ABS countdown | Law firms must embrace corporate governance

The recent report from the SRA that 160 law firms are in serious financial difficulties, and that around 20 per cent of these are in the top 200, leaves no doubt that the profession is experiencing unprecedentedly challenging times. Among the reasons cited are the lingering effects of the recession, the referral fee ban, cuts to legal aid funding and civil justice reforms. However, the SRA's overriding concern is "poor financial practice across the piece".

At a time like this, firms have little time for changes in regulation, and an astonishingly large number have failed to meet the deadline for appointing compliance officers. The irony is that many seem not to realise that the demands of outcomes-focused regulation are exactly what they need if they are to get their houses in order, because it is based on the requirement for the management systems and controls which many firms lack, and of which financial controls form an integral part. A Law Society report flagged up the issue as far back as 2009, commenting in relation to ABS that "perhaps the main requirement for all of these (structural) options will be good and well developed management and skills only found in a minority of firms at present".

Compliant environment

The new SRA Principle 8 requires that firms should be run in accordance with sound financial and risk management principles. And Chapter 7 of the Code of Conduct requires a clear and effective governance structure and reporting lines, accompanied by systems and controls, as the basis for the creation of a "compliant environment".

However, it is clear that some solicitors still regard these concepts as alien. Legal Services Board CEO Chris Kenny recalled a conversation between Sir David Clementi and a solicitor who protested that he was a professional, not a businessman. Sir David's response was: "If you don't think you're running a business, pretty soon you won't be."

The requirement for compliance officers is an important step on the road to a corporate ethos, and the SRA has been at pains to emphasise that COLPs and COFAs will not be treated as fall guys. It explained in the introduction to Chapter 7 of the code that "overarching responsibility for the management of the business in the broadest sense rests with the managers". Firms should therefore as a first step define their organisational structure and the attendant individual responsibilities, and promulgate these to all members of staff. This should assist managing partners and CEOs to demand adherence to agreed policies and standards and put an end to the currently all too common cry "I couldn't possibly tell my partners what to do!".

Management's first role should be to create a business plan which takes account of the issues recorded in the Risk Register which a COLP and COFA are likely to have been given joint responsibility for maintaining. This might suitably grade risks by reference to likelihood and impact. It would also include reference not only to the SRA's standard indicators of whether drawings exceed profits or borrowings exceed net assets, but also considerations such as competition, property costs, the availability of funding and the sustainability of current business lines.

Team spirit

A major objective of management should be to develop a team spirit and to overcome the tendency on the part of some partners to guard their own clientele jealously as their personal property. The issue goes beyond the sharing of clients and extends to the need for consistent recording and up-dating of client information in a usable form on a firm-wide basis. Unfortunately, solicitors' IT systems invariably focus on case management rather than data management, and this means that law firms are poorly placed to take advantage of what is undoubtedly one of their most important assets, namely their client base. As has been repeatedly pointed out in various quarters of the sector, solicitors would benefit from taking a leaf out of the book of financial services firms, which have become adept at analysing client data and segmenting clients for marketing purposes by reference to criteria such as age, wealth, location or need, and thereby providing the basis of maintaining on-going client contact. With clients' approval this information can be shared with referring solicitors.

Management structure and business plan should be complemented by a compliance manual or plan incorporating firm-wide policies, some of which may be sourced from Lexcel, supported by file checks and audit trails. The more progressive firms are rising to the challenge and capitalising on the opportunities, but too many firms are resistant to change, some dominated by old-school practitioners anticipating their retirement, apparently unconcerned that "après moi, le deluge". They are likely to be among the casualties. The days when it made sense for solicitors ultimately to become owners, managers and practitioners in their practices are numbered.