|
When the Law Isn't Enough:
Other People's Business
By Bob Andelman
(Written in Oct. 1991 for the American Bar Association
Journal;
not sure if it was ever published there)
If any one factor is bound to cripple and break up law firms
in the 1990s, it may be the singular lack of business know-how
and finesse possessed by the managing partners.
Mergers, buy-outs. marketing and technology are pushing the
commercial practice of law screaming and clawing into a new era,
and lawyers had better be prepared for more rapid change than
ever before. The very nature of practicing law is buffeting about
in a vortex of instability; where it stops nobody knows.
Richard O. Jacobs, 60, a partner in the St. Petersburg, Florida
firm of Riden, Earle & Kiefner, sees lawyers as emerging
casualties on two business fronts: their day-to-day legal practice
and in the companies of clients in which they invest or take
an active part.
Business failure - both through case histories and his own
personal experience - is a subject in which Jacobs is a reluctant,
self-taught expert. His opinions and advice are gathered in Crash
Landing (Glenbridge Publishing Ltd., $24.95), a combination
memoir and gut-check for attorneys dabbling in business. While
Jacobs' name may not be instantly recognized on the national
scene, his notions on the future of the law firm and preventing
the collapse of troubled firms will strike home for lawyers across
a broad spectrum of specialization and experience.
Jacobs became a lawyer rather late in life, graduating magna
cum laude from Stetson University, College of Law, at the age
of 35 following an early career in insurance. He joined a St.
Petersburg, Florida law firm in 1967 which eventually became
Jacobs, Robbins, Gaynor. Jacobs, Robbins, Gaynor was a big hitter
in the Tampa Bay game, supporting a considerable staff and several
satellite offices. Its Christmas parties were legendary in size
and style.
In 1977, Jacobs and eight other local businessmen acquired
St. Petersburg-based Park Bank, and became its board of directors.
Within five years the bank - represented, not coincidentally,
by Jacobs, Robbins, Gaynor - grew to several hundred stockholders
and $170 million in assets. The board asked Jacobs to take a
more active role in 1982 as president. Jacobs agreed and took
a six-month leave of absence that quickly turned into three nightmarish
years as the Federal Deposit Insurance Corporation (FDIC) criticized
Park Bank's rapid loan and deposit increases, its lending practices
and control systems.
The bank attempted to tighten loan management and systems
control but it was too late. As Jacobs puts it in Crash Landing,
"Park Bank was already too deep within its Black Hole."
The black hole was not pretty: it left eight offices, 350 employees,
$593 million in risky real estate assets, and investors with
$20 million in worthless bank stock. Park Bank became Florida's
largest bank failure on Valentine's Day, 1986 and the seventh
biggest bank failure in U.S. history at the time. It opened the
doors to Chase Manhattan, which purchased key assets of Park
Bank and moved into Florida for the first time.
As the walls came tumbling down at the bank, so did they at
Jacobs' law firm. He was bought out of Jacobs, Robbins, Gaynor
even before the bank's demise. Some partners left for greener
pastures altogether; others re-formed minus Jacobs and his banking
baggage.
Jacobs spent years entangled in lawsuits, unable to get back
in law. Friends and business associates cut him off. A reflective,
philosophic individual, he struggled to discover why he failed.
His search for answers led to Crash Landing and a chance
in 1988 to rehabilitate his legal career at Riden, Earle &
Kiefner.
"Law firms today are in terrible turmoil because of economics,"
says Jacobs. "They're disintegrating, laying off people,
something they never had to do 10 or 15 years ago. They're becoming
very economic and very bottom-line oriented. Lawyers are being
looked at as to what they can produce and bring in. It's producing
an embarrassing problem in the profession."
Flaws in how and why lawyers make economic decisions are at
the root of many financial problems in modern law firms. How
do you split and share income? How do you give credit for rainmaking
vs. doing work? How do you get paid for work that may not be
very productive in and of itself but is necessary for the firm?
The corporate department may need someone to handle a minor problem
with employees of a client corporation. The responsible attorney
may have low billing for what he or she does but contributes
greatly to what the firm does. How do you pay that person?
"Most of the fights in law firms come down to money when
you get right down to it," says Jacobs.
One exploding area of conflict that fascinates Jacobs is the
way lawyers balance a practice against an active, personal interest
in the business of a client. Should lawyers even participate
with clients in their business activity? Should the law firm
share in the proceeds? The risk?
"When the lawyer gets immersed in the client's problems,
that creates decisional conflicts, servicing other client conflicts,
suit conflicts," warns Jacobs, whose bank crisis led to
the law firm crisis that caused the law firm to split up. "That's
a big issue and it happens to every business lawyer. Everybody
who is a good lawyer gets asked by some client to help him out
and to get involved in business with him in some manner. If you
don't do it to some degree it's an insult. Second, you think
you can do it because you know so much about the business. You
almost become a mentor to the business owner."
Most attorneys lack the basic fundamentals of economics, says
Jacobs - financial statements, financial management, financial
controls, personnel management, strategic planning or long-range
planning.
DOES HE BELIEVE IFD A LAWYER DOES HAVE A BKGRD IN THOSE, SHOULD
HE FEEL FREE TO GET INVOLVED/
"Medical schools and law schools teach nothing about
the economics of business or values," says Jacobs. "I
think it's extremely important that law schools re-orient their
education and post-grad education to deal with the issues of
value formation and value judgements. The profession is caught
up today in a series of ethical rules and that's not what I mean.
Ethics are rules. Rules don't help you in tough situations; only
values do. Values underline rules. Values are fundamental. How
do you look at life? How do you deal with clients? It's probably
more important today because life is far more complex. You have
more opportunities to deviate. And if you're under financial
pressure you might be more tempted to deviate into inappropriate
conduct. So your value system has to be strong."
Client businesses are irresistible to attorneys for one of
several reasons. The financial rewards are attractive. The business
may be glamorous - something to talk about at the club, a famous
client to introduce around. Maybe it's the challenge of succeeding
in two fields.
"You don't realize at the time that there's a difference
between sitting on the sidelines and giving legal advice and
actually getting in and running the business," says Jacobs.
"You think, 'If I can do one thing, I can do anything.'
But you can find endless stories of lawyers who get involved
in business and get in trouble. Clark Clifford, the great lawyer
and presidential advisor, got involved in running a bank he knows
nothing about. If he had a legal career right now, he'd be ruined."
Stress and the labor-intense nature of a practice are further
reasons some turn to business. It's a diversion.
The client has a business and reveres the attorney's intellect
and problem-solving ability. The business looks neat and it's
easy to want to get involved in it. And so you do. "You
do it for the money, you do it because it's less intense,"
says Jacobs. "At least, you think it's less intense."
Two immediate points of conflict will arise for lawyers in
client businesses: first, as a director of the company, the attorney
loses attorney/client privilege. "If the client comes into
the office and talks to me about problems," says Jacobs,
"we have a legally protected conversation. Once I become
a participant in his business, he loses that. So you have a different
relationship of communications. Second, the lawyer loses his
independence. And the loss of independence is a business issue
in giving sound advice.
"My experience has led me to believe that a lawyer who
represents a corporate client should not be on the client's board.
He should be an independent advisor," says Jacobs.
Another area where lawyers get in trouble is the assumption
that because they are good lawyers, they must be good business
people, and that their knowledge is transferable. Wrong.
"If there's anything I learned in the Park Bank experience
it is that that is not true. How to run a business is knowledge-specific.
You have to know that business very, very well. Good lawyers
are intuitive - intuition is knowledge-based. I can look at you,
talk to you about a problem. I may never have researched it,
but because I have a grounding in law, I can have instincts about
the way to approach it. Usually, those instincts are pretty correct.
I usually can find cases that support my position. I understand
the fundamental principles, I study very hard, I keep up to date,
I have a legal intuition. If I go into a business about which
I know nothing, that legal intuition has no data base. Therefore,
what I come up with are guesses and bad judgements as opposed
to intuitive thought."
Meanwhile, back at the practice, your extra-curricular business
pursuit may not be going over well with partners, associates
and staff.
Is the attorney covered by malpractice insurance while working
in a client's business? Not likely, warns Jacobs. The partnership
is going to be uncomfortable about being exposed.
Of even greater and more immediate concern may be the billing
hours that are lost when a rainmaker spends day after day doing
something other than practicing law.
"If I'm spending 50 percent of my time on a client matter
in which I'm participating, there's no way I can convert that
to a legal rate," says Jacobs. "Let's say I join a
company or start a new company with a client. There's an equity
interest and I give the law firm a piece, which I have to do
because of my relationship with the firm. That equity may make
it or it may not make it. There's a risk there. If, in fact,
the lawyers are in tough economic times, they're waiting to
get paid. I say look, I'm spending all my time on this, three
years, five years from now it's going to be a big deal. But they're
still waiting to get paid. That creates tension. My position
is I should get paid just like they are, I'm working hard for
the firm and it's a deferred payoff. Their position is, when
it pays off you get paid, meantime they're going to suffer income-wise.
It creates tremendous income tension. How do you split income
under those circumstances? So you've got the liability tension,
the income tension and then you've got the fact that by doing
the client's business, I'm not billing other clients. I'm not
rainmaking in the real sense of the word."
While the attorney-turned-business person is off moonlighting,
the law firm doesn't stand still. It can be a very different
place to which to return. Jacobs was away from his firm for most
of three years while he ran Park Bank. By that time there were
people in the firm that he didn't know and who knew him more
by reputation than common experience. Many had been hired in
his absence. They bore no loyalty to him in tough times and,
when push came to shove, it showed.
NEVERTHELESS Jacobs says a lawyer falling under the
allure of a client's business should consider taking a hiatus
from the practice.
"Larger firms may well require that," he says. "Medium
firms, 25 to 50 people, that's where you have the real tug because
lawyers think they can do both. They can bring in the legal work,
have other lawyers do the work and still be involved in outside
business."
What happens when the client business the attorney is involved
in goes bad?
"This I can tell you from personal experience,"
says Jacobs. "I don't talk about it a lot in the book. In
the part of the book where I talk about me having the final confrontation
with the law firm, they are concerned about what is going on
at the bank and the effect on them. Well, in reality, they were
afraid at that time of being sued. Of course, they did end up
being sued. The spillover effect of the client failure was that
the law firm first found itself embroiled in litigation. The
second spillover effect is that there's a lot of adverse publicity,
usually about the firm rainmaker. You have spillover bad publicity
that drives away clients. That reduces firm income and productivity."
It also turns off fellow attorneys.
"When it gets down to the rim and the black hole,"
says Jacobs, "there is no brother and no friend. That's
true for lawyers. If you get right down to it, that happened
to my firm. The firm split up out of fear, out of the inability
to stand through the trauma. Everyone decided to take care of
themselves. Many of the lawyers spun off, went with different
firms or formed different firms to get away from the trauma.
Clients were lost. That was a tremendous economic cost to everybody.
To me, in particular. Huge cost.
"I believe the firm would not have split up had I still
been in it. But I couldn't even deal with those issues at the
time. I had all I could deal with with Park Bank. And so there
was no way I could have stayed there and worked with it. They
bought me out and I went back to the bank. It was a significant
issue because I defined myself as a lawyer. Now that part of
my life was gone and under attack. Lawyers were seeing all the
bad things which could occur and wanted to run away as fast as
they could. It was like the bombing in Beirut. They wanted to
get to the bomb shelter and let me stay in the palace. I was
very upset about that. We were together all those years. Then,
when things got tough and tight, they abandoned me. That firm
bore my name for 15 years. Losing it was very traumatic."
After Park Bank failed, Jacobs talked to friends about going
back into practice and was encouraged. Then the torrent of lawsuits
were filed and the bad press got worse.
"People wouldn't talk to me," he recalls. "It
was as if I had changed as a person. That was hard to deal with.
People want to sit on the sidelines and see how you make it through.
'Did he commit all these things?' 'Will he make it through?'
You get shut out of opportunities. I thought of moving but I
just had to fight my way through it. For a while I froze in position
and literally did not know what to do."
Just as Jacobs endured the disintegration of his law firm
and stuck with his bank until the bitter end, senior managers
in business and partners in law firms often don't know when to
bail out of a sinking ship. They tend to interpret facts and
circumstances to protect their personality. They don't see the
flame and ashes beyond the volcano's rim, to use a Jacobsian
analogy from "Crash Landing."
"I saw trouble, but not really as trouble," admits
Jacobs. "Most people see it as short term and not long-term.
They under-estimate trouble. And then most people over-estimate
their ability to pull themselves out. Some do walk away. But
lawyers are adversarial in nature and I suppose they tend to
stay and fight it out."
Despite his dismay over being abandoned by employees and partners,
Jacobs swears by maximum disclosure in troubled situations. That
is, after someone recognizes that a problem indeed exists.
"You need to be straight-forward and honest for the people
who are affected by your trouble," he says. "Of course,
that creates a crisis all by itself. I don't think I would have
had a chance to save the bank had I not been that way. People
normally assume the worst. Their natural presumption is, if something
is going wrong, somebody did something wrong. The only way you
can deal with that is to be forthright. Some people think that
if you're in trouble, if you keep it to yourself and don't tell
anybody else about it, that that's the right thing to do. If,
in fact, it's trouble that affects the whole organization, then
I think you have to discuss it with the whole organization. Because
those people have the right to make decisions about what they
do with their own lives.
"In the book I talk about depositors. You shouldn't keep
over-$100,000 deposits uninsured. If you know they're at risk,
they have a right to decide if they want to be at risk. If a
law firm has a huge malpractice case against it or something
else that could be a disaster for it, it should be discussed
with all the lawyers so that all of them have an opportunity
to be a part of the solution. Or, at least, to deal with their
own lives. I don't think you have the right to play God with
other people's lives."
Are there signs of trouble a firm should recognize?
"Lawyers are leaving - why?" asks Jacobs. "Watch
for lawyers meetings at which there's no participation. These
would be obvious signs. Inability to recruit good people. Lowering
recruiting standards. Inadequate financial controls. Lost support
staff is also a sign of trouble. It tells you you've got the
wrong office manager, the wrong lawyer looking after that."
The "spillover effect" - one of many key phrases
and buzzwords in "Crash Landing" - is the overflow
from a sour business deal. It pervades the business, the law
firm and the private arena.
"I don't think you can avoid the spillover effect,"
says Jacobs. "I think that's a natural result of problems.
Bad spillover publicity - it attacks character. A number of clients
just had nothing to do with me until the publicity was over.
I couldn't go out and promote business. And it went on for over
five years. That's a tremendously disabling thing for a law firm.
Most don't last through it."
A good lawyer can learn a lot from losing.
"You learn that people are vulnerable," says Jacobs.
"You learn that not everybody wins. And therefore you learn
to respect circumstances and situations better.
"Lawyers going into business get caught up in the same
presumptive assumptions that everybody else makes: That you're
pretty smart, that you ought to be able to get through it, that
you know what is going on. Those are exactly the opposite presumptions
a lawyer makes when he gets a case if he's being careful about
his work. He's digging in to see what the real truth is. So from
a lawyer's perspective, getting involved in business, he should
not drop his investigative mode, he should not drop his caution,
he should look at things and try to objectively get at what really
is going on. I didn't do that in the Park Bank circumstance and
I don't think most business people do it. Lawyers don't apply
their in-depth analysis to the businesses they're running and,
quite frankly, I don't think they apply it to running most law
firms."
Sidebar:
THE LEXICON OF A CRASH
"Crash Landing," Richard M. Jacobs' book about the
collapse of his bank and law practice, is packed with colorful
terms. Here are a few examples:
"Analysis paralysis": People who spend so
much time analyzing things they never get around to making a
decision. In law, many management decisions are so foreign to
the knowledge of the lawyer that he will tend to withhold making
a decision.
"Black holes": Where universes collapse.
Once in the grasp of a black hole, there is only death and destruction.
Even light cannot resist.
"Black hole blinders": Something in your
psyche that prevents you from seeing disaster coming. A winning
lawyer in the courtroom would tend to be blinded to any sign
in the life of his firm or practice that would take away from
what he thinks about himself.
"Gatsby grabbers": People who are more concerned
with what others think of them than what they really are as people.
They're performers for the show. They're doing things to look
good for status with other people, blind to the signs of danger
that interfere with personal cravings.
"Groupthink": A problem for law firms, especially
in board meetings that are dominated by one or two members. Others,
in their "respect" for the senior lawyers, don't participate.
Lawyers and doctors tend not to want to make business decisions.
As a consequence, they tend to rely on others' decisions.
"Leveraging leaders": They leverage the law
practice for personal gain, borrowing money from a bank to pay
top salaries to lawyers that were not earned. Law firms, which
rely on personal services and relationships to survive, cannot
afford to carry huge loads of debt. The leveraging leader seeks
power and control he deems necessary for self-esteem.
"Masters of the universe": Lawyers are singularly
trained to be totally in charge of what they are doing, to be
the consummate master of their universe. That leads to enormous
blind spots because nobody is the master of his universe.
"Rim country": The transition zone between
the reality now and the ultimate crash, where problems develop.
It tests the spirit and the will, taking each to the brink.
"Rim people": They resort to primitive behavior,
putting survival at the top of the list. They don't sit down
to figure out what ought to be done. It's every man for himself.
Happens in the breakup of every law firm. The firm polarizes
and the rim people become worse than ex-spouses in a divorce.
end
©2000,
All rights reserved. No portion may be reproduced without the
express written permission of the author.
Free Andelmania E-Newsletter!
Want to hear the latest about the Andelmans? Join
our mailing list!
You'll get updates about the family and professional news, too.
Enter your email address below, then click the 'Join List' button:
|