‘Governance was a concern long before people started talking about ESG. What we’ve learnt over time, though, is that governance is also about having a better business. There’s a carrot as well as a stick: an opportunity to gain financial advantage as well as to avoid regulatory issues.’ The words of DLA Piper boardroom counsel practice head, Alex Tamlyn, particularly ring true. While the environmental and diversity-related efforts of law firms have been the focus of interest in law firms from an ESG context of late, governance has fallen under the spotlight as the all-embracing part of the ESG triptych. How law firms govern themselves has become particularly important. Essentially, they cannot really deliver on ‘E’ and ‘S’ unless the governance is sound.
While the business vehicle for law firms may differ from corporates, the principles of good governance still apply. Jean-Pierre Douglas-Henry, partner and managing director for sustainability and resilience at DLA Piper says: ‘It’s fair to say that good law firm management has broadly the same objective as other forms of corporate governance. It’s all about leadership, transparency, accountability – and, really importantly for us as lawyers, it’s about integrity. It’s about fostering growth and creating a long-term business. And, from a client’s perspective, it’s about walking the talk.’
‘Good governance and formalised governance structures have been seen as a priority for firms for some time now,’ says Kirsty Rogers, global head of ESG at DWF. ‘This, in part, has been led by increased scrutiny from regulators, key stakeholders (eg, banks and insurers) and clients but also aligned with the increased focus on risk management, ethics and compliance. The input from our regulator is welcomed as it assists in driving better behaviours. As lawyers, compliance with regulation is our business and it is therefore critical that we also apply that regulation to ourselves. There is a growing expectation that legal businesses should ensure that they walk the walk as well as talk the talk and apply the same high standards that they provide advice upon to themselves.’
But Jason Glover, London managing partner for Simpson Thacher, warns that it is important not to go over the top: ‘Clearly governance is very important. The key thing for governance is making sure you have appropriate checks and balances, but that you are not stifling creativity. With any governance culture you need a structure that probes and asks questions but also encourages ambition. A lot of firms get bogged down in committees, but you want a governance structure that is relatively lean and can respond quickly to initiatives. Another issue is where governance becomes the be all and end all of people’s existence. At Simpson Thacher, no-one other than the chair has a time allowance to do governance/management instead of fee-earning. This avoids governance/management becoming a means to an end for some partners and keeps excess in check, so partners focus on fee-earning.’
Money talks
One key governance challenge, highlighted in our ESG survey responses, is the integration of ESG principles into governance structures that have traditionally focused on maximising profits.
In our survey, several firms suggested that this was now a serious concern for senior management. Slaughter and May, for example, states: ‘The firm’s ESG agenda is a partnership board-level priority for strategic decision-making.’
Similarly, Paul Hastings claims: ‘Our firm not only ensures that our managing partners have visibility over our ESG agenda, by placing our managing partner as co-chair of our diversity, equity and inclusion council and our global pro bono programme, but we also have key leadership roles, including ESG counsel, pro bono senior counsel, chief talent officer, managing director of corporate responsibility and our managing director of diversity, equality & inclusion , reporting in to senior management.’
Likewise, Hogan Lovells says: ‘At a governance level, the board and the international management committee are responsible for ESG and we ensure they are up-to-date with latest thinking and training. That responsibility and approach extends beyond the use of checklists.’
Other firms highlighted the adoption of a more structured approach to integrating ESG into their governance procedures. In Latham’s response, the firm notes: ‘As part of our responsible business governance structure, in 2023, we are formalising our approach in the form of a new ethics committee to support decision making on complex ethical issues we face across the business, from client instructions to our procurement processes.’
‘The key thing for governance is making sure you have appropriate checks and balances, but that you are not stifling creativity.’
Jason Glover, Simpson Thacher
While a top-down approach and clear leadership from senior management is a good starting point for firms, for ESG to be truly incorporated into the governance structure it requires engagement at all levels to engineer the necessary cultural shift. Rachel Barrett, partner and lead of the environment and climate change practice at Linklaters, explains that for firms and their clients to govern well in the future they will need: ‘A willingness to get used to working on a cross-practice basis, and a willingness to join dots where they might not have previously be joined.’
This increase in the salience of ESG issues is driven by both regulatory pressure and stakeholder engagement. Lawyers note the rising tide of ESG regulation, with disclosure in particular a key issue. And, for Gareth Sykes, head of Herbert Smith Freehills’ corporate governance advisory team, ‘disclosure is really being used as a way to demonstrate good governance’, but regulation is just one part of a bigger picture. ‘Stakeholders, investors, and civil society are big drivers of change.’ Stakeholders are crucial to law firms: though they tend to be private partnerships, firms have clear responsibilities to both employees and clients.
For Douglas-Henry, the extent of client commitments to ESG is striking. ‘Most of our clients are grappling with ESG issues, and the governance around their sustainability strategies is one of the top three issues at board-level. We need to be both able to respond to client demand and credible in that space ourselves. That’s a necessary corollary of giving serious advice.’
Crucially, clients increasingly demand not just statements of convictions but results. ‘Just like our clients, we use data to inform our strategy,’ adds Douglas-Henry. ‘We conducted a double materiality assessment about 18 months ago, and set targets against which we’re tracking progress. We don’t think just having a principles-based approach is enough. It’s got to be data-driven, and supplemented by principles-based decisions where appropriate.’
Clients face the same drivers for change as law firms themselves, with a barrage of regulatory changes on the horizon and increased reporting requirements. As a result, clients are increasingly requiring more complex governance advice.
Anna-Marie Slot, global ESG and sustainability partner at Ashurst, notes: ‘The governance side is going to grow and grow. That corporate reporting, supply-chain work – it’s early days, but if we were looking at what’s coming down the pipe, what’s going to be important, it’s going to be that.’ She adds: ‘We’re talking about system change, for all business as we know it. And to get system change, you need to focus on how businesses do what they do.’
For corporates to futureproof themselves they need to adapt. As Tamlyn explains: ‘One of the most fundamental underpinnings is the notion of sustainability. Business for such a long time has been driven by the short-term. Driven by the practice in the public markets, where in many parts of the world quarterly reporting was mandatory. Which meant that c-suites were running their businesses on 12-week intervals.’
‘Very few lateral partners ask about acquiring firms’ governance structures. While good governance provides comfort and a feeling of security, candidates do not intentionally pursue firms with strong governance.’
Melinda Wallman, Macrae
A further pressure felt by clients is the increased scrutiny corporate leaders find themselves under. In the face of this, leadership teams need to be able to back up their actions with evidence of sound governance practices. Sykes notes: ‘Particularly in the UK, there’s been more of a focus on boards and the roles of businesses in society following several high-profile corporate failures, which led to questions over how the interests of wider stakeholders should be taken into account.’
As businesses and regulators increasingly take account of stakeholders’ interests, so does demand from stakeholders for greater candour around corporate decision-making. To meet this, Tamlyn says: ‘You must be governed in a way that allows you to respond to those demands.’
Attracting talent
But the attraction of good governance at firms to the lawyers within them and potential recruits remains debatable. For Slot, ‘it’s the other side of the coin when it comes to bringing your whole self to work. You and your work must align on certain core values. We’re seeing that particularly among younger people entering the profession. They want to work with others within their organisation to achieve the goals they find important, and to do it in a way they find relevant’.
Rob Shooter, managing partner of Fieldfisher, agrees: ‘While cultural ethos has always been a factor in recruiting at all levels, a new generation is perhaps much more interested in joining firms that are sincere in their ESG aspirations.’
For those further along in their careers, though, the picture is different. Some are positive on this point. ‘You see it at the senior level as well’, says Slot. ‘People are starting to think about their kids and their grandkids, as well as their legacy, what they’re leaving behind.’
However, Scott Gibson, director of recruitment firm Edwards Gibson, takes an opposing view. ‘If you’re a partner looking to move roles in big law, you’re generally not going to ask about ESG. It’s not really a factor. In the last five years a couple of people have raised the issue. And it may be that those who really do care about ESG-related matters have already looked into it. But generally, out of the scores and scores of partners that I speak to, it’s not really a factor.’
Melinda Wallman of Macrae offers a similar recruiter’s perspective: ‘Very few lateral partners ask detailed questions about acquiring firms’ governance structures. While good governance provides comfort and a feeling of security, candidates do not intentionally pursue firms with strong governance.’
Shooter explains this division in generational terms. ‘I do think there’s a mindset change, which is generational. It’s less of a factor for laterals, whereas, for junior lawyers and associates, it’s an absolute key factor.’
But despite youthful enthusiasm towards ESG, more traditional concerns such as compensation, platform, and practice fit still seem to count for more, at least to partners. A glance at the press releases and comments that accompany major lateral moves backs this up. It is rare that a partner cites a firm’s ESG credentials as a motivating factor behind a move.
‘A new generation is perhaps much more interested in joining firms that are sincere in their ESG aspirations.’ Rob Shooter, Fieldfisher
Senior figures in the market who had recently moved among top firms echo this sentiment. To many, governance, not to mention ESG more broadly, does not feature as a serious consideration. Culture is important, and good governance can influence a positive culture, but more in the sense of working practices than attitudes towards ESG. Partners care about who they work with and how – about collaboration with their colleagues and sharing work.
The difficulty of assessing good governance stems from the fact that when it is effective, its mechanisms are often inconspicuous. However, there are underlying principles to keep in mind.
Barrett explains that one of the most important aspects of governance is having: ‘A cross-practice approach, you have a clear strategy and focus but you also have the right people in the room. It’s not a one-person job, it’s about having people from a range of business lines and practices to get diversity of perspective. That’s really important. You can’t govern effectively without that.’
This is particularly important as law firms typically operate under a partnership model. While this removes the principal-agent problem faced by corporates, it does mean that management are faced with the difficult challenge of trying to juggle the potentially differing needs of the partnership.
Says Glover: ‘You have always got to approach governance on a case-by-case basis as each firm is different but there are some basics that have to be done. You have to understand your partners, you have to lead from the front, and you have to create a vision and bring people along. This means focusing time and attention on persuading the partnership as a whole on the direction you want to go. Where a lot of firms appear to go wrong is focusing their strategic ambitions around the views of their rainmakers and then trying to drag the partnership along without having spent the time necessary to build consensus among the wider group of partners. The other thing is you have to make sure that a decision to not pursue a strategic initiative isn’t taken simply because it might fail. Lawyers are generally risk adverse so it is very easy for downside risk to win out over upside reward. The key is to fully determine all risks and rewards and take a calculated decision.’
Jeroen Ouwehand, Clifford Chance’s global ESG board lead, explains the dilemma: ‘If you’ve come to a global partnership, you’ve got hundreds of partners across the world, maybe more, that are entitled to a say as owners of the business, and therefore leadership has the advantage of hearing important and diverse views, but at the same time you want to be effective and efficient and agile.
‘Law firms, like any professional service firms, are special institutions in that they are partnerships and not corporates with a purely top-down corporate sort of approach. They are partnerships so you have to collaborate as a partnership and really operate as one. That I think is what many firms seek to do. To really involve your partners in a way which is collaborative, you involve everyone in decision making at the same time, but you remain agile, and you manage to move forward.’
Approaches to this issue are notably different in US and English firms. US firms’ leadership tends to take a more dictatorial approach to their management strategy, whereas English firms have tended towards a constituency-based style. When the going is good and profitability high, partners may be happy to hand over the reins to an authoritative leader, but this may be a less appealing prospect when things start to go wrong.
Observes Glover: ‘I get the sense that at US law firms, leadership is not so widely shared as it is in UK firms. I’m not sure that’s a bad thing. Sometimes with UK firms you can see a significant proportion of partners involved in senior management, whereas the bigger US firms are more corporate in their culture with a leaner management team.’
Weakness in a firm’s governance processes often only becomes apparent once pressure is applied. Connor Cahalane, a corporate partner at RPC, explains that: ‘The most important aspect of effective governance is to ensure that the structures and processes actually work when they’re called upon, and not just for the day-to-day stuff, but in a crisis when they’re placed under stress.’
‘Sustainability strategy and DE&I stats are the first questions our people ask, and then they ask about salary and career.’
Jean-Pierre Douglas-Henry, DLA Piper
If good governance is hard to spot, bad governance can be glaringly apparent. When considering poor law firm governance, it is difficult in the current legal market not to turn to the recent events at Ince as an obvious example. Poor financial hygiene, evident in the lengthy delays to its audit, unsatisfactory communication to the partnership regarding key strategic decisions, and reports of tensions surrounding both the previous and current management teams, culminated in a deluge of partner departures from the firm.
Partners may not take note of governance and leadership when they think about the success or failure of a firm. But that does not mean that those issues are irrelevant. An ever-expanding web of regulation and rising stakeholder interest in ESG mean that corporate governance cannot be overlooked, for firms or their clients. It requires firms to think about the sustainability of their businesses, the wellbeing of their employees, and how to embed ESG policies throughout their operations. And generational shift may well see these issues loom ever larger for law firms.
Douglas-Henry is clear on this point: ‘Our people were among the most vocal and vociferous about the need for us to embrace sustainability and ESG, and about the need to put into place appropriate governance to secure what we’re doing. In our employment engagement surveys, they used to ask about salary and career prospects. Now, they ask what your sustainability strategy is, what are your DE&I stats. Those are the first questions they ask, and then they ask about salary and career. It’s literally turned on its head in recent years.’
The question for the future, then, is whether firms can deliver on these demands and walk the governance talk. LB
holly.mckechnie@legalease.co.uk
alexander.ryan@legalease.co.uk