Thoughts on ways to improve the management of professional services firms

Tuesday, May 29, 2007

Corporatisation and Professional Ethics

In my last post, Corporatisation, Corporate Structures and the Law, I outlined some of the reasons why corporate structures including listed entities might make sense for law firms as compared to the traditional partnership model.

In this post I want to look briefly at some of the professional ethics issues raised since this is the area that many commentators have focused on. The critical issue to my mind is the extent to which adoption of corporate forms per se creates new ethical challenges.

At one level, a simple move from a partnership to an incorporated body changes nothing. Partnerships already face a variety of challenges, including the need to make sufficient profit to pay partners and fund development in a competitive marketplace. Wrapping a corporate envelope around the partnership does not change this.

The position changes, however, if the firm actually lists in the way Slater and Gordon did because two new factors come into play.

The first is the need to formally consider the needs of shareholders as owners. In theory at least, a partnership may decide to sacrifice profits in the interests of its clients. Again in theory, this is more difficult in a listed corporation because of the direct pressures to provide shareholder returns.

I say in theory in both cases because I am not sure how much difference there is in practice. Indeed, in partnerships the need to maximise partner cash flow creates pressures that may be just as, if not more, detrimental to clients than the shareholder return requirement. Here a feature of the ethical discussion has been a comparison between corporate operations and the independent professional model, whereas the comparison should be with the partnership model.

The second linked factor is more complicated, the temptation to play corporate games in an attempt to maximise the the share price and to please the market . In my view this is a real danger that can, as we have seen in other areas, threaten the very existence of the firm itself.

None of this to my mind detracts from the advantages that can be offered by corporatisation, but it does point to risks that need to be managed.

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