Firms: separating management and ownership can reduce effectiveness, says report

It is unlikely that non-lawyer owners can operate law firms any more efficiently than lawyers, an economic analysis of the legal profession has claimed.


The report by Copenhagen Economics, commissioned by the Danish Law Society as it faces its own Clementi-style review, said this was because introducing new owners could lead to conflicts with lawyers, and would diminish the lure of ownership as a way to motivate and keep qualified staff.


It said separating management and ownership can weaken the influence of the owners on a firm's operation, reducing efficiency. It added: 'Economic literature often highlights that it is optimal that lawyers own law firms because lawyers often make up an ownership group with very homogeneous interests.'


While law firms do have problems with bad management, the report said it is not obvious that modifying ownership requirements would improve matters. The profession itself is addressing the problem and can already bring in non-lawyer managers. However, Copenhagen Economics was cautious about allowing such managers to become owners, owing to possible conflicts of interest that could arise, for example, over ethical and professional issues.


It also questioned the demand for widening ownership, as access to capital is not a real obstacle to law firms - because they are not capital dependent - and there is little evidence of a strong desire for multi-disciplinary advice, especially given the problems of conflicting client confidentiality obligations.


The report pointed to Sweden, where accounting firms' efforts to take over law firms foundered because 'the demand for multi-disciplinary advice was too small to overcome the management difficulties that the ownership model posed'.


Copenhagen Economics also raised concerns that if non-lawyer advisers wanted to own a law firm so as to secure a new client base, or sell other products to existing clients, this could result in lower quality of advice - if the lawyer is not independent of other interests - and higher fee levels if the client simply relies on the recommendation of an existing adviser to find a lawyer.


The report was cited heavily by the Council of Bars and Law Societies of Europe (CCBE) this month in a submission to the European Commission that further deregulation of the profession - as part of its project on competition in the professions - may not generate the economic advantages that balance the 'serious negative impact on clients, society and access to justice'.


The submission deprecated the commission's 'purely economic approach', which it said failed to appreciate the non-economic objectives of professional rules and regulations, such as serving the administration of justice and rule of law.