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Standing in a conference room high above Manhattan’s Grand Central Terminal last May, James Benedict tried to mollify his partners. “Lockstep,” he told them, “isn’t communism.” To the assembled former Rogers & Wells partners, it might as well have been. Nearly 18 months had passed since their merger with London’s Clifford Chance, but only now were they coming to grips with an end to their eat-what-you-kill compensation system. Benedict, the newly ensconced head of Clifford Chance’s U.S. operations and himself a former Rogers & Wells partner, knew that his colleagues were anxious. They had indicated as much during a retreat in late March. Although the official transition to Clifford Chance’s lockstep, seniority-based pay model wasn’t scheduled to occur until spring 2002, their concern was understandable. Rogers & Wells, with its roots in the insurance morass that grew out of the great Chicago fire of 1871, had been a ruthless meritocracy, rewarding partners based on individual contributions to the bottom line. Although Clifford Chance and Rogers & Wells shared comparable profitability at the time of their merger, there was a big difference in the spread between the highest- and lowest-paid partners at the two firms. Switching to the British model would mean compressing Rogers & Wells’ pay scale. In theory, that meant that some American stars were facing steep pay cuts, while some lesser lights would more than double their draws. Everyone knew that wouldn’t work. Something had to give. On May 17, it did. Benedict, in his address to roughly 100 partners in New York, described a series of complex changes to the lockstep model. Most Rogers & Wells partners would move into compensation levels based on several factors, seniority being just one of them. But even at the top of Clifford Chance’s lockstep, as many as eight high performers would end up taking pay cuts (in Benedict’s case, by about half). A tiny group — most likely including antitrust partners Kevin Arquit and Steven Newborn — would continue to be paid well above the top of the lockstep’s maximum, in recognition of their market heft. (Arquit and Newborn each took home about $4 million last year, more than three times Clifford Chance’s top earner in London.) At the opposite end of the pay spectrum, roughly a dozen Rogers & Wells partners would not make the transition to lockstep. To avoid diluting equity, the firm would compensate them at levels below the lockstep minimum. A year and a half earlier, Clifford Chance had boldly absorbed 400-lawyer Rogers & Wells and Germany’s 262-attorney P�nder, Volhard, Weber & Axster as part of a grand plan to build the world’s premier law firm. The integration had been difficult, and was further complicated by the looming compensation switch that hung over the heads of the former Rogers & Wells partners. Now, with their pay levels spelled out, Benedict was urging the lawyers to move forward. “The transition is over,” he declared. “We need to be thinking about implementing our strategy for the future instead of worrying about the past.” That could be wishful thinking. In the short run, Benedict’s communiqu� triggered a wave of negative publicity on both sides of the Atlantic. News reports spoke of a “bloodbath” and a sizable “de-equitization” — characterizations that Benedict angrily rejects. He also denies claims by several former partners and two current partners that the leviathan is pushing out about a dozen former Rogers & Wells partners who practice in tax, real estate and other areas deemed undesirable. The bad press has come amid other signs of a rocky transition. Although some partners rave about the benefits of an international platform, others gripe that the rate of internal referrals has been unspectacular. Conflicts of interest, as expected, have been treacherous in certain growth areas. What’s more, all three of the firm’s senior management posts are now in flux. Last month, longtime chairman Keith Clark announced plans to step down before his term expires next year and take over as international general counsel at client Morgan Stanley Dean Witter & Co. The news came six months after a stormy partners’ retreat outside London. At that March meeting, there was “open revolt,” in the words of one attendee, as several malcontents — mostly British partners — blasted management for lack of communication and imposition of bureaucratic constraints. Although Clark, 56, says that no one “directly” asked him to leave, he says that he recognized the firm needed an infusion of fresh blood. After nine years on the job, he says, you “risk growing stale.” Now all eyes are on Peter Cornell, the incoming chief executive officer. Cornell, a popular partner based in Madrid, edged out a competing candidate backed by management during an election earlier this year. It would be an overstatement to interpret Cornell’s election, along with Clark’s exit and the retirement this summer of the firm’s third-in-command, as a no-confidence vote for the firm’s global strategy. But the changes are symptomatic of the challenges — from clients to culture to compensation — faced by a firm hell-bent on world preeminence. The broad issue at play is how to balance traditional notions of partnership with the pressures of running a global business. As Clifford Chance management has discovered, there are limits to the sacrifices partners are willing to make. Whether the firm can continue to increase profits and expand its client base while giving partners a sense of control remains to be seen. But it is clearly the debate of the day. Cornell’s campaign message? Give the partnership back to the partners. The Clifford Chance-Rogers & Wells union was born of mutual ambition. In the late 1990s, Rogers & Wells was facing an uncertain future in an increasingly competitive market. Efforts to internationalize by opening offices in London, Paris, Frankfurt and Hong Kong had been largely unsuccessful, current and former partners say. The partnership recognized that it had a choice: Either shrink and focus on select areas, or do something big and bold. Clifford Chance, known for its banking and finance prowess, had been globetrotting, too, investing heavily in Europe and, to a lesser extent, in Asia. But it had failed in its concentrated effort to build a formidable New York operation from the ground up. By 1998, a decade after it had arrived in the U.S., the outpost was among the least profitable in Clifford Chance’s 20-office empire. Recognizing the need to establish a foothold in New York, the firm directed six partners to hunt full time for a U.S. mate. Rogers & Wells wasn’t Clifford Chance’s first — or even second or third — choice. But Clifford Chance, like its top British rivals, had discovered that the most desirable New York shops spurned suitors. In Rogers & Wells, Clifford Chance saw profitability comparable to its own, as well as strong litigation and antitrust practices and an attractive securities group. Taken together, Clifford Chance concluded, these practices could provide a platform from which it could build a sizable U.S. capability, particularly in mergers and acquisitions. The firm’s overarching goal is to combine high-end corporate and litigation work around the world with strong regional practices. Together with a synchronous deal to absorb P�nder Volhard, one of Germany’s top five firms, the January 2000 combination is the largest law firm merger ever. It gave Clifford Chance a sizable presence in some of the world’s biggest financial centers, including New York, London, Frankfurt, and Hong Kong. For the firm, it is a source of considerable pride that all of this has derived from a 1987 merger between two middling British firms. That union defied critics’ skepticism as Clifford Chance clawed its way into the Magic Circle — Britain’s top five firms. “We’re writing the book on global mergers,” chortles Michael Bray, the incumbent CEO and a veteran Clifford Chance partner. Nearly two years after the Clifford Chance-Rogers & Wells-P�nder Volhard combination, some progress has been made. The core infrastructure — technology, conflicts-checking systems, and now compensation — is more or less in place. The firm, though perhaps not the world’s best, is certainly the biggest. Some 3,200 lawyers in 19 countries brought in revenues last year of $1.4 billion, a 24 percent jump over the aggregate billings of the three predecessor firms. Average per partner profits topped $1 million. What’s more, partners say that clients are taking notice. They point to the merged firm’s early assignment as IPO counsel to European Aeronautic Defense and Space Company, the parent of airplane manufacturer Airbus, S.A.S. More recently, the firm handled worldwide antitrust issues arising from PepsiCo Inc.’s acquisition of Quaker Oats. Partners involved in both assignments credit the merger with giving them the cross-border capability necessary to land the jobs. Billings to the firm’s top four banking clients — Merrill Lynch & Co. Inc.; Citigroup Inc.; J.P. Morgan Chase & Co.; and Morgan Stanley Dean Witter & Co. — doubled in the first full year of operation. George Schieren, the associate general counsel at Merrill Lynch and a long-standing client of both Clifford Chance and Rogers & Wells, says he likes what he’s seeing. The firm is “penetrating deeper into the [bank's business],” he says. Still, Schieren’s not ready to call the Clifford Chance strategy a success. “It’s still early,” he says. Adding to his hesitation are doubts that a global, full-service firm is even necessary, despite Merrill Lynch’s own worldwide expansion. “I didn’t feel myself suffering beforehand,” he says. Clifford Chance is gambling that clients like Schieren will change their minds, sooner rather than later. When — if — that happens, the theory goes, it will touch off a wave of copycat deals between American and British firms. By then, Clifford Chance hopes to be way ahead of the competition. But growth presents plenty of difficulties aside from questions of partnership autonomy. How does a firm cultivate a blue-chip clientele and manage conflicts effectively? How do managers ensure that partners in Dubai are taking on desirable work? As one former Clifford Chance partner puts it, merging is actually the easy part: “It’s what happens afterwards that matters.” Some of the adjustments have been minor. London-based Rogers & Wells partners got used to sharing offices with their colleagues, a common British tradition. British lawyers, meanwhile, learned that Americans like ice cubes in their drinks. Both sides discovered that they formatted their electronic documents differently. But other challenges are more difficult. Conflicts — the bane of many law firm courtships — have been hard to navigate. A big plus for the merger was the overlap of financial institutions served by both firms; investment banks tend to be more relaxed than other types of businesses about conflicts of interest. One conflict involving a pharmaceuticals company, however, almost killed the merger, and others had to be resolved either by getting waivers or by dropping the client. For instance, Microsoft Corporation, a Clifford Chance client, had to go, because Rogers & Wells’ Kevin Arquit was, and still is, embroiled in the antitrust case against the software giant. To deal with the sheer volume of daily client inquiries, the firm took the power to conduct conflicts checks away from the partners and built a multimillion-dollar conflicts center in London. All new matters — even new work for existing clients — must first pass through the checkpoint. With 45 staffers in four locations around the world, the operation handles a few hundred inquiries a day, according to deputy chief operating officer Christopher Perrin. There’s also the so-called Black Box, a highly secure database containing the names of hundreds of hands-off companies such as PepsiCo, which is verboten because Clifford Chance represents the Coca-Cola Company. It also includes companies that the firm has reason to think will send it work in the future. The system, says Perrin, is neither foolproof nor beloved by all. In the beginning, conflicts checks were a disaster, in large part because of software glitches, he says. Now the main obstacles are the $2.7 million annual price tag and the risk of human error, according to Perrin. Still, he estimates that only three mistakes were made in the past year, far fewer than if partners had been running checks on their own. The conflicts center also helps ensure that partners are doing work that fits into the firm’s overall strategy. If a project submitted for a check doesn’t fit in with long-term goals, partners are told to turn it down, says Perrin, whose job is to monitor the firm’s intake. In the effort to attract blue-chip corporations and the high-value work they offer, managing assignments effectively is especially critical and involves extensive analysis of industries and the companies in each sector that are likely to be on the move in the coming years. (Sometimes it means placing bets. The firm recently turned down a small piece of a multibillion-dollar merger in the hopes of landing a bigger role in the deal, but the strategy didn’t pay off.) Partners don’t always react well to edicts commanding them to turn down assignments. Globalization, it turns out, has its price. As the firm increases its roster of corporate clients, while maintaining a sizable litigation practice, conflicts have become a bigger problem. That’s especially the case in M&A, where one former partner says that the firm had to turn down two out of three possible assignments in a recent week because of conflicts. “The major problem we’ve faced isn’t that Clifford Chance is an international company but that it’s a big firm,” says one partner. Adding to frustration over conflicts is the slow rate at which practices are cross-selling services to clients, this partner says. The partner notes that the merger has caused a drop-off in referrals from other firms, who are now worried about handing clients over to a major competitor. The expectation was that a boost in internal client referrals would help offset the lost business. But that hasn’t happened, according to Robert King Jr., the New York-based head of the firm’s capital markets practice and former Rogers & Wells partner: “The expectation was that things would come flying over the transom.” But King is quick to add that the expectation was unrealistic. Cross-selling takes time, he says. The firm’s struggles with conflicts and client marketing aren’t out of the ordinary, given the magnitude of Clifford Chance’s brazen mission. Though less than thrilled, partners say they recognize that opportunity costs are necessary. That said, neither the unhappiness over communication nor the ongoing debate over the compensation is so easily excused. What irked some British partners — and led to their criticism of management at the March meeting — was the high price of rapid, aggressive global growth. Lockstep, they fear, could become its biggest casualty. To make the deal work, Rogers & Wells had agreed to abandon performance-based compensation, a system that many viewed as flawed and deeply corrosive. But the system had effectively rewarded top performers. Shifting to the Clifford Chance model would result in drops in income for several American stars. Antitrust star Arquit, for instance, was earning over $2.3 million a year by 1999. That same year, the top of the Clifford Chance lockstep paid about $1.1 million. The short-term solution was to designate about eight top Rogers & Wells earners, including Benedict and Arquit, and pay them additional units, up to 250, on top of the maximum 100 allowed under the Clifford Chance system. According to two partners, the special treatment was sold to Clifford Chance partners — many of whom were intent on keeping their prized lockstep system pure — as onetime exceptions. According to management, the extra money would come out of the 23 percent in profits that Clifford Chance agreed to transfer to the Americans in the first two years of the merger. It was unclear to the partners, however, how many of these exclusions would survive the start of Clifford Chance’s 2002 fiscal year, or even where individual partners would end up on the lockstep ladder. The payment of the extra units, a first for Clifford Chance, were not easy to take. To many, the lockstep system works because it’s rigid and egalitarian. Deviations, the purists fear, only undermine the system — and the firm culture. The exceptions, according to former partners and the merger prospectus, have been portrayed as interim, U.S.-only deals aimed at keeping top talent until firm profits reached market levels, at which time the need for exceptions would disappear. Instead, more exceptions have been made. Earlier this year Clifford Chance absorbed its longtime Italian affiliate, 134-lawyer Grimaldi e Associati, one of that country’s leading corporate firms. To lure Grimaldi into the fold, management agreed to pay several Grimaldi partners above the top of lockstep. And to accommodate Vittorio Grimaldi, the firm’s 60-year-old senior partner, Clifford Chance agreed to extend the firm’s mandatory retirement age by five years, to age 70. The deal was struck without input from Clifford Chance partners. A few months later partners from around the globe gathered in Hammersmith, on the outskirts of London, for their second all-hands meeting. At one point, partners were divided into small groups and given topics to discuss (for example: “What headline would you like to see about the firm in 2010?”). British partners balked at the exercise and openly criticized firm leaders for keeping them in the dark on key issues and “whitewashing” others. Another sore point was lower-than-expected profits in New York. According to firm managers and partners, profits there were lagging because of soaring associate salaries and a sizable increase in merger-related administrative costs. But as part of the merger agreement, Clifford Chance handed over nearly a quarter of the firm’s profits to the Americans. “People were pretty unhappy,” says one attendee. The message, he says, was simple: Stop putting a gloss on issues. Be straightforward with us. Clark says he wasn’t surprised by the outburst. A merger of this magnitude, he says, produces “a lot of uncertainty and insecurity.” If partners wanted candor, they got it. Less than two months later, Benedict stood before his former Rogers & Wells partners and detailed the compensation switch that he knew was causing them anxiety. A 52-year-old litigator from upstate New York who is known for 14-hour workdays and an affinity for Tab soda, Benedict was a prime beneficiary of the eat-what-you-kill system — and someone who could make tough calls regarding compensation. He landed the role as head of the firm’s Americas practice this spring, when Laurence Cranch, the former Rogers & Wells managing partner, stepped down amid criticism that he wasn’t a strong enough leader. Cranch, who’s still practicing at the firm, declined a request for an interview for this article. The system that Benedict described to his colleagues this spring was a muddled version of lockstep. The foundation was unchanged: Partners move onto lockstep with 40 units, advancing a notch each year until they top out at 400 units, after about nine years. But for the former Rogers & Wells partners, seniority would be just one determinant of placement on the lockstep ladder. Consider Arquit and Newborn, both former Federal Trade Commission officials. They oversee a vibrant antitrust regulatory practice that brought $70 million into the firm last year. Because Clifford Chance hopes to use its antitrust practice to lure M&A work, it’s clear that the firm needs to keep them happy. Though Arquit and Newborn deny they’re looking to leave, both are rumored to be talking to other firms. Upping the ante is Clifford Chance’s loss of competition partner Christopher Bright to the London office of New York’s Shearman & Sterling. Bright had wanted to head Clifford Chance’s global competition practice, a job that instead went to Arquit and Newborn. Decisions about which partners will receive special compensation treatment will be made in the next few months, although Arquit and Newborn appear to be the only shoo-ins. Assuming there are no others, about six partners who were also paid extra units during the two-year transition will have to give up the added income to move to the top of the lockstep. At the bottom of the pay scale, the problem was brutally simple: By the late 1990s, the lowest-paid Rogers & Wells partners made just under $300,000, while their Clifford Chance counterparts drew roughly $430,000. Moving to the first rung on the Clifford Chance ladder, then, would have risked diluting the firm’s equity. As a result, fewer than a dozen Rogers & Wells equity partners would be paid below lockstep. Nonequity partnership is a concept that is not foreign to either Clifford Chance or Rogers & Wells, both of which had tiers for salaried partners before their merger. For Clifford Chance, the need to keep profits per equity partner high and to pay partners in remote locations based on the local cost of living has been a key element of its march around the globe. By 1999, some 70 partners — or about 20 percent of the total partnership — were nonequity. Today that figure has swelled to about 200 out of 650 partners. Rogers & Wells contributed to the increase, but most of the additions actually came from Germany’s P�nder Volhard, where most of the firm’s 100-plus partners signed on with nonequity status. Benedict is baffled that compensation has generated so much controversy. Partners understood all along that these steps were inevitable and that the firm was looking “to change the mix” of practices to focus on high-end work for multinational firms, he says. Arquit, who also serves as deputy chairman, agrees that the changes were not a shock: “Lockstep operates on the assumption that everybody is providing the same value added,” says Arquit. “I think there are few things that have occurred that were not anticipated [during merger negotiations].” But the compensation debate isn’t over. Firm leaders have sold their patchwork to partners on the grounds that profits are bound to grow, eventually equaling those of the richest U.S. firms. At that point enticements would no longer be necessary. But until that happens — and it could take a few years — the tension between partners who see a need to keep the system flexible in order to attract top talent, particularly in M&A, and the purists who want to safeguard lockstep will only increase. “If Clifford Chance’s culture is clearly collectivist, and I’m someone who’s entrepreneurial,” says one partner, “there’s bound to be a clash.” If partners crave a great communicator to help bridge these gaps, they may have found one in Peter Cornell, an affable partner and extreme skier who considers moments of physical danger to be good for the soul. The 49-year-old banking lawyer has spent nearly a quarter-century practicing at Clifford Chance, having spent time in London and Singapore before he ventured to Madrid in 1989 to resurrect the firm’s ailing Spain practice and help run the firm’s European operations. More than for his management experience, current and former partners praise Cornell for being straightforward and for bringing the firm a perspective that reaches far beyond London. Although Cornell won’t take the reins until late next year, he’s already setting his agenda. Among his priorities are a top-to-bottom review of the firm’s management structure. The future of the chairman’s job, for instance, is unclear: Clark could be replaced by Cornell or someone else, or the position could be eliminated altogether. In the seven months since his election, Cornell already has shown himself to be a skilled politician. “We need to strike a balance between achieving the right business discipline and retaining partnership values,” he told partners at the March 31 retreat. “Partners should not be taken for granted.” Months later, Peter Chaffetz, a reinsurance lawyer who joined the New York office in early 2000 and says he doesn’t know Cornell that well, was astounded to discover that Cornell had left a voice mail message at his home a day or two after the Sept. 11 terrorist attacks on the United States. “He asked me if I was OK, if my family was OK, and if there was anything he could do,” says Chaffetz. Perhaps that level of hand-holding is more necessary now than it ever has been, as the firm sets out to show the marketplace that the combination with both Rogers & Wells and P�nder Volhard was not only sound but also prescient. Until then, detractors abound, many of whom speculate that Rogers & Wells won’t be the last large-scale U.S. merger for Clifford Chance. The notion is audacious. But that’s exactly the kind of move that the partners relish. Remember: Clifford Chance has been down this road — and silenced its critics — before.

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