Solicitors' moral maze - solicitors value their professional standing and the adherence to a professional code of conduct

OONAGH MARY HARPUR CONSIDERS THE CASES OF TWO FIRMS FACING ETHICAL DILEMMAS ON PARTNERSHIP PROFITS AND LEGAL AIDLaw firms are knowledge businesses with a strong ethical value system.

The case studies here show the complexity and importance of reconciling what a business stands for, in its market place and the wider community, with the needs and expectations of its owners and employees.

This is especially true when the owners and employees are also the knowledge workers and entrepreneurs.

It is not sufficient to choose an option which is most consistent with a firm's values and objectives.

This is because management teams do not always have the management skill to implement decisions consistently with their values.CASE STUDY 1:DISTRIBUTION OF PROFITS.The managing partner of a 25-partner law firm faces the following ethical dilemma.The firm's financial year ended a month ago and draft accounts are now with the managing partner.

It is time to decide how much of the firm's profits to distribute to the partners.The partners' only income is their share of the profits.

The firm's drawings policy is similar to that of most firms.

At the beginning of a financial year, the partners agree a budget for the coming year.

From the profit forecast, they calculate how much profit-share each individual will receive.

The firm's profit-sharing arrangements are typical of most law firms of this size.

It operates a lockstep system in which the profits are essentially shared equally between all equity partners subject only to seniority.

It agrees to give each partner a drawing each month equal to 75% of its forecast profit share.Half way through the year, the partners agree a revised forecast and drawings are increased to 80% of the new forecast.

One month after the year-end, draft accounts are completed, and a distribution of profits is made to partners three months after the year end.

The distribution is equal to 95% of the profit in the draft accounts.

The final 5% is distributed nine months after the year-end when final accounts have been agreed.The firm has kept to this policy for many years.

The policy has provided stability for financial planning for individual partners and cash flow for the firm.The draft accounts show a profit 10% above the revised forecast six months ago.

However, in the past three months, the collection of payments for outstanding bills has been particularly poor.

Twenty-five per cent of last year's income remains uncollected from clients.

Also the new financial year has started slowly.

There seems to be less work in the firm and billing levels are down 15% on the same period last year.

The firm needs to pay salaries, rent and the partners' drawings over the next six months.

Salaries account for 30% (approximately) of law firms income, property costs for 15% (approximately) and partners' drawings for 20%; a total of 65% of total income.The finance director has recommended to the managing partner that he postpone the next distribution of profits for three months.

This will give partners sufficient time to get the bills paid.

The finance director's cash flow forecast shows that, if the firm distributes at the end of the first quarter, the firm's overdraft will need to increase by £800,000.However, some of the newer partners would have financial problems if they did not get their share of profits on time.-- EVALUATING THE OPTIONSThe managing partner identified the options and analysed them as follows:1.

Make the distribution on time and increase the overdraft;2.

Delay the distribution by three months;3.

Change the draft accounts to show a lower profit;Make the distribution on time and increase the overdraftEach partner will receive on average £30,000.

By making the distribution on time, the managing partner is sticking to the firm's drawing policy.

The partners value the stability this provides.

It sets a good example to everyone about loyalty and keeping agreements between partners.This option demonstrates trust.

The managing partner trusts the partners' individual judgements of clients to pay bills quickly.

Individual partners are responsible for deciding which clients to take on and when and how to bill them.

The partners can expose each other to significant financial risks, for example, if large bills are presented at the end of a lengthy transaction such as property or company purchase, or a client gets into financial difficulties.

Like many firms, this firm has grown quickly and has many new partners and clients.

It is now much more difficult to assess how much of last year's income is at risk.However, if the bills are not paid he may need to increase the overdraft.

If the bank refused an increase in the overdraft, he would have to cut partners' drawings this year or reduce staff numbers.Also if staff find out that the partners paid themselves and put the firm financially at risk, they might be accused of being greedy and putting their own interest before those of the firm.In order to make this option work, the managing partner would need to exercise a high level of management pressure on individual partners - both to collect outstanding bills and bring in new work.

He will also need to make a persuasive case to the bank manager to extend the overdraft, should that become necessary.

Finally, he will probably need to keep his analysis strictly to himself.In the long term this option is good for building trust and loyalty between the partners and the managing partner, and for sustaining a culture of loyalty and keeping agreements.

It requires high levels of management intervention, influence and skill.Delay the distribution by three monthsEffectively, the firm would be using the profit from the previous year to finance the current year's cashflow.Three partners retired last year.

They are not responsible directly for the outstanding bills, but the risk of them not being collected does fall on those who were partners in that year.

However, they should not be asked to pa y a penalty for a cashflow problem in the current financial year.

It would effectively be stealing from them for three months, unless the managing partner seeks their agreement to delay the distribution.The new partners in the previous year will be losing the use of the profits they are entitled to for three months.

But they will be getting what would amount to an interest-free loan from last year's more senior partners.

There will be similar distributive injustices between all the other partners in proportion to respective change in profit shares.

On average the value of the 'loan' is probably about £500 to each new current year partner.This option is the most honest.

The truth is out in the open for all to see.

The few partners who are in financial difficulty will be badly affected by this option.

If they go bankrupt, they can no longer practise as solicitors.

This would damage the firm's reputation.However, the bank would be more impressed by this approach.

It demonstrates proper prudence.In order to make this option work, the managing partner will need to persuade the retired partners to wait for their profit distribution.

He will also need to persuade the more senior partners to agree to fund the current partnership.

The pain caused by delayed cash payments to partners will probably provoke sufficient peer pressure among partners to do his management job for him.

In the short term this is the easiest option to manage.Change the draft accounts to show a lower profitThe accounts would include a provision for an amount of bills that may not be collected.

A smaller distribution would be made and the current cash flow problems would be met by a smaller overdraft if necessary.The managing partner is betraying his trust in the partners' judgement of their clients' potential to pay bills.

However, this exposes the problem fairly and illustrates the consequences for profit and distributions if bills are not paid.The management problems created by this option can be difficult.

Partners need to agree the amount to be provided.

This can be difficult and time consuming.

Those partners who want their cash quickly will present arguments for keeping the provision as low as possible.

In the short term, the partners may focus internally and lose sight of bill collection and new business opportunities.

Preventing such a scenario would require skill in communication and management.In its workshops, the Institute for Global Ethics identifies four common ethical paradoxes which emphasise the point that ethical dilemmas are about choosing between right and right:-- Truth versus loyalty;-- The individual or the community;-- Short term versus long term;-- Justice versus mercy.The choice of option 1 instead of options 2 or 3 would illustrate valuing loyalty to the partnership policy more than truth about the current financial situation.The choice of options 1 rather than 2 illustrates valuing the partners more than the whole firm.The choice of option 1 rather than option 2 illustrates valuing the long term more than the short term.-- CREATING A COURSE OF ACTIONIn this case study the best course of action depends on the firm's values, its attitude to financial risk, whether it values the individual partners more than the staff, its bias towards short- or long-term consequences and its competencies to manage the consequences of its decisions.Option 2 is most commonly pursued.

It is chosen because lawyers tend to be risk averse.

If one or two partners are likely to get into financial difficulty - then the partnership ca n lend the partners money and give them financial counselling.Option 3 can work successfully when the partners are financially sophisticated and have had several previous years where the composition of the partnership changed significantly.

That firm had an elected committee of partners, rather like an audit committee in a company, who were very experienced and whom the other partners trusted to assess the risks and make appropriate provisions.Some managing partners argue strongly for the first option.

In their firms the culture depends on partners respecting and sticking to policies, commitments and agreements.

They have often fought hard to build this culture and instinctively fight hard to retain it.CASE STUDY 2: STRATEGIC OPTIONSThe managing partner of a 25-partner firm is faced with a decision about whether to keep the legal aid practice.

Hundreds of law firms in Britain have faced this decision in recent years.However, this case study also relates to those firms where the decision is about any area of practice which is peripheral to the firm's strategic objectives.

The case study has been simplified and adapted to highlight the issues and ethical dilemmas.The firm has a traditional client base in an English provincial city, providing commercial advice to local businesses.

Recently the firm has established a good client base at a nearby science park, which gives it high-risk work with high rewards, both financially and professionally.

It has a reputation for loyalty to clients.The partners have recently reviewed the firm's business strategy and decided that they will build on its reputation for top quality commercial work and specialise in this area.

They agreed that for the present the legal aid team would remain in the firm, but they have asked the managing partner to review its position in the long term and make recommendations.The legal aid practice has two partners, three assistant solicitors and five legal executives.

It has improved its systems for getting cases completed efficiently and obtained a legal aid franchise.

It is held up as a model group by the Legal Aid Board (LAB).The firm's practitioners have all spent their careers with the firm.

They are well liked socially.

They have also played a valuable role in maintaining the cultural glue of the firm as people have joined and left.The common firm values are loyalty and teamwork.

The internal culture of the legal aid group is very different to the rest of the firm.

The legal aid group has more work than it can handle.

It values its hierarchy and stability, systems and procedures, efficiency and consistency.Most of the rest of the firm is entrepreneurial.

They work hard to market and sell their services.

Their work has great variety.

Creativity, legal expertise and sharing legal know-how and experience are especially important.

There is little hierarchy and assistants work in several different teams during the year.The legal aid work earns sufficient income to cover the costs of the operation but not sufficient to cover the partners' profit share.

Salaries account for 30% (approximately) of law firms' income, property costs for 15% (approximately) and partners' drawings for 20%; a total of 65% of total income.

Also, the LAB pays the firm many months, and sometimes as long as a year, after the work is completed.

The other partners in the firm are therefore subsidising this work.Inevitably there are clashes between the two parts of the firm - about profit sharing and expenditure.

Young partners in the commercial department maintain that they sho uld earn a greater share of profits because they bring more money into the firm.

The commercial partners want to spend money on promoting the firm.

The legal aid practice wants to spend money on the firm's infrastructure.These issues are discussed in some form almost every year at the partners' meeting.

The overwhelming argument has always been that the firm has a duty to the city to provide a first class legal aid practice.However, extra resources are almost always spent on promoting the firm and not its infrastructure.

Salaries in the legal aid team are lower than elsewhere in the firm.

The managing partner is under pressure to introduce a bonus system for profit sharing.

For example, 10% of profits used to create a bonus pool for certain partners.The managing partner has been approached by another law firm which has decided to specialise exclusively in legal aid work.

It would be interested in acquiring the firm's legal aid practice.The decision will not only affect the legal aid team and other partners.

It will also affect their families and friends, the other staff in the firm and the wider community.-- EVALUATING THE OPTIONSThe managing partner identifies and analyses the following broad options:I.

Keep the legal aid team and resist pressure to change theprofit sharing;II.

Keep the legal aid team and change the profit sharing system;III.

Persuade the legal aid team to join the other firm;IV.

Give the legal aid team a year's notice of redundancy.Keep the legal aid team and resist pressure to change the profit sharingKeeping the team demonstrates the partners' loyalty both to their partners and staff and also to their local community.

Preserving the lockstep preserves its underlying values.

These are the sense of equality, loyalty, teamwork and sharing.

Over the long term both parts of the firm make an equivalent, though different, contribution.

Equivalence is difficult to measure.

For example, in this firm the legal aid partners' contribution to the firm's cultural 'glue' and the firm's reputation in the wider community, is not measurable but certainly valuable.Keeping the legal aid practice is consistent with the firm's values but may not be consistent with the firm's strategic business objectives.

This option does not free up any profits for distribution to the young star partners.

If they leave, the firm may find it hard to achieve its objectives.There are several partners who would argue that all young partners want more money, but they should be made to wait like everyone else.

If they share the firm's values of loyalty and teamwork, they will be willing to wait.

If they do not share these values, then the firm will be better off without them.In the long term this option looks attractive for keeping the firm in step with its values.

In order to make this option work, the managing partner will need to have the trust of the partners, to communicate clearly about the firm's values with the young partners and to have sufficient influence to encourage them to stay.

He will also need to use his influence to ensure that the legal aid practice gets its share of resources.Keep the legal aid team and change the profit sharing systemThere are two broad options for changing the profit-sharing system: ask the legal aid partners to reduce and freeze their position on the lockstep, or create a bonus pool with say 10% of profits and share this pool among the 'best' partners.Reducing the partners' position on the lockstep would be difficult.

The first time it is done, partners can see themselves as not v alued as making an equivalent contribution to the firm.

The other partners will be breaking their agreements to be loyal, to value each others' contributions equally and to work as a team.

The legal aid partners may become de-motivated.

This could affect not only the staff in their department, but their families and the other staff in the firm.

The 'glue' might weaken.Some of the firm's weaker partners may begin to believe that they too will be asked to take less if their area of practice becomes less profitable.

Uncertainty and insecurity may begin to seep into the firm.Creating a bonus pool appears easier in the short term.

However, the distribution of a bonus can be divisive.

The distribution process needs high levels of skill in transparent, open and clear communication.

The attention of partners can easily start to focus more on the annual distribution than on their marketplace and the need to serve clients.In the short term, this option benefits the young 'star' partners and keeps them happy.

In the long term, the culture and values of the firm will be more difficult to sustain.Persuade the legal aid team to join the other firmThe managing partner has explored this option with the other firm out of loyalty to his partners to get the best deal he can for them.

The partners and legal aid team may consider that they have been 'stitched up'.

This would damage morale.This option will remove the pressure to change the lockstep system.

This will help to reinforce the values of loyalty, sharing and equality over the long term.This option achieves the firm's business strategy objectives to become a purely commercial firm; but the firm would lose a large part of its 'glue'.

The staff left in the firm would feel a great loss, as would those who left.In the short term, this option is attractive because it is quick, but it would be a severe loss for the firm.

The managing partner can minimise the potential damage from this if he is both aware of the demands of these stages and manages the firm with care.If it is not well managed, staff may believe the partners have betrayed their values of loyalty and teamwork.

This could lead to demotivation across the firm.

Over the long term the firm's culture could be changed forever.The team may or may not wish to join the other firm.

It may wish to set up its own firm or may already be in discussion with another firm.

The managing partner will need to be very skillful in his persuasion.If he is seen to be pushing the team out into the firm he has chosen, this would damage morale in the firm and undermine the values of loyalty and teamwork.He will also need to be skillful in his analysis of the culture of the firm and the gaps left when the team goes.

He will need to fill those gaps and rebuild the culture.

Finally, he will need to be good at managing change.Give the legal aid team a year's notice of redundancy.This has the advantage over option III in that it values the team's autonomy to determine and negotiate their own future.

Giving them 12 months to continue working in the firm, demonstrates trust.The option includes a large cash payment which will cushion the impact of the lower salaries they would receive in another firm, but will have short term financial consequences for the firm.This option places a high value on autonomy, fairness and justice, and trust.

With good people management and communication, this option can be made to work with minimum damage to morale.If poorly handled, the outgoing team could turn its 'glue' into 'poison' and do significant damage in a year.-- DIFFERENCES BETWEEN THE OPTIONSOption I is for the visionary leader and partnership who believe strongly in the firm's social responsibility to its community and that this is good for the firm's long-term reputation.Option II will be attractive to the short-termists who do not want to tackle the potential conflicts of option I or the more difficult change management problems in options III and IV.

In the long term, it may destroy the firm's culture and become the most difficult to manage.The balance of the main arguments in favour of, and against, options III and IV compared with options I and II, is about who and what is valued more - the legal aid team or the stars, the strategy or the culture, and the values or the morale of the staff.-- CREATING A COURSE OF ACTIONAll four options have been pursued in the past.

The first is the most unusual and takes probably the most courage and commitment to the firm's common values.

One firm that chose that option still has a significant legal aid practice.The pursuit of options III and IV should ideally start with a conversation with the partners of the legal aid team to explore the options and what they wish to do.

This conversation handled so badly that the trust between partners is lost and no option can be made to work well.The success of any option will depend on the management and interpersonal skills of the managing partner.

Where he is aware of his own weaknesses, then those tasks should be delegated to other competent partners or the option should not be attempted.ED NALLY EXPLAINS THE REMIT OF THE LAW SOCIETY WORKING PARTY WHICH IS CONCENTRATING ON MAKING SOLICITORS' PROFESSIONAL CONDUCT RULES SIMPLER AND LESS BURDENSOMEThe Law Society Council has decided that one of its strategic priorities should be to review the Society's rule-making function.

The regulation review working party has been set up to establish the principles which underlie the rule-making function of the Law Society and to provide consistency in rule making in line with those principles.

The aim is to simplify and make less burdensome the professional rules of conduct.In the view of the working party, that must mean that the rules have to be simpler and more accessible, not just for the profession but also for the public and in particular, clients.

The existing rule book is a veritable porridge of confusing concepts.

The profession is faced with rules, notes, guidance, codes, advice, protocols, Council statements, waivers and so on.

Is it any wonder that at times neither practitioners nor the public knows quite where they stand or what the relative force is of these different terms?Would it not be so much easier if rules of conduct were more plainly stated in a way which is more client-centred in certain areas? Thus the expectations of clients from solicitors would be clarified.But that which is planned in terms of simplification or changes to the rules is not a soft option, nor a lowering of standards.The minimalist approach might be to scrap the whole rule book and allow solicitors to be governed by the general criminal or civil law as the case may be.But is that really what the profession wants? I think not.

What defines a profession is the standing in which it is held by the clients it serves.

The responsibility that goes with such standing invariably means that at times solicitors have to act on a higher plane of conduct so that they can be trusted by clients with their most complex problems who can be confident that they are safe in professional hands.

Consider the bil lions of pounds that law firms handle in the fields of conveyancing and probate work.

The whole system revolves around a network of professional undertakings which have been developed not out of the general law, but rather as a matter of a professional code.And consider the solicitor advocate who must be trusted not to mislead the court, to the extent of being forced to withdraw if a client wishes him to lie or wishes to put the solicitor in an impossible ethical position.

It is ethical issues such as these which any regulatory system devised must preserve.Over the next few months, the working party will be establishing an over-arching principle to determine how best to approach rule making, both currently and in the future.

It will then determine a series of principles to govern the more detailed rule changes and finally, it will set out a series of core duties that a solicitor can be expected to perform.Assuming these three steps meet with the Council's and the profession's approval, the existing rule book will be tested against these principles and reviewed appropriately.

In certain cases, this may well involve a total deletion of certain rules, in others, elements of the rules may be converted into guidance as opposed to formal rules.It is hoped the final result will be a redesigned rule book which the profession and the clients it serves can each understand and which is fair and reasonable.

The thinking is quite radical.If the focus of regulation concentrates on the duties that solicitors owe to clients and the courts, that may well lead to a reduction in those rules which exist only for the benefit of the profession or sections of the profession.Solicitors will have the opportunity to contribute to the debate both informally and through a formal consultation process.AUSTIN O'MALLEY ANALYSES THE TRENDS IN ENQUIRES FROM THE PROFESSION ON ETHICAL ISSUESLast year the number of enquiries from solicitors to the Law Society's professional ethics department topped 60,000, and there is every indication that this number will increase.

During the preceding ten years the number has more than doubled, from a figure of 28,000 in 1988 to 62,000 in 1998.The substantial increase has been in the number of telephone enquiries, with the number of written enquiries remaining largely static.The 1998 statistics show that the single individual category that generated most enquiries was questions about the accounts rules (7,000).These enquiries were raised by solicitors and their cashiers or accountants.

It may be that this is a response to the proposed new accountancy rules and, in subsequent years as solicitors and others find their way round the new rules, these enquiries will not remain so pre-eminentThereafter the statistics show the sort of enquiries that one might expect to see, with:-- conflict of interest totalling 5,500;-- confidentiality issues at 4,000;-- investment business 3,000; and-- requirements of practice 3,000.The remainder of the enquiries are spread across the whole gamut of matters in the Guide to the Professional Conduct of Solicitors, from queries about conveyancing and wills to multi-national practices and financial scams.Not all enquiries can be resolved with reference to the guide.

Many of the problems relate to how the principles or notes are interpreted.

In this respect the professional ethics department will venture an opinion on what it considers to be the correct answer or approach.However the department's opinion, although it may be persuasive, is not binding on the courts or other decision-making forums such as the Law Society's compliance and supervision committee.This is relevant, for example, to the question of an alleged breach of an undertaking.

An opinion that the department may express might not be upheld by the court, or by the compliance and supervision committee.On occasions where points arise that are new, or particularly complex, or require further consideration, the enquirer will be told that an opinion will be sought and professional ethics will contact him or her with its findings.It may be that that enquiry can be dealt with by reference to another adviser with experience in a particular field.

Or it may be that the query raises a matter of general concern on which a concerted view is sought.Previously, any unusual issues that could not be resolved in-house would be referred to the standards and guidance committee for its view.

This committee was abolished, in common with others, as part of the restructuring of the Law Society.In its place a professional ethics panel will now help when required to give guidance on particular matters.

The panel consists of Council members drawn from private practice, public authorities and the academic world with extensive knowledge of the rules.It is envisaged that this forum will consider unresolved issues relating to the interpretation of the rules, and meet on an ad hoc basis.The service provided by professional ethics is confidential.

Information is not relayed to other parts of the Law Society.

An enquirer is not obliged to leave a name or telephone number.

The enquiry can be as discrete as is wished.

Solicitors contacting the department because they find themselves in personal difficulties may be referred for help to the Solicitors Assistance Scheme or SolCare.

Such enquiries are comparatively rare, and whatever advice is given, ultimately it is for the solicitor to decide whether to approach these bodiesWhile some queries are obviously serious to the solicitor and treated accordingly, others do have a lighter side.For example, there was the case of a solicitor who acted for the seller of a property, and anguished over disclosing to the purchaser's solicitor the fact that the family's pet rat had escaped after exchange of contracts and was still at large with completion looming .-- A new telephone system will come into effect in the Law Society's professional ethics department on 1 July, which, it is hoped, will mean a more accessible and effective service to the profession.

The service will be open from 9am to 5pm and can be contacted by telephoning 0870 606 2577.