The limited-profit law firm

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What if your law firm were legally prohibited from making too much money? What if there were a fixed profit ceiling for equity partners, and any profit exceeding that amount had to be distributed to others? What if your firm explicitly placed social goals ahead of revenue goals — what would change about your firm’s culture, structure and position in the marketplace?

This is, perhaps needless to say, mostly a thought experiment, since the number of law firms clamouring for this kind of setup are vanishingly few. But a recent article in The Economist about an emerging corporate form called a “benefit corporation,” or B Corp, got me thinking. B Corps, the article explains, “must have an explicit social or environmental mission and a legally binding fiduciary responsibility to take into account the interests of workers, the community and the environment as well as its shareholders. It must also publish independently verified reports on its social and environmental impact alongside its financial results.”

Companies seeking to establish themselves as B Corps are those wishing to place social or environmental goals above profit and revenue objectives, but which find it difficult to do that under the traditional corporate form. These aren’t non-profit organizations, but you might call them limited-profit, qualified-profit, or “yes,but” companies: yes, they want to make money, but they want to accomplish other things more. The Economist cites other corporate vehicles in this vein like flexible purpose companies (FlexCs), low-profit limited-liability companies (LC3s) and in the UK, community interest companies.

Could a law firm become a B Corp? Several small firms in the US have already done so, but there are complications. Carolyn Elefant explores the problems with B Corp law firms in a detailed post that points out a fundamental conflict: lawyers are required to place their clients’ interests ahead of all others, so a firm whose founding documents placed the highest priority on, say, the environment, would be breaking the profession’s ethical rules.

For example, consider a situation where a client receives a generous settlement offer in a contingency matter against the Sierra Club or some other environmentally conscious company popular in the community, but the client, reasonably, does not want to accept the offer because of certain conditions attached to the offer. However, pursuing the case to trial will be upsetting to the community and further, force the lawyer to lay off several employees to conserve cash flow for remaining discovery and trial and could potentially limit the Sierra Club’s conservation efforts due to lack of funding.

Ethically, so long as the client’s rejection of the offer is reasonable (which it is here), the lawyer must abide by the client’s decision. But under the b-certification framework, equal consideration of the interests of firm employees, the community and the client would militate in favor of the lawyer either strong-arming the client to accept the settlement or withdrawing from the case.

This is a strong objection to the use of B-Corp status for law firms, and if push came to shove, I could see a regulatory body ordering a law firm to abandon a corporate form that explicitly placed someone other than the client at the top of the priority pyramid.

Nonetheless, I wonder if there might not be other solutions. Slater & Gordon, for instance, the Australian personal injury firm that floated on the stock market several years ago and is now an international behemoth, makes for an interesting case study. As my Edge colleague Gerry Riskin pointed out at the time, Slater & Gordon’s initial prospectus was very clear with potential shareholders where its priorities lay:

“Lawyers have a primary duty to the courts and a secondary duty to their clients. These duties are paramount given the nature of the Company’s business as an Incorporated Legal Practice. There could be circumstances in which the lawyers of Slater & Gordon are required to act in accordance with these duties and contrary to other corporate responsibilities and against the interests of Shareholders or the short-term profitability of the Company.”

This seems to me a good way of making clear to shareholders that their profits are a tertiary concern for the firm: the firm believes (correctly) that its first duty is to the courts and its second is to clients. A modified form of B Corp or other limited-profit corporate form could be envisioned that would similarly arrange the peculiar priorities of a fixed-profit law firm. Might this kind of qualification address the ethical concerns that Carolyn raises? I’m not certain, but it’s worth thinking about.

For myself, I keep coming back to ponder the strengths and weaknesses of a limited-profit or fixed-profit law firm. Disadvantages? Legion: rainmakers and high earners would desert a firm like that immediately, knowing that their hard work would quickly strike an immovable low ceiling of financial returns. The firm would be unable to recruit ambitious lawyers or high-potential law students for the same reason. Clients who want the very best lawyers would turn away from a firm of anti-capitalist do-gooders. As a vehicle for anything more than a modest mid-sized firm, it’s almost certainly a non-starter.

But there’s upside, too. A law firm that was precluded from chasing ever-higher profits would have to find some other guiding business purpose. Maybe, as with many B Corps, it’s an environmental target, a quest to reduce its ecological footprint and those of its clients. Maybe, more likely for a law firm, it’s a social purpose: serving only clients in low- or middle-income brackets, making access to justice its higher calling.

Alternatively, maybe the firm simply rearranges how its profits are spread. Partner profits would be fixed at the start of the year on a percentage basis (lockstep or otherwise), so that beyond a certain dollar figure or percentage of total revenue, the partners couldn’t make any more money. Accordingly, the excess would be divided equally among associates or staff — everyone gets a bonus when the firm succeeds, driving everyone to make the firm’s success the top priority. And if you want to really go around the bend, make clients the beneficiary of success: every extra dollar at the end of the year is returned to clients per capita, like a co-operative. How’s that for a marketing tactic? Hire our firm and you might get a refund on your fees.

Yes, I know I’m dreaming in technicolour. And anyway, law firms don’t need a special corporate structure to do many of these things. But what these new vehicles really do is allow us to re-envision the purpose of the corporate entity, enabling reasons for existence other than the generation of wealth for ownership. The great majority of problems afflicting modern law firms, it seems to me, come down to money: competition for revenue, fights over profit, arguments about who makes more. Imagine a law firm that was structurally relieved from any of those concerns. You think we could live with a few of those in the legal market today?

Jordan Furlong delivers dynamic and thought-provoking presentations to law firms and legal organizations throughout North America on how to survive and profit from the extraordinary changes underway in the legal services marketplace. He is a partner with Edge International and a senior consultant with Stem Legal Web Enterprises.

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6 Responses to “The limited-profit law firm”

  1. Kevin OKeefe

    A lot of good posts from you of late Jordan. Feels like you have a book in you. ;)

  2. Carolyn Elefant

    Jordan,
    First, I should note that I need to correct my post. Apparently, the language that I quoted only applies to certain B-certified corporations organized as an LLC; other structures only direct lawyers to consider other issues, but do not provide that this consideration trumps the interest of the client. I do not want to suggest that the lawyers who have included B-certification language in their organizational documents are acted unethically; however, that is my interpretation of the LLC structure. I also think – and should have added to my post – that if these provisions are disclosed to the client, it mitigates the harm, sort of like a consent and disclosure of conflicts.
    Still, I do see the value of including this type of provision for larger firms which are run very much like corporations and who are not as close to the clients’ interest anyway (which explains the pressure to extract advance waivers). For example, law firms had a provision in their corporate charters requiring them to take associates’ interests into account when firms make cut backs due to the economy, many young lawyers’ jobs would have been spared and the harm to the younger generation of lawyers would been mitigated. Though I wonder who would have enforced the provisions…

  3. Lulaine

    The “B” corporation or socially conscious corporation/law firm is a development, I think will arise because of the generation shift happening. The “Y” generation is the most socially conscious generation according to reports by various media outlets. They volunteer more and money while important to them is not the commanding factor in how they determine value and success. A law firm not dedicated solely on profits may come in time when the “y” generation comes to shape. They are also the most entrepreneurial too so entrepreneurship and social consciousness can lead to corportations and law firms taking on those same characteristics.

  4. Peter Lederer

    Jordan, you write:
    “Partner profits would be fixed …so that beyond a certain dollar figure…the partners couldn’t make any more money. Accordingly, the excess would be divided equally among associates or staff ….”
    Way back in the early 1970s, that was exactly what Russell Baker, the founder of Baker & McKenzie, proposed to us at our annual partners’ meeting. He wanted to cap partners’ income at $100,000 (mind you, he was the only partner then earning anywhere near this!) but, regrettably, he couldn’t get the vote. I’ve often wondered how the trajectory of the firm might have changed had the proposal been adopted.

  5. Steve

    Jordan-

    Clients and their counsel have conflicts already. Whether due to the hourly rate or other factors (such as the lawyer’s need to survive financially, though most don’t face this as an immediate concern), their interests may not align any more than might those of a client and the “higher purpose” identified in a B Corp structure.

    Even regular corporations wrestle with how to address larger issues while adhering to the normal profits-over-all approach. The Sentencing Guidelines elevate ethical concerns much more than they once did (and obviously a great deal more than companies would do without the Guidelines’ admonition). Many realize that a short-term focus on profits uber alles might also lead to failure over the long haul. Should it be different for law firms?

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