these could become reasonably large entities,
and consolidation in pursuit of market share and economies of scale
will be the governing principle. - At the other extreme, a small group of highly sophisticated boutiques
may offer equity to raise capital in order to reinvest in their
premium practices. If Goldman-Sachs and Christie’s can be
public, why not Boies-Schiller? - In the vast middle, increasing focus on developing and publicizing
distinctive, credible, and "ownable" marketing statements about
why XYZ firm is different, and why you should invest in it. Where
does this notion come from? From the competitive drive to
lower a (public) law firm’s cost of capital. To take a step
back, the only compelling reason to go public
is to raise capital—otherwise who in their right mind needs
to put up with the regulatory and disclosure obligations involved? But
if you’re doing it to raise capital, you want to pay as little
as possible for those funds: That means you want as high
a P/E as you can obtain, and surely one above the new Law Firm
Equity Index median P/E. How, in turn, do you achieve that? Well,
presumably you’re already doing all you can to increase "E[arnings],"
so you have to persuade the marketplace that one $ (or one £)
of future earnings from your firm is more valuable than it would
be from other firms. In other words, you have to state a
distinct value proposition.
Will the Clementi Commission achieve its goal and will this actually
happen? Beats me, but it is devoutly to be wished.
Bring it on!
