The idea that law firms owned by non-lawyers would be more prone to dishonest practices could be wide of the mark, argues Paul Grout

As part of the ongoing reform process for legal services, the Department for Constitutional Affairs commissioned me to write a report on new ownership structures (see [2005] Gazette, 22 September, 1).


The parts that have attracted most attention look at the relationship between dishonesty and firm size, and whether it matters who owns a large legal practice.


The relationship between size and quality is extremely relevant, since concerns have been raised that the reforms may result in small solicitors' firms being driven out by well-funded outside-owned firms. What I quickly found when tackling this problem is that there is very little data. It would be rather glib to conclude that there is no big surprise in finding a self-regulated industry providing only limited information on an area that could, possibly, expose what causes dishonest practices - and, from my dealings with the Law Society, I feel that this would be an unfair implication to draw. But this does not alter the fact that it is difficult, using the existing data, to understand where and why such practices occur.


The evidence I found indicates strongly that dishonest practices happen more often in small firms, despite large firms having more people and so probably far more instances when it could arise. A partner in a practice with two to four partners is almost 60 times more likely to engage in dishonest practices than partners in firms with 21 partners or more. If we correct for size by fees, then the picture is even more dramatic.


While there are many potential explanations, anecdotal evidence indicates that a major reason is that it is more common to have formal procedures in place in large firms, restricting the ability to be negligent or dishonest, and creating a positive culture.


So are the lawyers running these large firms more likely to be enticed into dishonest practices if there is a non-lawyer owner than when they own the practice themselves? Professional wisdom and the Clementi report say yes. My view is that the opposite is at least equally likely.


For example, there is clear evidence that the medical profession's treatment of patients changes as economic incentives change, and there is little reason to suppose that lawyers are likely to be less responsive to financial incentives than doctors.


The new regulatory regime will be in a position to strip dishonest lawyers of their professional livelihood. So a non-owning lawyer manager will be placing a great deal of his livelihood at risk if he acquiesces to an outside owner's pressure to bend the rules, no matter how much of the practice's value is at stake.


In contrast, if the practice's ownership is concentrated in the lawyer-manager's hands, then the bulk of the lawyer's value at risk is the equity value of the practice. If there is large financial benefit to bending the rules for a major client, this is more likely to prove attractive to a lawyer-manager when owner than when there is outside ownership.


Large legal disciplinary practices may or may not bring big benefits, but it is not obvious that the profession should be so concerned about outside owners. If there is genuine concern about dishonesty in large, concentrated practices, the profession may do better looking closer to home.


Paul Grout is professor of political economy at the University of Bristol