Full text of my opinion piece first published in the Australian Financial Review on 27 August 2020.
Earlier this week, the Australian Financial Review reported that HWL Ebsworth (HWLE) was preparing to list the firm on the ASX with a $1 Billion-plus valuation.
While details are scant at this stage, it is worth asking whether stockbrokers will recommend a BUY when the HWLE Limited prospectus is issued?
My prediction is they will give this IPO a thumbs down for five main reasons.
#1 Insufficient surplus
As a listed entity, HWLE partners will have to share a portion of the firm’s profits with external shareholders. For the sake of argument assume the current partners enjoy average earnings of $1.5 million per annum. In the future, partner earnings – salary plus bonus minus profit share – might reduce to say $1 million. The incumbent partners will most likely accept a reduced annual income given their significant capital gain upon listing.
This business case seems logical but misses one key point – there is a fiercely competitive market for top talent. Many of the best HWLE partners are proven rainmakers will still be able to command incomes around $1.5 million or more at other non-listed law firms or by setting up their own practice when their employment and escrow handcuffs come off.
At $1 million – the maximum the firm can pay and still maintain dividend payments – HWLE Limited will be way off the mark in attracting any new ‘$1.5 million’ partners.
Over the long term, there’s insufficient surplus to keep both partners and external shareholders happy.
#2 Clients don’t buy the firm
When Shine Justice Limited first listed on the ASX, they presented strong evidence that their personal injury clients chose them because they trusted the firm’s brand and were largely lawyer agnostic. When IPH listed, investors were enticed by a large proportion of annuity income from patent and TM renewals and an ambitious plan to scale.
When it comes to HWLE’s mostly business-to-business relationships, research shows that clients are much more discerning around who does their work.
HWLE external shareholders will not be buying a company with a strong brand with sticky institutional client relationships. They will be buying a collection of individual portable practices, each with their own reputation and client following.
#3 Vague growth story
External shareholders examining the IPO prospectus will be looking for a compelling growth story. They will want to see how a fresh capital injection will drive shareholder value.
Under Juan Martinez’s leadership, HWLE has a solid track record of acquiring legal practices without the need to splash much cash. Economies of scale work well in mining but less so in premium legal where even boutique firms can generate supernormal profits. Despite all the hype, there’s no legal technology yet available that will create a sustainable cost or client service advantage. Creating a multi-disciplinary practice or moving offshore is fraught with risk.
So, unless I’m missing something, the growth plan beyond more of the same seems less than convincing.
#4 Key person risk
From interviews with former staff, it appears that Juan Martinez has a robust directed leadership style. Overheads are kept to a minimum and all lawyers are encouraged to be on the tools all the time to compensate for below-market pricing.
This is the operating model that has been the bedrock of HWLE’s success to date.
Given Mr Martinez’s tenure and track record, the market will have many questions over the strength of HWLE’s bench. If the proverbial bus had to arrive who will keep the firm together and herd the cats? I’d imagine the firm’s value will be discounted heavily because of this key person risk.
#5 More losses than wins
Future investors in HWLE will have a good look at the investment category and proceed with caution. A 20-year analysis of law and accounting firm IPOs in Australia reveals far more losses than wins, especially for external investors. This includes firms like Stockfords, Harts and Slater & Gordon.
One of the reasons for these failures is the loss of the partnership culture that underpins their initial success. This culture comes from the incumbent partners’ sense of proprietorship, stewardship, collegiality and identity. Shifting from partner to employee is a big shock to many. Financial transparency, share price volatility and an added compliance burden all often have a negative cultural impact.
In conclusion
I have drawn strong conclusions about the potential float of HWLE without access to any specific details. I look forward to reviewing their IPO prospectus and seeing how wrong I am. But if I’m not, buyer beware!
#leadership, culture, governance, legal industry, strategy management
Where was Minters’ chairman during the Kimmitt crisis?
In Articles, Commentary on 26 March 2021 at 7:28 pmThe full text of my opinion piece first published in the Australian Financial Review on 26 March 2021
“The Minter’s chairman went missing in action. One of the most important jobs of a chair is to resolve major disputes within the partnership without it spilling out to the rest of the firm, and even worse, into client land.”
This quote reflects a sentiment expressed by many law firm leaders I spoke to about the recent saga at MinterEllison.
While I’m not privy to the internal machinations at Minters to say whether this is a fair judgement or not about the firm’s chairman, David O’Brien, it does raise the question as to what should be expected of a chair?
In my view, the answer lies in the confluence of governance, guidance, and glue.
Governance
The chair of partners usually has an active leadership role in firm governance. As such, his or her job is to ensure that management’s direction is broadly aligned with the interests of equity partners and other stakeholders.
Unlike company structures, partnership governance roles and responsibilities are not stipulated in any statute and are largely ambiguous. All partners are assumed take on all responsibilities concurrently. In this context, the chair and managing partner are expected to carve out a tailored governance framework that balances stewardship, operational efficiency, risk-taking, control, transparency, partner autonomy and accountability.
The chair of partners would usually be expected to facilitate the effective functioning of board and partner meetings, ensure accurate timely and relevant information flow, oversee risk and compliance, manage board composition, and lead the process of reviewing the managing partner’s performance and succession.
In some firms, the chair is actively involved in deciding profit allocation and progression. In other firms, their role is more of an independent arbiter in profit allocation appeals.
Guidance
While most medium and large firms have adopted a more ‘corporate’ governance model, partners as owner-operators still often want a say when it comes to critical decisions around firm purpose, values, capital allocation and broad strategic direction.
The chair plays a critical role in helping the firm’s executives navigate this decision-making minefield.
Their guidance is critical in deciding which fights to pick, what options are on or off the table, what’s the best approach and forum to raise issues, and where power really lies in and around the partnership.
Chairs often act as cultural barometers – forecasting the mood, energy, and tone of the partnership. Their predictions of an imminent storm, or conversely, a period of calm and confidence can be hugely beneficial.
At a more micro level, firm chairs often act as a sounding board or mentor for the managing partner. In this role, they help talk through tricky issues, provide honest feedback, and offer comfort when exasperation overwhelms.
This mentoring role is particularly important for the induction of new managing partners or an external appointment. In the latter case, the chair needs to lend some of their social capital until the new leader’s position is firmly established.
Glue
The third role of the chair is to foster partnership cohesion and stability. This doesn’t mean leading the firm cheer squad, but rather putting out spot fires and addressing corrosive politicking.
Spot fires may include a major fallout between two senior partners or where an individual partner has displayed behaviour incongruent with the firm’s values or there is a case of systemic underperformance.
It is quite common for the chair to join the managing partner in having a fireside chat with these problem partners. The chair helps create a sense of deep collective concern. This threat is hoped to be the catalyst necessary to change aberrant behaviour.
Pie-splitting is often a source of ‘corrosive politicking’. For example, in meritocracies choosing a side when there’s a commercial or legal conflict could result in a major differential in individual earnings. In these instances, the chair may get involved in dialling-down the emotions and ensuring that trust in the model is maintained.
Coming back to the MinterEllison situation, I don’t have any first-hand information as to assess whether the firm’s chair did an effective job in governing, guiding, and gluing? As with so many tricky issues in law firm partnerships, that’s ultimately for Mr O’Brien’s partners to decide.
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