I’ll be writing about law firms less frequently in future, for reasons outlined here. But given how critical I’ve been about the way in which lawyers run their firms, I thought I’d share with you news of a growing movement in the business world that could bring about monumental change for law firms.
My fundamental critique of law firms isn’t the billable hour or rampant inefficiency or the resistance to innovation — it’s the apparent absence of any real purpose to the firm beyond the enrichment of its partners.
I’ve been telling audiences for a while now that a law firm is not a hair salon or a pizza parlour — it’s a professional business anchored in public trust and the rule of law. A law firm should stand for something in our society and in its community. But this message rarely seemed to have an impact — and given our society’s beliefs about the role of business, maybe that’s not surprising.
On September 13, 1970, The New York Times Magazine ran an article by future Nobel Laureate Milton Friedman with the admirably blunt title, “The Social Responsibility of Business is to Increase Its Profits”. The responsibility of a corporate executive to shareholders, wrote Friedman,
is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.
This sentiment has formed the foundation of the last five decades of corporate governance and business school philosophy, animating the decisions of countless company managers and directors worldwide. You need only take a swift glance at the economy, the environment, the quality of daily life for millions of workers labouring ever harder for less pay every year, to see where that sentiment has brought us.
But Friedman’s doctrine also doubles as a near-perfect encapsulation of the mission statement of the typical law firm. “Conduct the business in accordance with shareholders’ desires” — how could you better express the driving force behind law firm decision-making? The desires of the equity partners are sacrosanct, overriding all other considerations. And as Friedman accurately perceived, those desires usually amount to: “Make as much profit as I can without explicitly violating the law or ethics codes.”
This is “shareholder capitalism,” in all its glory, proposed by Friedman and eagerly adopted by two full generations of business leaders and law firm partners. I continue to be amused by lawyers who oppose non-lawyer equity ownership of law firms on the grounds that such individuals are “only interested in profits.” The mirror is right over there — go take a good look.
But times are starting to change. A real movement is underway in the business world to finally push back against Friedman’s ideology of shareholder über alles. As described by Deborah D’Souza of Investopedia:
Stakeholder capitalism is a system in which corporations are oriented to serve the interests of all their stakeholders. Among the key stakeholders are customers, suppliers, employees, shareholders and local communities. Under this system, a company’s purpose is to create long-term value and not to maximize profits and enhance shareholder value at the cost of other stakeholder groups.
Marc Benioff, billionaire co-founder of Salesforce, expressed the idea more forcefully in 2019:
Capitalism, as we know it, is dead. We’re going to see a new kind of capitalism — and it won’t be the Milton Friedman capitalism that is just about making money. The new capitalism is that businesses are here to serve their shareholders, but also their stakeholders — employees, customers, public schools, homeless, and the planet.
This is not just something for corporations — it’s for the legal sector, too. Writing at Law Sites last year, Leigh Vickery, chief strategy and innovation officer at Level 2 Legal Solutions, explained how the “Economics of Mutuality” can be expressed in a law firm:
The first step is to recognize and agree that a law firm’s long-term success requires recognition of the value of multiple forms of capital: financial, human, social, and environmental. The second step is to agree that this new way of thinking requires long-term strategy, commitment, and investment — and will require more capital outlay in the short term.
The third step is to start implementing the Economics of Mutuality methodology, a quantitative business model that uses proven measurable KPIs to help law firms create mutual value across their entire legal supply chain – while not sacrificing profit in the long term.
So here’s what I’d like you to think about: What would a law firm took like that operated according to stakeholder primacy, not shareholder primacy? What if a law firm chose its strategies and tactics not solely according to the short-term desires of its equity partners (in particular, the richest and most powerful among them), but also according to the best interests of:
- Associate lawyers
- Professional and technical staff
- The firm’s clients, collectively or individually
- Suppliers of products and services to the firm
- The community(ies) in which the firm is based
- The law firm’s physical environment
- The training and development of new lawyers
- The court system and the rule of law
There already are law firms that fit that description, that take into account everyone who’s directly affected (and many who are indirectly affected) by the firm’s decisions before making those decisions. They deserve our admiration. But what they deserve more is our imitation.
Stakeholder capitalism is gradually but inevitably encroaching on shareholder capitalism. It’s not going to happen overnight, but it is going to happen a lot faster than you might imagine — talk to anyone under 40 about what the phrase “late capitalism” means to them and you’ll quickly get a sense of where we’re going and how soon we’ll get there.
Don’t wait for shareholder capitalism to be fully repudiated and abandoned before starting to make changes to your firm’s purpose and governance. Stakeholder law firms are the future. This wave is coming hard and rising fast behind you — if you hope to stay ahead of it, move now.