Taking over – one leader at HSF but is the culture clash over?

Five years since the turbulent union of Herbert Smith and Freehills, the global challenger has chosen Mark Rigotti as its sole chief executive. Is the culture clash over?

Managing the delicate power balance between managing partner and senior partner is tricky at the best of times. But how do you address the cultural minefield as a foreigner taking the lead executive role of a 134-year-old City institution still coming to terms with a turbulent merger, especially when your opposite is a particularly influential and strong-willed senior partner?

Mark Rigotti (pictured), the energetic Australian finance lawyer this year assuming the lead executive slot for Herbert Smith Freehills (HSF), spells out his ethos: ‘I’m reminded of the advice my father gave me at my wedding: “It’s easy to stay married; you make the big decisions and let your partner make all the other decisions.” I asked my father how many big decisions he made in his marriage. He said: “I’m still waiting to make one.”‘ So observes HSF’s soon-to-be-sole chief executive: ‘I let James [Palmer] make all the big decisions!’

Of course, it’s more complex than that. Rigotti’s polished social skills and down-to-earth humour helped him win over a sceptical City partnership and build a solid working relationship with HSF senior partner Palmer, the firm’s most prominent M&A name and the strongest figure the firm has had in the role since Edward Walker-Arnott in the 1990s.

That Rigotti has been elevated to the sole chief executive speaks to easing tensions at the 470-partner firm after a turbulent period following the 2012 tie-up between Herbert Smith and Freehills, beset by senior departures and dissent among some London partners. Such was the fall-out that a Legal Business profile of the firm in 2014 sported a cover image of Rigotti next to the banner: ‘Is this man taking over Herbert Smith?’

One partner unlikely to be cheering is Sonya Leydecker, the former head of disputes for Herbert Smith and latterly co-chief executive alongside Rigotti. While by all accounts the pair had a constructive working relationship, HSF’s partnership council last autumn made the decision to elevate the Australian to the sole executive slot from January 2017, with Leydecker set to retire from the firm, following what was seen by some as a ruthless move.

‘I knew some people would go. That was the cost of the merger and I thought more would go than did.’
James Palmer, Herbert Smith Freehills

Leydecker will end her 32-year career at the firm after what has been viewed as a credible run in the c-suite, with integration and major post-merger initiatives completed smoothly as morale has lifted. It is striking that HSF has avoided anything like the problems that have beset comparable Anglo-Australian unions like Ashurst and Blake Dawson and SJ Berwin and King & Wood Mallesons (KWM), which last month filed for administration in Europe.

HSF revenue hit £870m in 2015/16, a rise of 7% in the constant currency terms that HSF insists on reporting in, while profit per equity partner (PEP) edged up 5% to hit £838,000.

Legal Business caught up with the straight-talking leadership team to assess how HSF aims to position itself as it attempts to secure its place in the global elite.

Rigotti’s core message: HSF is ready to go on the offensive after a period of being focused internally. ‘It feels like we are moving beyond integration, that’s pretty much done. This is probably the main difference in the business, pivoting away towards performance and long-term strategy.’

Palmer strikes a more bullish tone: ‘We’ve got good morale, and we have moved towards being Herbert Smith Freehills as well as any firm could conceivably have done in under five years. I don’t think we could have done anything to better integrate.’

The transformation

Much of the reason for the buoyant mood at HSF has been a respectable run for its European practice.

In Germany HSF has expanded substantially in the last two years – a key strategic test for the firm after the end of its alliance with Gleiss Lutz and Stibbe in 2011 – growing from seven to 16 partners and increasing overall headcount to 116 since its launch in April 2013.

The prime architect of that growth is the well-regarded managing partner Ralf Thaeter, who joined from Gleiss Lutz. The firm now has offices in Frankfurt, Berlin and Düsseldorf, and during 2016 made heavy investment in disputes, adding four new partners.

Thaeter cites standout matters, including M&A rising star Markus Lauer advising Germany’s largest housing association Vonovia on its proposed €9.92bn takeover of Deutsche Wohnen, as evidence of progress. Growth has come despite avoiding group recruitment in favour of carefully selected individual appointments. ‘Ours is a story of quiet but steady growth. While we would never exclude smart team moves, I believe desperation to grow always leads to bad things,’ says Thaeter.

A similar story can be seen in Paris, which is often cited as the biggest success story of HSF’s European network, thanks to an expanding transactional practice. ‘Paris has repositioned itself in the market,’ says Rigotti, to secure ‘more prestigious work for better clients’. The office counts Natixis, Danone and Google among its roster of clients. With public takeover work expanding rapidly over the last three years and a number of lateral hires in 2016, including a six-lawyer litigation team led by Hogan Lovells partner Antoine Juaristi, the firm has just leased an additional 1,000 sq m of office space to allow it to accommodate 150 lawyers.

‘In corporate, we are the same size as Freshfields and Allen & Overy (A&O). I am confident we will reach full capacity soon in all practices,’ says Paris corporate head Hubert Segain.

HSF also launched in Johannesburg and Düsseldorf in 2015 and Riyadh in 2016, and will open in Kuala Lumpur in May 2017, giving the 2,400-lawyer firm 26 offices in 18 countries. Expansion in Europe has largely balanced out some notable departures in the firm’s City heartland over the last two years (see box, ‘Coming and going’), in particular the loss of arbitration heavyweight Matthew Weiniger QC and capital markets head Steve Thierbach in 2015, but such exits have been manageable. The one glaring exception to this positive picture in 2016 occurred in HSF’s Australian heartlands, where White & Case in September recruited a 10-partner projects team for its local launch. The high-billing group was believed to control at least £20m of annual billings, constituting a significant hit to its local practice.

The expansion has come amid a period of substantial investment for HSF after the firm in April 2016 finalised a working strategy, prosaically dubbed ‘Beyond 2020’. While such documents are typically dull statements of obvious or reheated platitudes, this review was more substantial than most, taking up a significant amount of time from Rigotti and Leydecker to address some thorny strategic knots. And, unlike most law firm strategy documents, it is actually cited by some partners at the coalface.

Key priorities are continued expansion in Europe, addressing the issue of US coverage and securing credible Chinese law capability. A series of other key points focused on improving client management and service delivery, fostering innovation and steps to instil a high performance culture. All three goals have seen some initiatives on the ground already.

The most obvious evidence of that comes in the ongoing expansion of its Alternative Legal Services (ALT) business, the low-cost support practice Herbert Smith pioneered in Belfast back in 2011. Under Leydecker and head of disputes Justin D’Agostino, HSF has expanded this global practice to over 350 staff with offices in Belfast, Brisbane, London, Melbourne, Perth, Sydney and Shanghai. Rigotti describes ALT as the firm’s ‘fifth largest practice group’ and soon to be its fourth as he expects it to account for around 7% of profits this year.

The ALT team has become increasingly visible in the firm, extending to a small team in London that supports the disputes practice.

Deepening links with key clients and a greater emphasis on industry knowledge is another side of the equation. Unveiling the strategy last year, Rigotti said the approach was ‘heavily influenced by what Goldman Sachs did many years ago [by moving to a] relationship model rather than transaction model. What’s different today? A promotion candidate will be required to pick a sector and develop a business case in relation to it’.

The firm’s core sectors are defined as energy, financial institutions, real estate, infrastructure, financial buyers, TMT, mining, consumer products and pharma.

This being HSF, a buoyant mood means the firm’s much-vaunted disputes practice must be firing on all cylinders. The practice – which generates near 40% of HSF’s income – has remained the firm’s pace-setter, notably in its spiritual home in London and throughout its Asia network (notes Rigotti: ‘Disputes in Asia is fantastic, highly profitable, leading arbitration’).

Standout matters include advising on longstanding client British American Tobacco (BAT)’s landmark civil fraud defence against the US government and Nortel’s $1.3bn settlement of its case with the Pensions Regulator. HSF also continues to act on The Royal Bank of Scotland’s defence against shareholder claims related to the bank’s 2008 fundraising. The 25-week-long trial set to begin next month will be one of the most expensive disputes to ever hit London’s courts (HSF’s legal bill to the bank is expected to top £90m).

While markedly less profitable than disputes and contributing around a third of revenue overall, Palmer argues that the firm’s corporate practice, where post-Lehman weakness generated much angst around the time of the Freehills union, has performed strongly, in part due to heavy investment in its Continental deal team.

Recent notable transactions include 21st Century Fox’s £18.5bn takeover approach to Sky and BAT’s offer to acquire the remaining 57.8% stake in Reynolds American for $49.7bn. In Asia-Pacific, the Singapore and Tokyo offices advised investors on the £1.4bn Skyscanner disposal. Meanwhile, the firm’s small but classy real estate practice posted a strong year.

Of course, competing against more profitable City and Wall Street rivals for marquee takeover work remains daunting and is arguably the biggest challenge facing the firm.

Asked if HSF’s deal team is ultimately a second division player in global M&A, Palmer responds: ‘I don’t accept that for a second. Do we compete in every respect where we would like to? No. We still have progress to make. But do we think we can’t compete? I don’t accept that. Globally we are transformationally better positioned.’ With a solid year for the City deal team, the firm also cites a line-up of M&A partners under 45 including Alan Montgomery, Mike Flockhart, Mark Bardell and Steven Dalton to position it for the years ahead.

Palmer also defends the firm’s position in finance which, energy and infra finance aside, is typically dismissed, arguing the practice has made progress over the last five years.

‘Leadership is put down. But there’s an opportunity to be a contributor rather than a whipping boy.’
Mark Rigotti, Herbert Smith Freehills

If the firm is achieving growth in deal work, it concedes that the Australian market remains challenging, despite its local business strengthening its already dominant position. With finance and commodities-related work facing fee pressure, Rigotti notes: ‘Partner numbers are going down in Australia and that was probably already happening in a heavily-serviced market. But we are still growing our market position.’

A contributor

If growth priorities are clear, Rigotti also aspires to diffuse more effective management through the firm, a challenge given that legacy Herbert Smith was one of the most lightly-led law firms in the Square Mile, in contrast to the slickly-run Freehills.

Asked what he wants to achieve as chief executive, Rigotti says: ‘Sharpening leadership and management. Within law firms, leadership is sometimes put down. But there’s an opportunity for that to be sharper, to be a contributor rather than a whipping boy.’

As an influence, Rigotti cites Wesfarmers, the Australian conglomerate with wide-ranging interests spanning mining, agriculture, chemicals and retail. The business is renowned for its sophisticated management and willingness to move executives around its empire.

Also cited is Macquarie Group chief executive Nicholas Moore. ‘He’s that kind of figure I admire. They are calm, inspiring confidence rather than just raising the temperature everywhere.’

The Wesfarmers influence could be detected in the decision to have Rigotti work primarily in Europe over the last two years while Leydecker often focused on Asia, reversing their backgrounds. As a result, Rigotti and his family were already London-based before the decision to appoint him sole chief executive.

A cynic could see this as a means of wooing the London partnership, which was always going to be key in securing a sole appointment. Whether by design or not, Rigotti has done a striking job of winning over a group with a very low threshold for management bullshit, and often management full stop.

Canvassing over a dozen current and former partners for this article fails to find anything but positive comments about the management duo of Palmer and Rigotti – which would be unusual in any major law firm, let alone one that has just gone through a huge merger.

‘He is remarkable, so inspiring in the way he goes about things, and even though he’s robust he does it in such a charming way,’ gushes one HSF partner about Palmer. ‘He’s an incredible chap really.’ Even the persistent critics of the Freehills union generally give Rigotti decent reviews: ‘He’s straight, trusted and very thoughtful. He consults, absorbs. He’ll take tough decisions, but always involve the right people and move on. He’s a doer,’ comments another HSF partner.

Rigotti brings a different dynamic to the restless Palmer, who is always eager to move the firm in a dozen directions to the point of impatience with foot-dragging or mediocre performance.

Asked where he tends to differ from his senior partner, Rigotti says: ‘Pace of change, sometimes. James wants to go faster than me. But that’s a healthy debate to have. We’re aligned around the vision and ambition for the firm.’

Palmer is relatively unusual for a senior partner at a firm this size in that he still spends two thirds of his time with clients, meaning HSF’s executive team has wide discretion on day-to-day operations. But it was Palmer and the oversight council he chairs that appointed Rigotti over Leydecker as chief executive (subject to a rubber-stamping by the partnership). Veteran City litigator Leydecker, who made her name in the 1980s on the Guinness share-trading fraud scandal, divided opinion in the firm to some extent. A less fluent communicator than some law firm leaders, she arguably failed to secure enough block support in the firm’s City disputes team to make her position unassailable despite a credible run in the c-suite. A cynic may contend that the boys’ club atmosphere of the London partnership – never the most progressive, even by the standards of City law firms – worked against her.

The council ran two rounds of consultations with the partners, the first on moving to a sole chief executive and the second on the candidate. Though there was little doubt about the sole chief executive shift, the actual candidate was less of a foregone conclusion. While the firm remains tight-lipped on the process, it is apparent both Leydecker and Rigotti had put themselves forward.

Asked if he thought Leydecker was disappointed, Rigotti responds: ‘She is at a different stage of her career and she’s got lots of options.’

Palmer is more reticent, noting: ‘The partnership felt very strongly that we should move to a single CEO as a sign of where people perceive the firm right now. They wanted unified leadership, one direction of travel and to signal that we are not in post-merger integration mode anymore.’

Asked if HSF’s deal team is ultimately a second division player in global M&A, Palmer responds: ‘I don’t accept that for a second.’

Still, a potential flashpoint for the future may be the old rivalries between corporate and disputes and sensitivities about the influence of the Freehills side. ‘You now have a heavy Australian and corporate input over the management of the firm, which some people in litigation are not very happy about,’ argues one former partner.

The new model

While the firm’s European and Asian ambitions have gone largely to plan the familiar issue of US capability hangs as ominously as ever. The mood music several years ago suggested HSF would attempt to secure a US union in the short-to-medium term, but it is now acknowledged that its options with a credible suitor are limited and probably dwindling.

An obvious hurdle is the disparity in profitability with leading Wall Street firms, an issue aggravated by sterling’s Brexit-induced weaknesses, and the fact that, to management’s chagrin, HSF still lags behind the profitability of the Magic Circle.

Such considerations have led to debate among management over whether the firm needs more flexibility to pay partners above the top of its plateau for certain markets and to account for recent similar moves by Magic Circle rivals.

Both Palmer and Rigotti lean towards further flexibility but the matter is some distance from being settled. Palmer says the issue is ‘not urgent’ but adds: ‘My honest view is that our model is too compressed. We’re always going to be at the flatter end [of the spectrum] but at some stage the firm will need to think about that.’

HSF still has an unusual model where it uses a single profit pool but largely retains Freehills’ merit-driven pay model in Australia with the rest of the firm adopting legacy Herbert Smith’s actively managed lockstep, which runs from 43-100 points.

While Rigotti says Freehills’ model was tweaked in Australia to make it slightly closer to the Herbert Smith system, it has still not progressed to a uniform regime. ‘We absolutely want to unify [the remuneration system], other people have different views but I see it as just a transition system. Some of the mechanics still need to be finalised, but that will happen,’ says regional managing partner for Asia and Australia Sue Gilchrist.

The firm, which maintains high associate/partner leverage and PEP more than 20% below that of London’s big four, also needs to push up utilisation and financial performance if it is to have a hope of competing against the finest firms in London and New York. ‘Contribution versus compensation remains very much a live issue for us,’ notes Rigotti.

In the meantime, HSF hopes to bolster its US law capacity on a firmwide basis, reflecting in part the inroads of New York law in Europe and Asia. The firm is also looking to make investment in its 12-partner New York office, which initially focused on disputes and investigations work, though it expects any expansion to be very targeted.

Rigotti observes: ‘We are extending outside of contentious too, but only where it makes sense. If the right Latin America expert came along, we would take a look at them. Would we put a random M&A partner in New York? I doubt it.’

Palmer sums up the hedged bet the firm is making in Manhattan: ‘You can’t know when the right deal will be available, but you have to think about it and not just wait for someone to phone you one day. You have to be proactive, think about relationships, clients and make sure you know people and people know you.’

Another familiar issue for the firm is striving to close the large profitability gap between its disputes practice and its transactional practice, which remains as sizeable as ever even with revenues in corporate expanding 17% in the last three years.

‘I’d like to believe corporate can close more of that gap,’ says Rigotti. ‘In Europe, we are good at getting big transactions, but we could do more. You have to know what you’re good at and what you need to improve.’

‘You now have a heavy Australian and corporate input over the management of the firm, which some people in litigation are not very happy about.’
A former Herbert Smith Freehills partner

Rigotti notes that HSF is also hoping to bolster its position in acting for the private equity houses and sponsors reshaping deal markets, a major challenge given Herbert Smith’s woeful track record in Europe’s buyout market.

A more positive way of assessing the situation is that there is no sign that the Freehills detractors’ claim that Herbert Smith would lose ground in its top-tier disputes team has come to pass. If anything, the firm is engaged with widening its contentious work globally, most notably in arbitration and investigations. ‘We run a global arbitration practice from New York to Melbourne – and we are developing that across other products,’ says D’Agostino. ‘We are taking a global approach on financial services regulatory, investigations, contentious construction and infrastructure.’

Over the next few years, the leadership will be much engaged in making good on the attempts to institutionalise its slicker performance, which has been allied to a much wider client management programme.

‘The model requires teamwork. The historic challenge for Herbert Smith was that it relied too much on its own expertise and not enough on people getting out in the market and proactively driving it,’ asserts Palmer. ‘We’ve always had entrepreneurial, collegial people but have not always been as focused on business performance.’

HSF is also currently trialling no less than six artificial intelligence packages to juice up its ALT arm and is considering extending the 24/7 operation to cover civil law, allowing the system to be used for European matters. Though Leydecker was the prime champion of ALT, there is no doubt Rigotti will keep prodding HSF to build on its progressive credentials.

While HSF faces considerable challenges ahead if it is to have a hope of competing against the emerging band of global leaders, by any yardstick the firm has made major strides to galvanise its partnership after its high-stakes merger. It could have gone worse. A lot worse.

Notes regional head for UK, US and EMEA Ian Cox: ‘The best achievement post-merger was it gave legacy Herbert Smith, which was in something of an identity crisis, an intangible boost of confidence that it is now part of a global offering. The priority now is to consolidate.’

As Rigotti concludes: ‘What I hope to focus on as CEO is our vision as a world-class, well-run professional services firm. That will serve the future generations more broadly than the laterals you pick short-term. There’s a sweet spot between being ‘corporate-like’ and a well-run business and being a highly engaging, fulfilling place to work, which is like a partnership. We’re trying to hit as much of that sweet spot as we can.’ LB

georgiana.tudor@legalease.co.uk

alex.novarese@legalease.co.uk