Thank you for sharing!

Your article was successfully shared with the contacts you provided.

There is no economic requirement for public companies or law firms to grow. There is a requirement that they provide a robust return to shareholders: failure to do so results in shareholders taking their capital (public companies) or labor (law firms) elsewhere. In the public company world, growth drives shareholder returns; hence growth is a means to achieve the superordinate goal. Many law firms assume growth must similarly be good for them. This is misguided. The linkage between growth and shareholder returns at public companies doesn’t hold for law firms. Good growth for law firms centers on a narrow set of opportunities.

The Public Company Rationale for Growth

For public companies, growth enhances shareholder returns through stock price appreciation. This linkage rests on two economic fundamentals: One is that companies typically have significant excess cash flow that they can deploy from one business to another; the other is that equity markets allow shareholders to realize value today for anticipated future earnings. Neither applies in the law firm world.

On the former: Companies can be thought of as portfolios of businesses, where each has different cash flow characteristics—some generate more cash than they consume; some consume more cash than they generate. Management directs the net cash flows across the portfolio. The growth-share matrix, developed in the 1970s by The Boston Consulting Group, describes how to do this: Excess cash is taken from the “cash cow” businesses and invested in “question marks” so as to turn them into “stars.” Law firms can likewise be thought of as portfolios of businesses where partners in different practices or offices comprise the distinct businesses. Here the similarities end. There is no excess cash flow in a comparable sense at a law firm. For such to exist, a partner would have to be paid less than the economic value of their practice. If such a shortfall pertained in a significant or sustained way, the partners would become susceptible to departure to rival firms. This dramatically limits the amount of cash that can be taken from “cash cows” and that can be repaid by “stars.”

On the latter economic fundamental: when a public company makes an investment it effectively takes cash from current shareholders (as the cash invested could have been used to pay a dividend or buy back shares) and invests it in a “question mark” opportunity. If the equity markets perceive the “question mark” as a good investment then, because a stock’s price is a reflection of anticipated future cash flows, today’s stock price will rise. Thus, the shareholders who forgo the cash to make the investment are the same as the shareholders who benefit from the investment.

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]

Reprints & Licensing
Mentioned in a Law.com story?

License our industry-leading legal content to extend your thought leadership and build your brand.

Law Firm Partnership AgreementsBook

This book tackles the key life events of a law firm partnership formation, setting compensation, partner admissions and departures, retirement, dissolution, term...

Get More Information

Think Globally

How does your firm compare against firms around the globe? Evaluating a potential global alliance? Find critical information on the Global 200 law firms in Legal Compass - compare financials, track laterals, and more.

Get More Information

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.