Friday, April 28, 2006

Lawyers, Banks and Brokers: Making a Property Derivates Market

In my last post I raised the question of what lawyers do. On Wednesday this week I attended a seminar at Olswang, a law firm. The seminar was about property derivatives. Derivatives of all kinds have become the investment du jour for many companies and so banks and others are always looking for new, creative ways to market new instruments.

The seminar brought together a group of lawyers, bankers, brokers and investors. It was clear they were talking about a nascent market, but one they advocated with much potential to grow. At present it exists in a few mature economies only, but the transactions market was worth 150 billion euros in 2005. Essentially property derivatives enable investors to hedge against risk in the property market by contracts based on property indices.

Interestingly, it was the lawyers who organised the seminar and brought together the other professional groups. Lawyers have the ability to spot market gaps and think of ways of filling them. What was represented here was a collaboration between the salient groups--banks, lawyers, brokers--that thought carefully how to manage the development of the market. Early adopters have an advantage over others. Their advantage is only partially gained through their expertise, because eventually expertise is disseminated generally. Advantages are gained by establishing a reputation that attaches your name with a particular activity. This creates a nebulous barrier to entry that can be difficult to overcome. If the lawyers show they have created the right set of relationships so that transactions can be pursued without difficulty, it creates confidence among others. And this is a legititmate part of the lawyer's role: to act as counselor and adviser to clients. Part of this is to be able to say "I know the field", but just as important is to say "I know the key players in the field because we created it."

As I sat through the seminar, I watched a field being created through a collaborative enterprise. But it is one thing to see the creation of it, the other is to observe the forecasts of its future. While the brokers and bankers talked of the market and its potential, it was left to the lawyer to speculate on what the future possibilities might be. That's where the creativity comes in.
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Tuesday, April 25, 2006

Lawyers Doing Nothing...Successfully

What do lawyers do? It's a question that still seeks answers. And if we are to understand how the legal world, the rule of law, even society function, we need to have some idea of how to describe and theorise lawyers' activities. There are stock answers such as lawyers' work involves drafting, counseling, litigating, but they don't take one very far. There have been more innovative approaches. For example, Maureen Cain described lawyers as kinds of translators. Ken Mann saw them as controlling information flows. I argued that lawyers managed uncertainty for clients.

Much of the work on lawyers, however, avoids tackling these types of questions. Scholars would rather study the organisation or politics of lawyers, which are not unimportant. There is a reason, I think, which underlies this avoidance. If you want to understand the relationships between lawyers and clients (or doctors and patients, for that matter), the relationship itself requires close scrutiny. What actually goes on between them? Who says what, when, and how? Observation, or participant observation, is difficult to do. It's time consuming. And there is always the problem of access. How do you observe that which is supposed to be a privileged relationship? The answers vary according to jurisdiction and personality type. Some lawyers and law firms recoil at the thought of a social scientist observing them, while others welcome it. I like observing people--I do it all the time--but there are others who feel more secure with a clump of statistics for whom life in the raw is too unmediated.

A new project is underway in Germany and Italy which is quite fascinating. Livia and Marius Holden (anthropologist and film maker) have been observing and filming a lawyer, Lionello Manfredonia, in the south of Italy. They have looked at his cases, his clients, his files even, and how he conducts cases in court. They have put up a website called "Doing Nothing Successfully", which shows what happens when a lawyer decides the best strategy in a case is to do...nothing. There is a trailer (in QuickTime) for a longer film which gives highlights of the researchers' approaches and the lawyer's strategy. Watch it. I think it will make you want to see more of the project as it emerges.

More about Dr Livia Holden and the "Law-in-Action" research project she is part of can be found at the project website. There are papers produced by other researchers, such as the "Micro-Formation of Criminal Defence". It is a rich repository, so enjoy...
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Saturday, April 22, 2006

Goldman Sachs and the Failure of Trust

Today the Financial Times reported that Rupert Murdoch's British Sky Broadcasting had dropped Goldman Sachs as its corporate broker in favour of Merrill Lynch. BSkyB and Goldman had been together for at least 12 years, when Goldman assisted in the stock market flotation of Murdoch's company. This relationship was cemented by John Thornton, former president of Goldman's joining the board of News Corporation, the BSkyB holding corporation.

What has gone wrong? In part, it can be traced to the statements of Hank Paulson, chairman and CEO of Goldman, warning his private equity buy-out executives not to get involved in hostile bids, especially ones (he didn't explicitly say) that fail. Since May 2004 Goldman has been participated in six failed UK bids, including, Marks & Spencer, Mitchells & Butler, BAA, and ITV. It was the criticism Goldman's behaviour by Roger Carr, M&B's chairman, which sparked Paulson's edict. Carr, who sits on the boards of several major companies, said that Goldman would lose the trust of clients if it played both sides of the fence too aggressively.

Goldman states as its first business principle: "Our clients' interests always come first. Our experience shows that if we serve our clients well, our own success will follow." It's difficult for clients to understand that principle when they may be on the receiving end of an hostile bid.

This goes back to the 1980s when vulture funds became active in bankruptcy buying distressed debt and using it to get good returns in workouts. Since the banks were actively involved in workouts they resisted the vulture funds, until they began setting up their own in-house vulture funds. So a bank could find itself sitting on both sides of the table.

With the growth of private equity funds this corporate schizophrenia has worsened. Although there are the "traditional" private equity funds like KKR, Texas Pacific, and Blackstone--freestanding funds--the banks have joined in. Interestingly, Apax and Blackstone, Goldman's partners in the failed ITV bid decried Goldman's "muscular" stance towards the bid. The returns on private equity investments are enormous. And Goldman admits that the returns on its advisory business were only a small part of its revenues. So, Goldman truly does sit on the "horns of a dilemma".

All professional services--and I include banking, law, accounting, consulting--depend on the creation and maintenance of trust. This type of relationship can exist as an arms length type but whether it gives rise to further business is questionable. Trust creates the potential for long term relationships. Trust is at the heart of fiduciary relationships.

The corollary of this is the way professional service firms create and sustain themselves. Many, such as law firms, accounting firms, are partnerships, ventures where sharing profits and losses is collectively valued. Bound in with the trust elements of the intra-firm relationships is the maintenance of reputation. A collective enterprise helps promote reputation and similarly if a partner deviates, the partnership is seen to act together to deal with the situation.

It's too easy these days to lose reputation. Mike Milken did it for Drexel Burnham: it vanished after the junk bond scandal. Enron did it for Andersen: also gone. If the SEC had indicted KPMG, the agreed opinion was that it would have been death on indictment: only just saved.

Of course it doesn't need scandal. Clifford Chance managed to upset a large number of clients when it announced that it would prioritize them according to size and global reach. Global clients would be in Rank #1; regional clients (eg, EU) would be in Rank #2; and national clients in Rank #3. Unsurprisingly, given the insensitive nature of the classification, a number of national and regional clients decided to change law firms. In the paper I gave at the Indiana Symposium on the Globalization of the Legal Profession recently, I argued that in promoting the cause of economic globalization, law firms helped by creating private systems of governance (private ordering), a process that depended on their good offices, their reputation, the trust they can engender. If their own organization fails in this, they can no longer command respect elsewhere.
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Friday, April 14, 2006

Revisiting Barristers' Clerks

My first-ever research project was a study of barristers' clerks. More often than not, when one has finished a project, one moves on to something else. Well, over 20 years later I am back where I started. The Nuffield Foundation has just awarded me a grant to restudy barristers' clerks, one of the most unusual groups within the legal profession. Here is a brief introduction to them from my research proposal:-

Barristers’ Clerks: The Law’s Middlemen was published in 1983. It examined, through the ethnographic method, a group of, largely, working class men who acted as the fulcrum of the litigation system in England and Wales. This proposal seeks to re-research barristers’ clerks in the light of changes in society, legal system, technology, and globalisation.

Barristers’ clerks, still a relatively homogeneous group, are agents who work for barristers. They negotiate barristers’ work, fees, and career trajectories. Although professional rules no longer dictate the necessity of employing a clerk, most barristers use them. Barristers are organised into chambers, a suite of offices that pools common resources, such as clerks, yet enables barristers to claim to be self-employed. The arrangement permits a flexible working environment whereby barristers, from the same chambers, may appear on opposite sides of the same case without incurring problems over conflict of interests, which normally besets solicitors. In the past 20 years barristers’ chambers, while not growing greatly in number, have expanded their memberships considerably. Some chambers have over 100 members with premises in a number of cities. Moreover, the geographical spread of barristers’ chambers is much wider than before; the profession is no longer quite so London-centred. Significantly, barristers and lawyers generally have become popular cultural icons with television programmes such as This Life, Kavanagh QC, and North Square (one which explicitly concentrated on barristers’ clerks).

In North Square, Peter McLeish, is the ringmaster, as this capsule from a review of by an Australian barrister shows:

"McLeish dominates proceedings. He's the master of the unexpected, keeping his own staff on their toes and his barristers well supplied with booze and briefs. The last episode explains a lot about the character and his motivation, but the Svengali act seems second nature. It's certainly the most swashbuckling portrayal of a barrister's clerk seen on the screen, but not a million miles from reality. Think of ex-Private First class Wintergreen, in the book `Catch 22', who did command assignments at Allied HQ, of whom even generals were afraid."

The legal profession has altered enormously in the last 25 years—especially in the increased participation of women and ethnic minorities—partly as a result of economic changes, eg, globalisation and increased competition, and partly from the stimulus of government measures. In many respects law is now more important in the lives of the citizenry than it has ever been. People are aware of the power of exercising rights over, eg, welfare, consumer problems, and human rights. New administrative tribunals have emerged and judicial review of governmental decision-making has accelerated dramatically. Also alternative dispute resolution has come of age. There are even claims that the UK has become a litigious society akin to the US.

While substantive rights have increased, it can be argued that changes to procedures in law have occurred more recently with the greatest transformation being the Woolf civil procedure reforms. Central to procedures working efficiently are the barristers’ clerks. A considerable part of their work involves liaising with others in the litigation process so that cases can be planned in an orderly fashion that maximises the utility of judges’ and lawyers’ time while minimising delay for the parties. Many high court cases are planned long in advance and lawyers are aware that their schedules are subject to the threat of change, all of which can interfere with the proper course of justice. This occurs both in the civil and criminal spheres. In Niklas Luhmann’s terms they can help establish legal certainty by stabilising the expectancy structures of those in the process.

Barristers’ clerks are an interesting group because they facilitate the course of justice, yet their circumstances would indicate that they are not trained to achieve this. Most clerks start as ‘tea boys’ or ‘gofers’ in chambers. They fetch and carry, accompany their senior clerks on listing missions, photocopy and so forth. Their early years are an apprenticeship where they absorb the mores of the barristers’ chambers, learn the structure and hierarchies of the legal profession. For example, in the original study one clerk explained how he educated young junior clerks into the mysteries of the social order:

When I call a barrister by his first name, you call him ‘Mr Smith’. When I call a barrister Mr Smith, you call him ‘Sir’. When I call him Sir, you don’t speak to him.

The Institute of Barristers’ Clerks offers a BTEC course in basic accounting, management, court procedures, etc, but essentially the skills of the clerk are craft skills that are imparted by senior clerks in a mentoring relationship. As junior clerks acquire experience they take on greater responsibilities, managing barristers’ diaries and taking care of junior barristers. After a number of years, a junior clerk will seek a position as senior clerk, either as a successor to his/her own senior clerk or with a new set of chambers. Barristers’ clerks’ earnings are considerable; the highest paid clerks in London earn in the region of £350,000 a year. £100,000 is not uncommon.

In the past ten years many chambers believed they should have more sophisticated management systems. Clerks were seen as antediluvian and amateur. Instead practice managers and administrators were brought in. These were accountants, MBAs, and ex-military officers. They were intended to modernise chambers’ administrations and make them competitive with other lawyers’ offices. Some chambers kept the senior clerk alongside the chambers’ administrator. The clerk would mentor the barrister and the administrator would manage the office side. Needless to say, this was a fraught relationship. In fact, a number of chambers decided to abandon administrators believing no benefits accrued and retain the clerk system. One other major change since the original study has been the development of technology in IT and telecommunications, all of which have allowed barristers’ clerks to manage their barristers in a more fine-tuned way.

However, two incidents that occurred recently lead me to believe that not all has changed since I wrote the book. The first was seeing a presentation by a clerk at a conference about the role of the clerk. He told me he used my book to help prepare his paper. The second was a clerk telling me that he gave my book to his juniors to help them understand their role.
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Wednesday, April 12, 2006

Globalization of the Legal Profession Redux

During the symposium on the Globalization of the Legal Profession, one simple exchange captured the core essence of the proceedings. An American attorney turned to another and said: "I wonder what the effect of Clementi will be?" The question wasn't directed to any of the English participants, although it is a review of the English legal profession, but was treated like an internal affair. He meant the effect on the American legal profession. I have never heard this type question before. But it shows that globalization exists and that legal professions can no longer see themselves isolated from others by national rules.

The two models for the legal profession in globalization are the US-type law firm and the UK-type law firm. Their cultural heritages differ and the social and economic domestic contexts in which they practice are distinct. Once they move out of their home jurisdictions difference becomes more nebulous. Giles Pugh presented a competitive scenario where American and English law firms would battle it out, yet ultimately he saw neither as the absolute winner. Instead a hybrid would eventually emerge. We are beginning to see hybrids of a sort being born, eg, Rogers & Wells with Clifford Chance, and most recently Reed Smith with Richards Butler. But their labours are long and hard, and we haven't seen a merger of top-rank equals yet.

The globalization of the legal profession doesn't happen of its own accord: there are drivers which we can examine. Three types of examination were presented. The first was historical where Chris McKenna showed how law firms could stretch their global links back to the 19th century when Coudert Bros opened offices in Paris and New York. The main period of expansion, however, occurs in the aftermath of the Second World War.

Leonard Bierman explained internationalization through the exploitation of two types of capital. Human capital is the expertise of the law firm within its lawyers, and relational capital is embedded in the links with multinational clients (MNCs). There is another type of relational capital which is composed of links with foreign governments. No matter what links law firms have with MNCs, unless they have the human capital to back them up, internationalization is impossible. One interesting result Bierman produces is the inverted curvilinear U of internationalization: if firms over-extend themselves, they create a series of problems that result in implosion as with Coudert. The early stages of the process are the most rewarding for law firms.

Carole Silver delved into how the human capital of law firms is formed. In a sociological inquiry she showed that while US law firms hire primarily American JDs from American law schools, there is a growing number of foreign LLM students who are joining US firms. Some remain in the US, but more it seems move to the foreign offices of the US firms. Thus foreign offices are staffed with a combination of American JDs, foreign LLMs and locally-trained lawyers. The blending of these profiles enables US law firms to practice local, American, and global law. However, despite the spread of US law firm offices throughout the world, only a small number of cities--London, Brussels, Paris, Hong Kong, Tokyo, and Frankfurt--dominate. Robert Lee, however, warned of the regulatory and ethical issues that arise from international practice.

One fascinating aspect of lawyers' venturing into other jurisdictions that is not usually encountered is the impact they have on the formation and development of local law. Jacqueline Simmons presented a case study of a chemical company struggling to obtain the necessary permissions to build a plant in China. Not only were there divergences between local and national legal rules, but many of the regulatory standards were hazy at best. The establishment of realistic codes became a long term negotiation between the Chinese authorities and the company's lawyers covering legal, technical, and policy issues.

The symposium was diverse, exciting, and challenging. I have only mentioned some aspects, but the symposium website presents others. Bill Henderson and the students of Indiana Law School created a great environment for scholars, practitioners and students to come together and participate in an interesting dialogue. Some of the papers will be published in the Indiana Journal of Global Legal Studies, in issue 1 of volume 14.
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Monday, April 03, 2006

Research and Plagiarism

I wrote a while ago about research and plagiarism mentioning along the way that Raj Persaud was being investigated for plagiarism. The investigation is continuing but according to the Guardian both the British Medical Journal and Progress in Neurology and Psychiatry have retracted articles by him because he copied from an American academic, Prof. Thomas Blass.

Blass was reported in the Guardian thus: "The alleged plagiarism came to light when Thomas Blass, professor of psychology at the University of Maryland, happened upon Dr Persaud's article. The piece, entitled 'Why The Media Refuses To Obey', was about the social psychologist Stanley Milgram, famous for his 1963 "obedience" experiments, when people were encouraged to "electrocute" peers as punishment for a mistake. Professor Blass has written a book and numerous articles on Milgram. He said he was shocked by the similarity between Dr Persaud's piece and his work. "I am reading it [Dr Persaud's piece] and all of my words are echoing back at me," he told the Guardian. "He had taken paragraphs from my work, word for word. Over 50% of his piece was my work, which I have spent more than 10 years researching. I felt outrage, disbelief and incredulity this could happen, that a person who is himself a writer could do this. It's very disconcerting.""

Persaud put it down to a cut and paste error.

This has now been taken a step further and Persaud will not be presenting BBC Radio Four's psychiatry programme, All in the Mind. The Guardian quoted the BBC saying, "Dr Raj Persaud offered to stand down until this matter was resolved. The forthcoming series will be presented by a series of guest presenters, including Claire Hammond and Tanya Byron."

I hope for the sake of all concerned that this is sorted out soon. Plagiarism is one of the worst crimes in the academic world and one that is besetting students more and more. Ultimately, it leaves an awful smell in its wake.
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Sunday, April 02, 2006

Globalization of the Legal Profession

This coming week I shall be in Bloomington, Indiana, speaking at a symposium on the Globalization of the Legal Profession. It is being organized by William Henderson, Associate Professor of Law. For me this is an unusual and exciting opportunity because of the range of people he has invited to speak. We are British and American academics, practising lawyers and consultants, and bloggers, for example, Bruce MacEwen of Adam Smith Esq. (It would be rare to find such a symposium in the UK: it would be either academics or practitioners.)

The expressed them of the symposium is:

"Much has been written on the process of globalization and its effects on international and individual state law. The impact of globalization on the legal profession has received far less systematic attention, despite a universal recognition that the practice of law and the economic and personal lives of lawyers may be on the brink of profound transformation. The purpose of this unique symposium is to initiate dialogue about how globalization is fundamentally changing the work lives and professional opportunities of lawyers in the U.S. and abroad. Prominent figures in the global legal industry will explore various interrelated themes on the issues facing legal profession, including law firm strategy, the relevance of geography, the lawmaking role of transnational lawyers, and how cultural norms affect or shape our perceptions of ethical lawyering. The program will include presentation of scholarly papers and responses by symposium participants."

If you look at the symposium website, through the link above, you will find a number of the papers available online, including my own, and also links to biographies of the speakers. I shall report more as it progresses.
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Saturday, April 01, 2006

Reflecting on the Legal Profession Sessions at the SLSA

When the papers for the legal profession sessions at the SLSA were being put together, I thought they were a disparate group to begin with. Topics like plaintiffs PI lawyers, gender discrepancies in the legal profession, changes in the funding of criminal legal aid and so on. (For more details on the individual sessions and papers, see here1 and here2.)

Now I have been away for a day or two, I am beginning to realize that there was a thread running through the papers that gave them a shared theme. The legal profession is often presented in the media and the arts as something rather stuffy and resistant to change. The wig and quill appear regularly in images of lawyers and courts. Yet this is wrong. The legal profession worldwide is facing unprecedented pressures for change. It may resist, but usually the economic forces are too strong. Joe Little showed how courts are prepared to reduce the barriers to expressions of client dissatisfaction with lawyers' quality of work. While Lynn Mather demonstrated that in some cases lawyers could be quite entrepreneurial in their pursuit of cases, especially when they were able to forge precarious alliances with the states in their actions against "Big Tobacco.

Organizationally, lawyers are being given a stimulus to create new forms via the Clementi proposals on the UK profession, as Fiona Westwood argued. However, McKerrell and MacMillan showed us the obverse that many of the classic forms of discrimination have a strenght in their persistence. But for Scottish lawyers who suddenly faced dramatic changes in the ways their legal aid cases were to be funded, as Tata and Stephen said, they were sufficiently imaginative in their responses to benefit. The most extreme case presented, by Burke and Hinton, was that of the wholesale reorganization of how the Australian legal profession would structure itself and its practices.

What can we draw from this? First, none of these changes came about from inward reflection of the legal profession: all were responses to external stimuli. Terry Johnson proposed three models of perceiving professionalism. One represented the classic formulation where the professional (lawyer) is the senior member of the professional-client duo. Professionals determine the outcomes and preclude quality judgments on their services. Patronage is where the client determines outcomes, as in those who commission buildings or artworks. The most interesting form for our purposes is Johnson's third category which he called "mediative". This is where a third party intervenes in the relationship and is able to determine outcomes in various ways.

The most powerful agent of intervention is the state (or government). Either through regulatory action or changes in funding principles for state-aided legal work, change can be promoted, often against the interests of the profession. Of course this is not to say that there is a necessary opposition between the parties here. There may appear to be antagonism, but it is accompanied by much collaboration. And collaboration can emerge when the benefits of change are not immediately perceived but only become apparent after time, as Tata and Stephen illustrate.

The state therefore has at least a double representation. On the one hand it seeks forms of good governance within institutions that have considerable impact on people's lives--law and medicine. On the other hand, it represents the powerless, the individuals who are unable to influence change unless consolidated. Most often in the case of professions this is the consumer. The state is the mediator.

Professions in their classic form have had their day. No longer can they be bastions of conservatism and stasis; now they have to be responsive and flexible aware of many interests. Change is now the constant factor that professions must live with and risk analysis is the norm. So be it--professions live in interesting times.
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