Question: 

I am a partner in a fourteen lawyer firm in Des Moines, Iowa with seven equity partners (shareholders) and seven associates. We are a business litigation firm exclusively. The seven equity partners (shareholders) have all been practicing law for fifteen years. We formed the firm five years ago when we all left a large law firm in area. The firm is structured as a professional corporation (PC). For the past five years we have managed the firm as a group with the seven of us making all of the management decisions. This requires us coming together at least once a week and often even more frequently. While this worked for us when we were smaller the amount of non-billable time it taking a toll on all of us. We have come to the realization that we have outgrown our management structure and are looking for a better approach to managing our firm. We are looking for ideas and would appreciate any ideas that you may have.

Response:

I understand your frustration and your experience is typical what I see in newly started law firms. While the approach you have taken to managing the firm made sense and worked when you started the firm five years ago, you have simply outgrown this approach and need to move to a governance/management structure more appropriate for a fourteen lawyer law firm. For a fourteen lawyer firm with seven equity partners, you have enough partners to benefit from more formal governance, but you don’t need the bureaucracy of a large-firm model. The key is separating day-to-day management from major ownership decisions.

Most smaller to medium sized law firms choose one of three fundamental varieties of management structure. These systems may be characterized as management by:

  • Democracy
  • Managing partner
  • An executive or management committee

Democratic

This is the method that you have been operating under. Under a democracy each member of the firm has an equal voice in management. Any decision must be agreed to by all partners. Administrative tasks may be assigned or rotated among partners. Democratic firms traditionally progress more slowly and are less profitable than firms governed under one of the other structural models.

Managing Partner

This approach with a strong managing partner is probably the most efficient form of managing a law firm. Under this approach the administrative responsibilities for other partners in the firm may simplified as the result of the managing partner’s role, however this type of structure has many shortcomings and issues. Egos of the partners is a major issue is many firms. Also the managing partner came become overloaded with firm decisions and his or her law practice, as well as the firm, may suffer financially. The managing partner may not be able to devote the time or follow-through required to handle organizational and financial matters. Since no other partner may be trained in managing the firm, this partner may not feel comfortable in relinquishing power to anyone else. This is a problem which may be especially troublesome if the managing partner dies, becomes ill or disabled.

Some attorneys may be dismayed at the prospect of having their firm dominated by an individual or group of partners. However, if properly handled, this form of structure can be productive, and economically and professionally rewarding. To be effective, the managing partner should maintain communication with other partners. The managing partner should seek advice from other partners (and associates) on matters that will affect them. The managing partner should obtain other partners’ input on decisions, appoint individuals or committees of partners to perform particular functions and require a report of their achievements.

Executive or Management Committee 

The executive or management committee structural concept is a representative form of governance typified by a committee of partners having defined authority, accountability and responsibility. In most smaller firms this committee, frequently consisting of three partners, may be responsible for recommending and implementing policy for the firm, planning for the future, appraising results and recommending corrective action, as required.

I believe that a three partner executive or management committee might be the best approach for your firm and would be the best way to avoid deadlocks or inaction and to spread the burden of firm management among appropriate partners. One of the partners should be designated to chair the committee. Each of the other members may be assigned authority, responsibility and accountability for coordinating and/or performing specific functions. For example, one partner may serve as the financial partner. This would involve responsibility for insuring the preparation and analysis of income and expense budgets and financial reporting. This partner would oversee attorney production, fees, collections, etc. A second partner may be responsible for the personnel functions including associate career development, i.e., employment, training, evaluation, etc., and implementation of policy for the administrative staff. A third partner may serve as the general administrative partner, and oversee the implementation of administrative policy, systems, automation, etc. These partners may be assisted by an office manager, bookkeeper, etc.

To preserve continuity in the management function, it is recommended that tenure of partners on the executive or management committee be staggered over a two or three year period. The executive committee should communicate with the partners regularly or as issues arise. The executive committee should meet weekly, or if that isn’t convenient, as frequently as required. To keep all of the partners apprised of issues before the executive committee meeting is held, it is recommended that the meeting agenda be distributed to all partners within 48 hours prior to the scheduled meeting. Partners should be encouraged to discuss, with members of the executive committee, any items listed on the agenda or recommend subjects for discussion. Following this meeting, minutes should be prepared and distributed to all of the partners for information purposes.

Meetings with all of the partners (shareholders) should be scheduled at least quarterly and possibly even monthly.

You did not indicate whether your firm has a firm administrator on your staff. I believe that this may be a good time to consider hiring a firm administrator and that role should be incorporated into the firm’s management/governance plan. The firm administrator should handle all administrative matters and the the management committee should focus on higher level management matters. The full equity shareholder membership should weight in only on matters reserved for their vote and approval.

You should document your governance/management structure in your shareholder agreement. For example:

Specific policy matters that might be reserved for full equity shareholder vote might include:

  • Non-equity partner/member and equity partner/member admission
  • Practice composition
  • Type of practice
  • Size of firm
  • Long range planning
  • Firm goals, mission, and vision
  • Merger or dissolution

Specific policy matters that might be the domain of the management/executive committee might include:

  • Equity partner compensation
  • Non-Equity partner compensation
  • Associate compensation
  • Lawyer and paralegal recruiting
  • Legal staff compensation
  • Budget approval
  • Practice management
  • Billing practices

Your shareholder agreement should clarify who decides what, by what vote, and within what financial/authority limits. It should address management, voting thresholds, partner rights/duties, compensation, and partner withdrawals.

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John W. Olmstead, MBA, Ph.D, CMC

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