The initial public offering of DWF today represents the largest law firm listing yet in the UK, with a market capitalisation of £366m.
DWF’s valuation is lower than initial market expectations but should the share price be maintained following the IPO it is likely to encourage other mid-tier law firms to consider going public. In so doing, firms will need to consider the extent to which it is possible to balance being a public company with the traditional custodian role of law firm partners.
Key to that custodian role is the issue of governance and partner remuneration and how that will change in a listed environment. Law firm partners considering an IPO will have to appreciate that listing is fundamentally a shift away from the traditional tenancy and full profit distribution model of partnership.
DWF partners will receive a fixed salary, with the remainder of partners’ remuneration deriving from dividend income from their shares. Equity partners’ total partner compensation will be reduced by 60%, and all other partners’ compensation will be reduced by 10%. The scaling back of partners’ remuneration is, of course, necessary to generate net profits for all shareholders (including external shareholders). In effect, partners are giving up a proportion of their income rights for the capital opportunity afforded by the ownership of shares. Partners will, however, be subject to lock-up arrangements, with shares vesting over a five-year period and clawback for those who resign within two years.
The DWF prospectus identifies the key role that remuneration plays in the success of a law business. The approach it has taken is designed to secure long-term buy-in from partners who, through their shareholding will maintain an interest in the success of the firm. Such an approach will potentially provide a financial windfall for partners who eventually cash out. Such a model does, of course, create 'winners' and 'losers', with the winners primarily being the current crop of senior equity partners. This may raise succession issues in the long-term, as the listed model fundamentally changes the role of law partners as stewards of a firm that will survive them and their influence, to employee-shareholders who might retain corporate influence and financial interests long after their retirement.
To many in the legal industry the idea of accountability to shareholders – whether former employees or institutional funds and others – is antithetical to the management model of seniority, legal acumen and experience, and collective decision making. In addition, being a listed firm may require non-lawyer management to which lawyers are (in)famously resistant.
IPOs present a major opportunity for law firms to reward existing partners, de-leverage (and thereby de-risk partners) and raise capital for investment and development opportunities. It remains to be seen if those advantages outweigh the potential impact on institutional morale and the long-term recruitment and retention of lawyers who may prefer the partnership culture and financial model offered by traditional law firms.
Zulon Begum is a partner at London firm CM Murray specialising in advising professional services firms