Clifford Chance (CC) has made a habit of taking the market by surprise. The news that the firm’s US managing partner Larry Cranch had been replaced by head of litigation Jim Benedict last month was regarded by insiders as nothing less than a palace coup.
It had happened before, of course. Tony Williams’ short reign as London managing partner ended in 1999, amid claims that he was sidelined during the firm’s merger negotiations. Williams, who, it is understood, favoured signing a merger deal with Bruckhaus Westrick Heller Loeber before Clifford Chance turned to Puender Volhard Weber & Axster, was just two years into his five-year term.
The case of Cranch was different. A corporate rainmaker, Cranch had been with the firm for 30 years – 20 of them as a partner – and was the chief US architect of the Clifford Chance and Rogers & Wells merger.
He had more than a year of his five-year term remaining and had given no indication that he wished to stand down, despite whisperings within certain parts of the firm that Rogers & Wells has been too slow in building its corporate practice in New York.
Nonetheless, the speed of ‘tough talking’ Benedict’s ascension to managing partner has surprised even the most radical of Clifford Chance partners.
The move is being viewed as a reflection of the firm’s determination to improve the performance of Clifford Chance’s newly acquired New York arm.
Meanwhile, as Benedict and Cranch considered their new roles in New York, the Clifford Chance board in London was similarly preoccupied with the issue of management succession.
The current management team is divided between the executive – Michael Bray (chief executive officer), Garth Pollard (chief operating officer) and Chris Perrin (deputy chief operating officer) – and a board – comprising chairman Keith Clark and deputy chairmen Kevin Arquit and Thomas Gasteyer – which oversees the executive.
Pollard announced his retirement this May, some weeks before the shake-up in New York, and a candidate needs to be found to replace him.
In addition, banking partner John East is stepping down as Asia managing partner and Bray is retiring next year. Bray is being tipped to replace Keith Clark as chairman. It is clear that the firm is facing a shake-up of its global management little more than a year after the firm’s groundbreaking merger with Rogers & Wells and German firm Puender Volhard Weber & Axster.
This poses a problem for the incumbent board. The appointment of so many key positions at the same time – in addition to the upheavals in New York – could be disruptive when the firm is looking for stable leadership.
“It would be a PR disaster for all the management positions to become vacant at the same time, so they will have to be staggered,” one senior Clifford Chance partner says.
“Nonetheless there is a groundswell of opinion that the mergers have now been done and that new blood is required to take us where we want to be – the world’s leading law firm.”
The successor to Pollard as COO is clearly the firm’s most pressing concern and the new candidate is expected to be in place towards the end of April, shortly before Pollard’s retirement.
Whoever is elected to the post will play a pivotal role in determining Clifford Chance’s future direction, as the winning candidate looks set to be given a clear run at the chief executive post – currently held by Bray – which is scheduled to be vacated towards the end of 2002.
The winner, it is envisaged, will shadow Bray with a view to eventually taking over from him.
Unless any late contenders emerge, the contest is expected to boil down to a head-to-head between two of Clifford Chance’s most senior partners: Peter Charlton, who is London managing partner; and joint Europe managing partner, Peter Cornell.
Charlton, the odds-on favourite, is believed to be Bray’s first choice – a potentially decisive factor as the winner – and will work alongside Bray for at least a year.
A corporate big hitter, Charlton is viewed as a tough communicator who, in the words of one
Clifford Chance partner, has “the balls to make the difficult decisions”. Criticised by some for having no empathy for matters outside of London, sources nevertheless believe he would form an excellent partnership with Benedict in New York.
Cornell is viewed as a smooth operator and the opposite of Charlton. “Less of a manager and more of a gentleman,” according to one partner at a rival firm. “More in the mould of Anthony Salz of Freshfields.”
Whether this lack of overt toughness will endear him to the US contingent is debatable.
Whoever wins the new team will face a number of major challenges. The firm remains tight-lipped about its internal matters – its lawyers have been threatened with disciplinary action if they are caught talking to the press about its internal affairs. And it has had a tremendously successful year.
Insiders claim that most offices have exceeded budget by 10%-15%, with the worrying exception of New York, which is understood to have narrowly missed its target.
Like most firms in New York, Clifford Chance has been struggling to contend with last year’s associate salary increases, which occurred after budgets had been set.
Despite this, partners within the firm remain critical of the performance of Clifford Chance’s Rogers & Wells limb so far.
While the firm knew it was getting a premier league litigation practice, it did not expect the corporate capability to fall quite so far behind.
According to one senior Clifford Chance partner: “Litigation is the powerhouse of the New York practice and is truly stunning. However, on the corporate side we clearly do not figure.”
The strength of the litigation practice can be gauged by the fact that 45% of the firm’s business in the US is contributed by the litigation and dispute resolution department. Of 10 new partners appointed in New York last year, six were litigators. Just one came from corporate.
“Most of us feel that the Rogers & Wells merger was made out to be a bigger coup than it actually was,” the source adds.
But how does the Clifford Chance board intend to transform Rogers & Wells into a serious corporate finance contender?
The elevation of litigator Benedict to managing partner does not appear to be a PR master stroke from a firm trying desperately to deliver on corporate finance.
A workaholic and prolific fee earner, Benedict is submerged in one of the biggest anti-trust trials ever seen in the US, on behalf of his client, American Express. This is in addition to managing the whole of the Americas and implementing his own vision for the integration of Rogers & Wells into the firm generally.
A potentially crushing agenda, even for a man who allegedly works seven days a week and sleeps no more than three hours a night.
Of course, it may be unfair to suggest that Benedict’s litigation background will hamper the firm’s development.
Nevertheless, as Legal Week revealed this month (8 March), the firm still has a lot of work to do to convince even its existing clients to use the firm for corporate finance work in New York.
Client XL Capital’s £415m acquisition of Winterthur International Insurance, for example, saw Clifford Chance advising in all 24 jurisdictions except New York.
Clifford Chance corporate partner David Pearson conceded at the time that if a client has an existing relationship with a firm “then it takes a lot of effort to get in there”.
“Most firms made an extra effort to get tight with their clients when the merger went through,” he said, adding that “a lot of the deals we are using Rogers & Wells for seem to be crashing at the moment. This means we cannot go public on them.”
The firm is also having big problems recruiting partners.
While some big hitting litigators have been successfully snapped up, the lack of any major corporate hires has been conspicuous and a cause of some impatience.
To make matters worse, rival firm Allen & Overy (A&O) recently managed to lure ‘superstar’ derivatives and M&A specialist Dan Cunningham from Cravath Swaine & Moore. It has also persuaded Cravaths associate Joshua Cohen and Davis Polk & Wardwell associate Tom Werlen to join the firm, both as partners. The net result is a major stride towards building a top-tier derivatives and capital markets presence in the US.
The case of Cunningham was unique in the sense that he already had strong ties with A&O and particularly Jeff Golden, the head of its US practice. Golden had worked with Cunningham while at Cravaths and was in the unusual position of being able to move to a firm with a stronger global reputation for his line of work than his own.
Nonetheless, most Clifford Chance partners agree that the only way it can build its corporate practice quickly is by playing on its international brand value and buying the talent in.
“It is like football transfers,” one senior Clifford Chance partner says. “You pay big money, you get big names.”
This raises the question of remuneration, another major hurdle for the new management. Benedict, particularly, will have to oversee the full integration of the lockstep, which is due to begin in 2002.
A number of US partners are outside the firm’s seniority-based lockstep structure, including Cranch, who has 25 extra points on the other plateau partners’ 100, and Benedict, who is estimated to be on 200 points.
Other US ‘super-pointers’ include Steve Newborn and Kevin Arquit, the antitrust partners who are thought to be earning about £1.4m each.
Therefore, as well as paying to bring new talent in, Benedict will have to convince the existing super-pointers that the firm deserves to keep them.
In their search for new talent, Clifford Chance’s management faces a major headache. How does it marry the need to pay top remuneration to hire the right calibre of people or teams at a time when the super-pointers’ arrangements, which gave them flexibility to pay over the odds, are close to coming to an end?
The quickest route to building the corporate practice would seem to be another US merger. While this would undoubtedly be the news story of the year, it is not as unlikely as people might think.
All Clifford Chance partners contacted by Legal Week during the research for this article refused to rule it out and the bar room gossip at Clifford Chance indicates that it remains a distinct possibility. It would certainly be quicker and possibly less expensive than building capability.
Finding the right merger partner would be just as difficult the second time around, however.
“If you go to the white shoe firms you are talking to people with established egos and philosophies who are working to a completely different agenda,” one Clifford Chance partner says.
The issue of building up New York is a challenge that remains critical to Clifford Chance, with a clear and decisive strategy expected of the new management team.
Equally important is the issue of under-performing partners, both in New York and within the firm generally. Last year the firm enlisted the services of elite management consultancy McKinsey to help it launch a quality control programme to police partner standards, following the tripartite merger.
It also set up an internal training school, known as The Academy, which will open this autumn to instil quality standards into all of its lawyers.
The unofficial view from Clifford Chance is that a cull of its under-performing partners is desperately needed if the firm wishes to seriously increase its profitability and dispel allegations that its quality is being diluted.
Benedict, it is claimed, is more than up to the job, as is Charlton who would not shy away from the task, if elected.
“Benedict and Charlton will think out of the box and will not hesitate to kick things into shape,” says one Clifford Chance partner.
“If the firm wishes to be perceived as corporate then it should act corporate and become more performance-driven.”
Reports from Germany, which is performing well this financial year, indicate that the clearout has already happened. At the time of the merger, Puenders’ 30-odd salaried partners were forced to sit pre-equity tests, which included language, numeracy and group skills tests. Many left the firm to take ‘early retirement’.
At the time of writing, two more salaried partners have resigned from Puenders for what sources close to the firm claim are ‘life-style’ reasons. Legal Week understands that a number of others are expected to consider their positions in the near future.
Controlling standards is seen as crucial if the firm wishes to be known for quality rather than sheer numbers.
It is also understood to be the reason that Larry Cranch resigned. Put simply, it is claimed that he would never sack a partner.
“We are making enormous amounts of money,” one source says. “But some people are cruising along. To get tough on profitability we need to get tough on performance.”
What Clifford Chance needs is leaders who are adept at creating this hard-driven environment across the firm. With more than 650 partners across 29 jurisdictions the firm is frighteningly large.
In many ways, rather than sipping from a poisoned chalice, the revised management team will have a lot going for it. The firm may be feeling the heat in parts of its New York practice and a consistently tough approach to partner performance will have to be taken.
For a global firm, however, exposure to an economic downturn in one part of the world is just a fact of life – if it is not New York, it could be Asia or Eastern Europe.
The financials are positive – last year’s profits per partner of £804,000 at plateau level are expected to rise significantly – and if the unofficial view is to be believed most of its offices have had a strong year. And the new management will continue to have a level of resource at its disposal that few, if any, can match.
A lot will be demanded by the partnership in return. “Whoever is voted in has to be positive,” warns one source. “Failures do not last very long at Clifford Chance.”
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