How can firms reconcile a profit-sharing model with the traditional partnership?

The secret to the success of the John Lewis Partnership – as one of the UK’s leading employee-owned companies, where all 90,000-plus ‘partners’ participate in the business and receive the same percentage of salary paid as a profit-sharing bonus – has recently gone public.

The Nuttall review of 2012 raised awareness of employee ownership, and the Finance Act 2014 introduced a new Employee Ownership Trust (EOT), which offers tax benefits, including income tax relief on John Lewis-style bonuses. Employee-owned businesses have much-publicised improved productivity and better levels of employee engagement, retention and recruitment.

And the Employee Ownership Association estimates the value of employee-owned businesses will represent 10% of GDP by 2020, as the number of companies choosing this form of ownership grows.

Even politicians have embraced it, with former prime minister David Cameron announcing the introduction of ‘John Lewis-style public services’ in 2011, and ex-deputy PM Nick Clegg calling for a ‘John Lewis economy’ in 2012. So it was only a matter of time before headlines announced the arrival of the ‘John Lewis-style law firm’.

The trailblazers

Professional services firms have been following the example of businesses such as consulting engineers Ove Arup and architects Make, respectively employee owned since 1977 and 2004, for some time now.

The number of architects’ firms adopting the new EOT structure is growing rapidly, and Royal Institute of British Architects president Jane Duncan, speaking at the launch of Formation Architects, welcomed the new model, which ‘will create pride in the business, with all employed contributing to profit and valued for their work’.

The Legal Services Act 2007 allowed lawyers and non-lawyers to own and invest in law firms through an alternative business structure (ABS), in theory opening the door for law firms to become employee owned. Employee ownership would undoubtedly offer many opportunities: to attract non-legal staff into senior managerial roles; to recruit and retain the best associates sub-partner level; and to benefit staff firm-wide with profit-related rewards (whether shares and/or cash).

And in an ABS, EO could both bring new capital into the business, and protect its long-term independence.

In practice lawyers, conservative by nature, and with an entrenched profit-sharing partnership structure, were slow to choose one of the fastest-growing business models in the UK. But there were one or two early adopters.

Triton Global, a multidisciplinary ABS combining legal services and claims management, operates an all-employee share incentive plan and is 100% owned by its employees. Postlethwaite became employee owned in 2015, through share options and direct purchase of shares. BDBF LLP operates a firm-wide points-based profit-sharing scheme, combined with a culture of openness and engagement.

Gateley was the first law firm to list on the stock exchange’s AIM, in 2015, stating that it considers employee share ownership to be an important part of its strategy for employee incentivisation. It has established a stock appreciation rights scheme under which awards may be made over up to 10% of the company’s issued share capital.

Things changed dramatically in May 2015 when accountants Grant Thornton announced their intention to become a John Lewis-style ‘shared-ownership enterprise’, citing the Employee Ownership Index as evidence that employee-owned businesses perform better.

New CEO Sacha Romanovitch followed the long-established example of the John Lewis chairman to cap her own salary, at 20 times’ the firm’s average. The GT model is based on sharing ideas, responsibility and rewards, with a ‘superior profits’ sharing scheme for all staff.

The announcement attracted interest and excitement both in the EO world and amongst other professional services firms.

A changing legal landscape

In February 2016, Mishcon de Reya LLP announced it was consulting on a ‘John Lewis-style’ ownership model. And in March, West Country firm Stephens Scown LLP, with 270 staff and 50 partners in three offices, hit the headlines when it announced its ‘shared-ownership model’. It created a limited company, owned by the staff through an Employee Benefits Trust (EBT), which is also a member of the LLP.

Under the scheme, all firm profits above a minimum threshold are paid into a pool – half is retained by the firm and half paid equally to all staff by the EBT. In May the firm announced that the bonus payable to each employee had increased from £1,300 to £3,000.

There is no ‘one-size-fits-all’ model of EO, as law firms exploring the possibilities and opportunities offered by different structures are finding. Whether direct or indirect ownership of shares, or a ring-fenced or superior profit-sharing scheme is chosen, there is increasing recognition of several common features.

First, that successful law firms are people businesses which prioritise client service, recognising and anticipating the ever-evolving demands of their clients

Secondly, that the world of legal work is changing rapidly and that, in a competitive market, the younger generation of trainees and associates is no longer chasing the holy grail of ‘partnership for life’.

They increasingly value a work/life balance, if necessary at the expense of higher rewards, and when getting on the property ladder has become an almost impossible challenge, may not want the financial risks and liabilities of partnership.

Thirdly, that non-lawyer professionals can bring significant and competitive added value, both to management and as practice builders. (Mishcon de Reya was granted an ABS licence in February 2015, when chief operating officer Bambos Georgiou became the partnership’s first non-lawyer.)

A matter of culture

The alchemy of employee ownership works when there is an alignment of interests (financial and non-financial) of employees and owners/partners, combined with an open culture of employee engagement and participation.

It is easy enough to claim that a law firm that introduces a firm-wide ‘ring-fenced’ or ‘superior’ profit-related bonus scheme, while retaining the equity within the partnership, has effectively replicated the benefits of the John Lewis employee ownership model. In practice, nothing could be further from the truth.

Successful employee ownership depends on a culture of engagement, democracy, participation and openness which includes the whole firm. Grant Thornton has already spent a year working to change the culture of the firm, in order to generate superior profits and shared rewards.

Stephens Scown managing partner Robert Camp started consulting on the scheme three years ago, and cites as a measure of success the fact that the night caretaker puts a chocolate on the desk of employees who turn off their computers. And Mishcon de Reya continues to discuss the option to move to a John-Lewis-style partnership model after a year-long consultation on its ten-year strategy.

Recognition of the fact that, like an iceberg, two-thirds of the key to success lies below the surface, is the common factor in all the cases cited above.

Whether offering ownership (direct or indirect) and/or introducing firm-wide profit sharing, the challenge - and the opportunity - for law firms is to find the best way of reconciling this with the traditional partnership model.

Ann Tyler is employee ownership consultant at law firm Lewis Silkin. This article was co-authored with Fergus Payne, head of the partnerships practice group at Lewis Silkin