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The appointment of non-executive directors is not common in law firms, but those that do take this step significantly outperform their competition. Nigel Haddon and Rob Lees explain how and why you should appoint a non-executive director for your firm.
With so many law firm clients required to have independent, non-executive directors (NEDs) as part of their governance structure, it is surprising that so many law firms, with no regulatory barrier to the incorporation of NEDs into their own corporate governance, have opted not to do so.
Of course, this may be more down to lack of knowledge than anything else. Becase NEDs are relatively rare, firms may not know some of the basics: what a NED would do; what value they could bring; how to find the right NED for their firm; or how to incorporate the NED into their culture once they’d found one.
In this article, we address these questions, outline the business case for NEDs in law firms, and provide a beginner’s guide for recruiting a NED in your firm.
No. Listed companies must comply with the UK Corporate Governance Code, which requires at least half the board, excluding the chairman, to be NEDs. Smaller companies, perhaps more directly comparable with sub-top 50 law firms, are required to have at least two independent NEDs. AIM-listed and unquoted companies, which includes most professional service firms (PSFs), are not subject to the code.
However, there is much encouragement both in the code itself and from peers, funders and accountants for them to follow suit. This may be for a range of reasons, but one often cited is that NEDs can, when appointed appropriately and operating effectively, improve the management and operation of businesses of all types.
But appointing NEDs is no panacea. To be effective, a NED must be truly independent, and needs to be given time to really understand the business and to know when to challenge executive management. For a NED to succeed, the right person must be appointed, and an appropriate environment must be in place (or be created) for that NED to effectively operate.
In a piece published in The Lawyer in August 2014 (tinyurl.com/Drummond-research), executive search firm Edward Drummond revealed that only one in four of the UK top-100 law firms had appointed one or more NEDs, but that those which had appointed them had grown about a third faster over the previous four years than those which hadn’t. They also identified a trend for law firms to ape corporate governance structures with a view to gaining competitive advantage.
And those which had appointed NEDs had generally done so not to gain sector knowledge, nor connections, but to add a ‘helicopter’ or external view of the business.
The benefits of appropriate NEDs being appointed to firms identified in the Drummond research and elsewhere include:
Would every type of firm benefit from a NED? With our 60 years in and with law firms, we would say that just about every firm in firm in the top-500 would benefit from at least one NED. There are exceptions – there are some firms where the cultural barriers may be insuperable, such as in a highly collegiate, regional ‘High St’ firm, and there are others at the lower turnover end of the top-500 which may not choose to prioritise investing in a NED, given a range of competing priorities. But in general, and given all the benefits, we would encourage every firm in the top-500 to at least investigate the options.
Recruiting people into any firm in any position starts from knowing precisely what you want the individual to do, and NEDs are no different. So you need to define the NED’s remit clearly before you begin recruitment. Of course, that remit may change over time, but their initial responsibilities must be clear to all parties.
Should a NED be someone who can open doors and introduce the partners to potential new business, or someone who can help the firm become even more effective across all aspects of its activities? The Edward Drummond research was quite specific on this point, and all of our experience supports their research: that lasting improvements to a firm’s operations and profitability only come from appointing NEDs with the ability to contribute across the piece.
Some firms hope to combine the two roles but, in reality, finding someone with both the right business networks and the expertise to help the firm substantially improve its performance is exceptionally rare. One requires knowledge of markets, the players within them, and how the firm’s services can be most effectively introduced. The other requires knowledge of how professional service firms ‘work’ and what the best firms do, and an acute understanding of how to translate that knowledge into actions that lead to the firm making substantive increases in all aspects of its performance.
A NED’s remit must be tailored to the challenges the firm is facing. For some firms, that may be how to be develop a more effective compensation plan for the partners; in others, it may be about succession planning; and in others, it may be about turning strategy into action (which is where a lot of law firms falter). In determining what you want the NED to do, it is imperative that their remit is tailored to a real understanding of the challenges facing the firm.
A NED needs to be able to offer high-quality, objective advice, and this requires truly high-level diagnostic skills – with those skills having been applied successfully in PSFs and law firms. In our experience, law firms and PSFs are different from their corporate counterparts, and it is rare for people to be able to switch diagnostic expertise in, say, a production environment, to professional services.
We have met a lot of managing partners whose instinctive understanding of their markets is first class. They know exactly what the firm should do to penetrate them successfully, but, sadly, they do not know how to align the firm’s people and processes to deliver the actions necessary for success. Consequently, any NED must be able to both craft strategy and assist the firm’s partners in turning strategy into successful actions. To us, this is a core skill, and it is one of the reasons why we believe truly effective NEDs must have worked in professional services at a senior level.
This is critical, of course – but not as critical as the voice being heard and acted upon. Again, we have seen too many instances when effective external advice floundered through managing partner inaction. So, while we firmly believe firms should appoint NEDs who can help them deliver lasting, substantive uplifts in performance, we also firmly believe doing so is an absolute waste of time in firms where the managing partner’s actions (on their own or with their team) have refused to countenance any challenge to the status quo.
This is the key element in the challenge to the status quo. All of the very best PSFs we know actively look for new markets and new ways of doing business. They refuse to accept the status quo and also refuse to be second best. Sometimes that presents a real challenge to a practice or a team, but that willingness to look at things differently is what singles the top firms out. As a result, looking for a NED who comes from exactly the same world as you do is usually a mistake: we recommend looking for NEDs whose experience in different firms and markets will challenge what your firm does.
Law firms, in fact all PSFs, contain some of the most ego-driven people we know, and they can be intolerant of people they do not consider as their equals. Partners’ initial willingness to listen to what a NED has to say is typically positively influenced by the partners’ perception of the NED’s track record – so ideally, they should have experience as a NED or at a high level in the very best law firms, and evidence of that. Also, having faced or advised on similar situations speeds up the NED’s ability to consider potential responses and to come up with objective advice that will make a difference.
Of course, this links closely to many of the other points above – having a different perspective, challenging the status quo and a voice that is listened to. Being a critical friend means having the expertise and skill to bring new ideas and perspectives to the table, and to act as a vital sounding board and external voice to challenge the firm’s current thinking and practices. It is an exceedingly tough role for anyone to play, just as it is exceedingly difficult for some firms to be the recipients of that advice.
One of the things often forgotten when recruiting is the need for the individual to fit into the firm’s culture. That fit takes you into the NED’s characteristics – such as sense of humour, interpersonal skills, friendliness, considerateness – and you need to choose which are the most appropriate for your firm’s culture. However, without exception, any and all characteristics are usually blown apart in most firms unless the individual delivers. Professional services is an execution game and sustained success is only achievable if the firm continually delivers the right products, delivered by the right people, into the right markets, at the right time. It sounds very easy, but in today’s highly competitive markets, it most certainly is not, and the more astute firms look for additional support from skilled NEDs to help them succeed.
It’s through people you know – definitely not through advertising. Most partners have good networks both within and beyond their community, and through these contacts, names often come to the surface. So too do names of good headhunters with a strong NED practice. Using the headhunter route obviously has costs associated with it, and our advice is to only use headhunters with a PSF arm, with experience in recruiting partners, as well as their more traditional senior corporate practice.
You need to integrate the NED into your business. This is where having been clear from the start about the role’s remit will pay dividends – integration is so much easier when both parties are clear about the NED’s remit. In our experience, successful integration is always about time and timing.
Time is about allowing the NED to experience the firm’s culture in action. The best NEDs will always ask for time in the firm to understand how it works, how power is distributed, who carries sway, which practices are closest to their markets etc. If a NED isn’t able to answer these and all of the other questions related to getting things done, they will not be able to give informed strategic advice.
Timing is about knowing when to introduce the NED into the business: when they will get the best reception, and when the partners have time to help the NED understand the firm and how it works. We have heard people say there is never a good time, but an effective managing partner knows how to position events to ensure the NED gets the right introduction and welcome.
And before you bring the NED into the firm, communicate clearly with your people about who the NED is and what their remit is. Otherwise, rumour and exaggerated rumour will abound.
An effective NED will see part of their role as educating the board and the partners, helping to uplift their skills and expertise. You should therefore see a distinct improvement in the board’s and the firm’s performance – and this uplift in expertise may ultimately make the NED redundant, and see them replaced by a NED with slightly different expertise or a different perspective.
Unsurprisingly, the reasons are often obvious, and many stem from the recruitment process. There can be subsequent relationship failures too, some of which simply weren’t predictable and, sadly, some that were. Anyway, here’s our list of things to avoid:
If, despite our hopefully persuasive arguments, you are not sure that you should go down the NED route, ask someone you trust who has done so, or a consultant who has worked with firms who have. In our experience, which is supported by an ever-increasing amount of research and anecdotal evidence, using NEDs to improve board and firm performance is unequivocally the right thing to do.
© Rob Lees and Nigel Haddon, December 2017
Nigel Haddon is a former chief executive of SAS Daniels, and now a management consultant who advises law firms on strategy and leadership issues. He is a member and past chair of the Law Management Section committee. He is an author of two Law Society publications and various articles. Rob Lees is an author of professional service firm strategy books and articles, including co-authoring the best-selling ‘When Professionals Have to Lead’. He is a former global consultant advising professional services firms on improving individual, team, and firm capability.