I have read several articles suggesting law firms should consider appointing independent board members to assist with governance and accountability, in a similar vein to corporations.
The objective of this article is to explore the value of the appointment of a “Board Advisor” whose role is to provide expert support and advice to the governing board, without the firm releasing ‘power’ to an outsider.
Governance v Accountability
Governance is guiding and steering an organization to meet its objectives which, hopefully, are oriented to benefiting not only its owners but all its stakeholders. It involves making strategic decisions and overseeing business operations.
Accountability is ensuring that management is held to account for performance and assuring shareholders/owners and other legitimate stakeholders are fully informed. It involves monitoring of performance and compliance with applicable statutes, regulations and codes.
The presence of non-executive directors or independent board members in organizations is influenced by the desire for better governance and the need for accountability.
The boards of corporations and public entities are typically comprised of non-executive directors (or, independent directors) to oversee the business and hold management accountable given that the shareholder community is separate and distant from the management of the business.
In contrast, smaller, privately held businesses and professional service firms tend to appoint board members who are also shareholders and/or managers within the enterprise and who are regarded as having the capability to both govern the business and ensure accountability.
In recent years, professional service firms have begun to explore new arrangements to improve their governance structure. For example, some of the Big 4 accounting firms have added independent directors to their governing bodies.
In admitting its first independent member in 2018, the Chairman and CEO of the U.S. KPMG board said “This enhancement to KPMG’s governance will challenge our conventional thinking and expose our firm and its leaders to a broader range of unique experiences and a fresh external perspective.” The implication is that independent directors are likely to enhance the quality of decisions and, potentially, business performance through their expertise. While they may be able to inspire or advocate for accountability, that is clearly not their primary responsibility as a minority on the board.
Law firms, which in the vast majority of cases are structured as partnerships, regard their internally elected Boards or Executive Committees as being responsible for management and accountable to their equity partners (owners). Equity partners usually have ultimate decision-making power over key policy and operational decisions (e.g. strategic plan, budget, partners and management appointments).
The growth and consolidation of the legal industry has produced firms of significant size. Many now have national reach and some are global in scale. And with embrace of scale, firms need to consider governance and accountability to ensure arrangements are fit for purpose. As the late Ward Bower of Altman Weil put it “law firms…are arguably as accountable to their varied constituencies as are other businesses” and “outside directors can imbue the law firm’s governance with objective accountability”.
On the occasion of appointing an outside member to its Board in 2017, the US Chair of PwC explained that the goal was to get more diverse perspectives on its business and avoid groupthink. He added that “We know corporate boards that lack diversity can develop groupthink as a result of shared biases and blind spots….”, seeming to imply that PwC’s move was to avoid a similar malaise.
Consultations with industry experts have revealed that the appointment of external advisors to provide guidance to law firm Boards/governing bodies has become increasingly prevalent in different geographies across the world. However, the practice has not been embraced in the United States.
In the U.S., Rule 5.4(d) of the ABA Model Rules seems to inhibit the appointment of external advisors in so far as it does not allow lawyers to practice in firms where non-lawyers own an interest, act as directors or officers or have the right to direct or control the professional judgement of a lawyer. While it appears that an outside lawyer could serve, that may not be attractive to firms that already consider that they have ample representation of lawyers and legal viewpoints internally.
To the extent non-lawyers do not have an ownership interest in the law firm and cannot direct or control lawyers (despite the fact that they would be in a minority they could also be denied voting powers) there is not an evident objection to their appointment. However, to avoid any misconception that an appointee has any decision-making responsibility or any authority over lawyers, their engagement as a “Board Advisor” would be an appropriate solution. The responsibility of the Board Advisor is to advise, nothing more.
Role of Board Advisor
A Board Advisor is an individual who is entrusted by the board to provide expert advice with the objective of enhancing the capability and the effectiveness of the board to govern the firm.
External members of law firm governing bodies can indeed provide perspective and unbiased views on the strategy, management and operations of the firm that will improve decision-making and performance.
Here is a short-list of the ways Board Advisors might add value:
- Addressing external factors impacting business and profitability
- Alerting management to potential impacts of decisions including unintended consequences
- Questioning strategies and business as usual
- Acting as an advocate for change and highlighting the anxieties of stakeholders
- Facilitating discussion and resolution of issues over which there are conflicting views at the board or management level
- Presenting outside perspectives on important issues (based on business experience)
- Providing information on resources and solutions (leveraging networks/outside contacts)
- Acting as “coach” and a “trusted advisor” to leadership and stakeholders
- Illuminating blind spots and problem areas
- Allowing firm leaders/management to focus on business administration by facilitating firm initiatives (resource limitations are particularly present in smaller firms)
- Representing the firm’s commitment to quality, diversity and innovation
There has been an understandable reticence in the United States to add outside advisors to the board. Contributing factors include concerns over the professional rules or the notion that advice/input can be obtained through other means, such as via consultants, without prejudicing the firm’s independence.
However, there are ways of moving in this direction as illustrated by Reed Smith’s recent appointment of an Independent Strategic Advisory Board (“ISAB”) consisting of three leading business executives. The ISAB will report to the Global Managing Partner, join the Executive Committee roughly four times a year and work closely with senior management.
The appointment of independent board members can afford significant benefits to law firms through enhancing decision-making and filling gaps in knowledge or capabilities in the governance group.
The presence of different perspectives increases the collective intelligence of the group. In his award-winning book “Rebel Ideas: the future of diverse thinking”, Matthew Syed makes the case that “harnessing the power of cognitive diversity is set to become a key source of competitive advantage…”.
In the same way that respect for diversity in the workforce has been heralded by clients of law firms, I believe that diversity in governance and an innovative mindset will also be viewed positively and generate brand value.
It is important to distinguish between a consultant and Board Advisor. Consultants are engaged by law firms to assist with the resolution of specific issues and assist with implementation. Typically, the engagements are project-based. In contrast, an advisor provides business expertise and specialist advice to enable others to make decisions based on an holistic view of the firm obtained through ongoing involvement with the firm’s business and management.
Choice of the right advisor can, and often does, generate considerable tangible (e.g. management time saved) and intangible (e.g. issue resolution/more effective decisions) benefits that far outweigh the Board Advisor’s fees.
As we emerge from the coronavirus pandemic, competition for clients and talent will continue to be fierce and it is incumbent on law firms to reassess their propositions and market perception. The very best hold lightly to existing arrangements, favoring new models of decision-making and service delivery, in pursuit of excellence.