The Firms

April 1, 2011 11:00 AM

The Goldman Model for Big Law?

Posted by Steven Harper

Goldman Sachs has been in the news a lot lately and the New York Times has covered it well. Taken together, several articles suggest parallels to big law. Anyone wondering where many large law firm leaders want to take their institutions--and how they might get there--should look closely at Goldman. As law firms have embraced metrics that maximize short-term partner profits, they've moved steadily in Goldman's direction. If America follows Australia and the UK in permitting non-attorneys to invest in law firms, a tipping point could arrive.

Others ponder this possibility. Professor Mitt Regan, co-director of the Georgetown Center for the Study of the Legal Profession, has been thinking, writing, and speaking thoughtfully about non-lawyer investment in law firms for a long time. Understandably, most academic observers focus on the outside--how smaller firms' access to capital could affect competition, the interaction with attorneys' ethical obligations, and the like.

Those are important issues, but I'm more interested on what happens on the inside. Presumably, the process would involve current equity partners selling ownership interests to investors. Many of those in big law who already take a short-term economic view of their institutions would jump at the opportunity for a one-time payday that discounted future cash flows to today's dollar. In fact, a big lump sum will tempt every equity partner who worries about next year's annual review.

Then what? Perhaps Goldman has devised an adaptable mechanism. When it went public in 1999, Goldman Sachs retained a partnership system within a larger corporate structure. As The New York Times reported in January, "Goldman's partners are its highest paid executives and it biggest stars..."

Consider the similarities to big law:

•On Management

Traders displaced traditional investment bankers and chairman Lloyd Blankfein surrounded himself with "like-minded executives--'Lloyd loyalists,'" according to the Times. Transactional attorneys have similarly risen to lead many big law firms; dissent is not always a cherished value.

On Resulting Culture Changes

Seeking to represent all sides of a deal, Goldman became adept at managing conflicts rather than avoiding them, a former insider told the Times. Large law firms have developed standard retention letters that maximize their representational flexibility to take on more lucrative matters that might arise.

•On Metrics

Goldman's leverage ratio is stunning: 475 partners out of more than 35,000 employees. As a group, large law firms have pulled up ladders, widened the top-to-bottom range within equity partnerships, and doubled attorney-to-equity partner leverage ratios between 1985 and 2010.

•On Partner Wealth

Goldman's partners are famously rich. Many big firm equity partners now enjoy seven-figure incomes previously reserved for media celebrities, professional athletes, and investment bankers.

All of this raises an important question: How well is the model working--and for whom? Maintaining the stability of such a regime presents challenges. Goldman partners maximize their continuing influence as minority shareholders by acting in unison on shareholder votes. But the cast of characters constantly changes. According to the Times, "Every two years, roughly 70 executives leave the club, by choice or because they are no longer pulling their weight. The average tenure is about seven years…Within five years of the IPO, almost 60 percent of the original partners were gone..."

In the end, the environment is problematic for many, as one former Goldman partner told the Times:

"It's a very Darwinian, survival-of-the-fittest firm."

It could also be big law's future. Then again, some firms may already be there.

Here's a concluding thought: perhaps Goldman Sachs will become a big law outside investor that buys its way into the legal profession. That shouldn't bother anyone. After all, Lloyd Blankfein graduated from Harvard Law School.


Steven J. Harper is an adjunct professor at Northwestern University. He recently retired as a partner at Kirkland & Ellis, after 30 years in private practice. His blog about the legal profession, The Belly of the Beast, can be found at A version of the column above was first published on The Belly of the Beast.

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Would this cause compensation disparity in firms at the associate level? Would associates in practices that generate more revenues (e.g., m&a) be compensated more than those in less lucrative practices?

As somebody who started in "big law" in the late '70s, when the biggest firm in New York had 250 lawyers, I think we are "already there" in terms of an investor mentality in the major global firms. It makes sense that the firms who serve the deal churners of the world would adopt the same strategies (and aspire to the same paydays). However, in a world where form has triumphed over substance, and trillions of dollars of hard earned wealth and retirement savings have been siphoned into apparently good investments and disappeared in the unending quest to make a fast buck for the insiders, it would be nice to think that the legal profession had not bought into the system (or been bought by it) irretrievably.
I find myself looking at business deals these days like the little child in The Emperor's New Clothes, watching the best and brightest of our profession admiring the invisible rainments of the deal structure while wondering why nobody notices that the economics of the underlying business transaction are leaving behind an old man dressed in his underwear.

Is anyone else concerned about professionalism and ethics as this trend continues (I know you are, Steven)?

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