The director’s cut

Many law firms do not give financial directors the recognition they deserve or the power they need.

One of the big questions, after the ‘why’ and ‘if’ of the Legal Services Act have been settled, is the ‘what’ – in other words, what has to be done in order to be ready?

From the conversations that I have had, it seems clear that there has been much talk within law firms about what the attractions may be, and whether to start planning for the time when this will be a reality.

But the legal profession is no different to any other market: there will be those that are leaders, and those that are laggards. Overall, though, I think it is fair to say that law firms in general have an awful lot to do.

I will not spend time here on the obvious considerations of strategy and structure, and the need to have a very strong pitch to put in front of any investor. However, integral to these, and all other aspects of such a project, is the matter of leadership.

Good leadership is the key to the success of any business at any time, but in these circumstances its importance is critical for two reasons: first, because a step of such fundamental importance as securing external investment can only be executed with a strong and united partnership – a situation which the leaders must bring about; second, the very relationship between the leadership and the partners will inevitably change – and this is something which must be recognised and accepted.

A strong board, with highly capable people, is a prerequisite. Depending on the proportion of the equity to be bought by an outsider, representation on the board is likely to be a requirement, and in the case of a flotation this will be by non-executive directors. Firms starting the long process (Slater & Gordon in Australia took five years from strategic decision to float) would be advised to think at an early stage about bringing in one or more non-executive directors (NEDs). This will ensure that the board is starting to deliberate and decide matters, taking account of an outside perspective.

The problem with almost all law firms to date is that, as partnerships, they have only ever been answerable to themselves. Bankers often have requirements but, so long as their agreements are adhered to and covenants met, they will not usually interfere beyond requiring a modicum of financial information. In any case, the bulk of the funding they provide to firms is via partners themselves. However, an equity investor shares all the risks of the business, and is among the last group to be paid out, so he can be forgiven for taking, if so inclined, a deep interest in the proposition, the quality of governance and leadership, and the financial position.

It follows, then, that the role of finance director will be crucial, not only in the task of helping to get the firm into a correct financial shape to attract the investor, and in producing consistent, accurate, timely and useful information, but also in influencing the business to establish and follow best practice. And yet it is in the role of finance director that many firms will find a significant challenge. In public companies, or even most privately owned companies, the finance director is one of the ‘holy trinity’, along with the chairman and managing director or CEO. This is the group which guides the business and the FD is a figure with significant responsibility, power and influence. There are innumerable examples of companies where the FD has taken over the managing director role, and a high proportion of the MDs/CEOs in the FTSE 350 are accountants and ex-FDs.

The question within the legal community is: are the FDs ready to take a more high-profile position, and will the partners allow it? This is not to say that there are not many talented FDs in law firms. There are, although there are also some who do not come up to scratch. The problem is that the relationship between partners and FDs has, in most cases, not been one of equals. There is a distinct sense among finance directors that ‘if you are not a lawyer, you are not important’. I have seen many shrug their shoulders when asked what they can do to change partners’ behaviour, because they know they are seen in their firm as the hired help, not an equal.

This is backed up by a survey undertaken recently for the Managing Partners Forum, which shows:

• A clear difference of opinion between managing partners and FDs about what the nature of the FD role is;
• A majority of managing partners do not see their FDs as change agents;
• Managing partners’ perception that more than half of partners regard their FD as a subordinate;
• Only a fifth of FDs are on their firm’s board – a truly remarkable statistic.

This survey was conducted across a range of professional services firms, but since this sector is dominated by law firms, it is likely to be a reliable indicator. This will not do.

In a world where competitive pressures are only going to get greater, and where the owners of the business will no longer be answerable to themselves alone, the FD has to be allowed to exert significantly more influence than most are now able to do.

Even if the partners do see the need to change their ways, in those firms where the FD was originally selected merely to produce the figures he may not be able to make that step up, which means that nothing will change until he leaves. For the good FDs, on the other hand, life could become much more interesting and rewarding.

One final thought: whether or not a firm decides to seek outside investment, the mere fact that it is happening in the market means that all firms will be subject to new competitive pressures. This means that the status quo is not an option – or, at least, will not be the route to success. Therefore, the need to improve all aspects of leadership and governance is vital.

William Arthur is director and founder of Fremont Consulting Ltd. www.fremontconsulting.co.uk.