Our structure allows our lawyers to do what they are good at, without requiring them to do things they are not good at.
Based in Adelaide, Australia, Kain Lawyers is a legal consulting company that specializes in complex transactions, disputes and advice. Kain Lawyers has adopted a corporate structure; two of its three Board members are not lawyers.
I started Kain Lawyers in 2004. The firm is an incorporated legal practice. From the beginning it has been run under a corporate, rather than a partnership, model. The company has four shareholders, each holding different shareholding proportions. We are currently exploring a broader employee share plan.
We have a clear distinction between the shareholders, the Board and the management, and their respective roles. Our shareholders’ agreement mandates that our Board must have an independent Chair and at least half of our Board as independent Directors. Independent means no financial interest in the business and not an employee of the business.
We have a Board of three, plus me as MD. The Chair used to be the CEO of another law firm; today he is the Executive Director of an accounting and commercial advisory practice. The second Board member is the Executive Director of a large advertising firm, and the third Board member is an internal appointment.
Our commitment to a corporate model allows us to ensure (i) that decisions are made in the best interests of the business, and not the interests of the individual owners, and (ii) that the right people are appointed into the right positions. Both of these outcomes are difficult to achieve in the partnership model, where too often decisions are weighted toward the interests of the individual partners rather than the interests of the business, and where standards gravitate to the lowest common denominator.
In my view, a true legal services company (as distinct from a firm) has three key elements: (i) it is an incorporated company, (ii) it has a corporate governance structure, and (iii) it has a corporate management structure. There are countless incorporated legal practices in Australia – but they are not true legal services companies because the governance and management structures are still partnerships in nature. Some have an external Chair, but the decision making still fundamentally resides with the partners. That is not the case with Kain Laywers. Outside of the few powers reserved for the shareholders, all decision making rests with an independent Board appointed on merit, not because they are owners – that is a corporate governance model. Our Board has the power to hire and fire and set remuneration, even for shareholders — and has exercised that power — that is a corporate management model. You will see these three elements in the listed legal companies in Australia, but to our knowledge, our structure is unique among unlisted Australian law firms.
I think this has placed us in good stead. We can objectively look at business and the world around us. On the whole, we have got the big decisions right and we have executed them reasonably well. I put much of that down to the objectivity that comes from having an independent Board, and to the ability to appoint the right people with the rights skills, to every position in the business. All appointments are made on merit which helps us, indirectly, to better serve our clients.
All of our shareholders are lawyers employed in the business. Some are in management roles, some are not — its horses for courses. Conversely, not all management roles are filled by shareholders. Some of our executive positions are held by non-shareholders.
Our structure allows our lawyers to do what they are good at, without requiring them to do things they are not good at. A common weakness of legal businesses is that responsibility for key management decisions is divvied up amongst the lawyers. For example a lawyer is put in charge of IT because they are interested in IT, even though they might be shockingly bad at implementing it. Because we have disassociated management from the technical legal services, lawyers can focus on providing legal services and not need to worry about the other things.
We believe that our structure offers us a competitive advantage. For example, a number of our team were equity partners in traditional law firms who were motivated to join us because of the failings they saw in the partnership structure, and we were one of the very few places that offered them a different structure. Being clear on how we operate and what we stand for is vital. This becomes self-selecting — people with a similar view of the world are attracted to us; those who don’t select themselves out.
In my opinion, many lawyers have not adopted a true corporate structure because they are reluctant to give up control, particularly to nonlawyers, even if it is ultimately to their financial detriment. Another reason, in my opinion, is that many lawyers do not understand business well, and they think their partnerships are doing well. Partnerships can make reasonable money, and many people probably think, in that case, “Why change?”
The liberalization of the capital structure of law firms brings with it the opportunity for external capital to invest. That external capital brings with it, not only an expectation of returns, but also the management skills to bring that return. This leads to the development of disruptive ways to provide legal services. From my observations of the Australian and UK legal markets, since the UK liberalized its markets, it has seen a much greater investment of private capital than we have seen in Australia, where the external investment seems to have been most notably through the public markets. I am not sure why that is, but it has led to the development of a greater number of disruptive service providers in the UK than you see in Australia. That is probably also a function of the relative sizes of the UK and Australian markets. I think it will come eventually in Australia, and it will come partly because of the liberalization of the capital structures, but also because of a general increase in competition fostered by globalization, technology and the realization of ‘outsiders’ that the legal industry has been running a cozy and inefficient quasi monopoly for too long.
The legal industry is one of the few industries in the world that has been protected from any real competition. A lack of competition is unhealthy. It makes you lazy and removes the incentive to innovate. To be brutally honest, this has led some lawyers to develop a conceited view of themselves and of what they do: everything must be a Rolls Royce job, “leave it to us and it will cost whatever it costs — just keep writing the checks.” But that should not be the decision of the lawyer. It should be the decision of the consumer – the consumer should get to decide if they want Rolls Royce or a Chevrolet. It shouldn’t be the lawyer’s decision whether or not to add all the bells and whistles. The lawyer’s job is to give them options, importantly to make a recommendation, and make sure that the client makes an informed decision — and that can be done before every rabbit is chased to the far end of every burrow.
I think what will happen over time, and it is evident in areas already, is that whilst the price of legal services will fall, the value of the market won’t necessarily shrink. By being more efficient, accessible and innovative, you open up entirely new markets. People who thought that legal services were too daunting, too expensive, too hard to get to, too whatever — they have a whole range of new platforms in order to access legal services. This says to me that there was something wrong with the old system because of all these needs that were not being met. In time they will be met — the challenge for lawyers is whether they change to meet the market, or try to cling to the old quasi-monopoly and let new entrants win it from them.
At the end of the day, it does not matter who owns a legal business. A legal business does not need to be owned by a specific kind of person in order for the ethical behavior of that firm to be regulated. It is entirely possible to regulate ethics and standards without regulating ownership.
In Australia, the process to change our regulations was slow. It took 20 years to get all six states on the same page. I can imagine that in the US, with 50 states, it will take longer.
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