Succession Planning: Should law firms regulate when and how partners retire?

By David E. Wood

In 1789, Benjamin Franklin wrote to French physicist Jean-Baptiste Le Roy that “in this world, nothing can be said to be certain except death and taxes.” For a partner in a law firm, there’s another certainty: Someday, at some point, every attorney will no longer wish (or will no longer be able) to continue practicing law.

When separation from practice is voluntary – as when a partner retires – the terms under which the lawyer leaves can substantially impact the profitability and cohesion of the partnership. Many firms regulate these terms selectively, leaving room for exceptions intended to balance their interests with those of retiring partners. Many others regulate partner retirement based on strictly objective criteria, such as partner age, taking partner needs into account less or not at all. Some firms do not regulate partner retirement in any way.

Deciding which path to take is a sensitive subject, and it is often dictated by a firm’s culture and values.

Firms take different approaches to regulating partner retirement

Many firms – especially large ones – have detailed rules governing partner retirement. The big-firm business model assumes that a larger shop creates a greater economy of scale. An element of this is the shift of many management functions to non-lawyer executives who are better at running a business than most lawyers. These managers may be less concerned about the needs of individual partners and more concerned about streamlining processes and promoting efficiencies.

Many other firms – small and midsized firms in particular – regulate partner retirement lightly. Usually, their business models are less transactional and more relationship oriented. These firms are managed by practicing lawyers who may have long-standing friendships with senior partners. Lawyer-managers may be reluctant to tell respected elders when and on what terms to retire, even when doing so is in the best interests of the firm.

There are many ways a partner’s retirement can harm a law firm. A partner who retires on a date certain without transitioning clients to younger attorneys leaves a hole in the firm’s balance sheet that the rest of the firm must fill. Similarly, when a partner who no longer bills hours or develops business postpones retirement to prolong participation in firm profits, a drain on cash flow occurs. To lateral candidates looking for firms populated by successful, highly-motivated lawyers where they can make more money, these partners can look like a liability – a good reason to look elsewhere. Thoughtful regulation of partner retirement can help protect a firm from these exposures.

Certain retirement regulations can be highly controversial

Some retirement rules are more divisive and controversial than others. A particularly contentious issue is whether to mandate retirement when a partner reaches a particular age. It is handled very differently, if at all, from firm to firm.

A mandatory retirement requirement establishes a date when every partner must step down as a firm owner. Firms may make exceptions, however. Some waive mandatory retirement where a partner can show that continuing to practice will contribute to profitability. Others de-equitize partners at a certain age, while permitting them to continue practicing as contract partners or “of counsels,” with compensation based on productivity metrics such as billable hours, marketing and business development, or both. A benefit of mandatory retirement is that it preemptively solves other problems associated with closing out older partners’ careers. For example, a retirement deadline with a profitability exception provides an efficient way to nudge out senior partners who are no longer productive, without forcing out contributing older producers who want to keep working.

At firms without a retirement age, every partner retirement is a de novo negotiation in which a firm’s prior deals with other partners may or may not be precedential. Not knowing when a partner plans to retire prevents a firm from predicting two important pieces of information. First, the firm cannot predict when the retiring partner’s revenues will go away, so a plan can be made to replace it. (The obvious solution is for retiring partners to invest the nonbillable hours necessary to transition clients to younger firm members, but for this to be effective, firms must protect their compensation while doing this work.) Second, if a firm does not know when a partner will leave, it cannot predict when it will have to write a check returning the partner’s equity. If a number of senior partners retire in a single year, this can have a material effect on the firm’s financial condition.

Small and midsized firms defend their choice not to require age-based retirement by citing the management flexibility and elasticity of firm processes this decision reflects – characteristics that draw many lawyers to their business models.

Regulating partner retirement is often defined by firm culture

Ultimately, regulation of partner retirement is a reflection of a firm’s culture. A firm that prefers a lean management structure may favor hard-and-fast rules that include no discussion of an individual partner’s needs. A firm that values productivity above all else may set revenue targets for older partners that, if missed, activate a path to retirement. A partnership that seeks the greatest good for the greatest number may regulate retirement with a lighter touch, opting for a case-by-case approach to when and on what conditions a partner retires.

That every partner’s career will someday end is as inevitable as death and taxes. Few firms have no guardrails whatsoever around how or when this ending takes place. But regulations governing partner retirement vary widely. They can be as minimal as establishing the date a retiring partner will receive a return of capital. They can be as draconian as mandatory retirement at age 65 with no exceptions. The industry standard is somewhere between these extremes. Often it comes down to how partners feel about telling each other how and when they must stop being lawyers – and with luck, begin new lives as something equally satisfying.

 

 

David Wood is a retired trial lawyer who helps law firms and senior partners plan and implement retirement succession programs. He can be reached at [email protected].