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In the wake of Enron, WorldCom and other corporate scandals, corporate governance has come under the microscope. One reform that has been widely endorsed is the election of more independent, outside, nonexecutive directors to boards of publicly owned corporations. Outside corporate directors provide not only accountability but also perspective, diverse experience and credibility. Law firms might well benefit from outside directors in the same way. Indeed, some non-U.S. firms have added outsiders to their governing group with apparent success. Historically, until the last quarter of the 20th century, law firms were small and very private, even mysterious. They shunned publicity and operated secretively, more like college fraternities than businesses. Beginning in the 1970s we saw the emergence of large, corporate-style law firms with specialized departments and multiple offices that were managed as businesses. The 1970s also saw the emergence of a national legal press reporting on legal-business issues and on individual law firms, later publishing financial information on individual firms. The 1980s ushered in an era of exponential growth in large firms, some driven by mergers. Firms shed their secrecy and began to market themselves aggressively. By the 1990s, growth and consolidation had produced regional, national and even global law firms, nonlawyer owners (in some places), and law-firm-owned ancillary businesses. Today, major law firms are important business entities by almost any measure. Worldwide in 2002 six law firms had fee revenue of more than $1 billion, and 20 of between $500 million and $1 billion. U.S. Department of Labor statistics indicate that the current aggregate revenues of lawyers and law firms in private law practice in the United States exceed $150 billion per year-more than 1.6% of the U.S. economy and two-thirds more than the aggregate revenues of accounting and consulting firms. Law firms also are significant employers; lawyers and firms in private practice employ an estimated 1 million nonlawyers for a total current employment of 1.8 million engaged in delivery of legal services-1.3% of the employed American work force. And law firms are important as consumers of business equipment and services. Private law practices spend $6.8 billion on information technology each year, average more than $11 billion in outstanding bank debt and pay occupancy costs (mostly rent) of $21 billion annually. A part of the economy The result is that because of this wide range of stakeholders dependent on them, law firms are vitally important to the economy; the public has a great interest not only in the services they provide, but also in their economic health and vitality. This public and economic interest is best demonstrated in the disruption caused by the business failure or dissolution of major law firms, which has occurred with alarming frequency in recent years. In the last year, large firms that have dissolved include Brobeck Phleger & Harrison (once more than 800 lawyers with revenues of $500 million), Arter & Hadden (once more than 400 lawyers) and Altheimer & Gray (once more than 300 lawyers). When this happens, clients suffer as their lawyers typically scatter to different firms, exposing them to disruption and often significant switching costs in the redirection of their work to new firms. Many associates and staff lose their jobs and benefits, lenders and vendors lose a major customer, landlords lose a major tenant, governments lose an important taxpayer and local economies in the area suffer. In the business failure of major law firms the case for outside directors gains strength. Despite these factors, law firms are vested with a public trust that allows the profession to self-regulate. For these reasons, the argument against outside direction-because law firms are unlike other businesses and accountable only to their owners-is specious. As in public corporations, outside directors can imbue the law firm’s governance with objective accountability. According to a recent Altman Weil survey of the 200 largest U.S. law firms, only two of 49 responding law firms included nonpartner, nonemployees on their primary governing boards (both in nonvoting capacities), and each had one such member of the governing body. Both were paid an annual stipend and reimbursed expenses. Of the two, one is an economist; the other’s position was unreported (but the person is not a lawyer). Clearly, outside “directors” is not an idea that has been embraced by major U.S. law firms. Most firms among those surveyed reported that they never considered outside directors. Six percent are considering or have considered outside directors but have not done it and 4% believe other methods can be employed to obtain outside input, including consultants and presumably client surveys. None seemed to see either stakeholder accountability or credibility as a reason to consider the appointment of outsiders. Still, a third said they would consider outside directors if professional rules specifically allowed them. Consideration of outside directorships in law firms may be inhibited by current rules. Rule 5.4(d)(1) of the ABA Model Rules seems to prohibit outside directors if they are not lawyers. But what about nonpartner, nonemployee lawyers, be they clients (corporate counsel), retired former partners, lawyers in other firms or in nonclient corporations or government agencies, academics or lawyer-businessmen? The current corporate governance crisis and the state of the profession invite a reconsideration of the profession’s position on the issue of outside input to law firm governance. Ward Bower is a principal at the legal consulting firm Altman Weil Inc. He can be reached at [email protected].

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