Back to top
Article

Independence: still viable?

14 April 08

Yes-no debate on the question "Can we preserve professional independence in a legal business not owned by solicitors?"

by Alan Campbell, Walter Semple

YES

Alan Campbell, Managing Partner, Dundas & Wilson CS LLP

Professional independence – in other words being in a position to give advice without fear or favour – is tested by what is happening on the ground. It is about what influences the way a solicitor advises clients.

We should ask ourselves, “How likely is it that an owner will try to undermine independence when solicitors are advising clients and dealing with institutions of state?” Could non-solicitor owners exert such influence? Yes, probably, but only if they want to, and so too could solicitor owners.

It is easy to see the distinction between ownership and operations in corporate models. Shareholders own the company and appoint directors to manage how the company delivers services. So in a partnership there is ownership and there is service delivery. The fact that partners deliver services as well as owning the business confuses the distinction, but not the different behavioural drivers behind it.

The partnership structure integrates ownership and operations. Wearing our owner hat we look to grow whole business value, but as practitioners we relate more to our individual CV values. When these interests are aligned this works well. But when not synchronised there is imbalance which can be damaging. The behaviour of practitioners can be too focused on individual aspirations rather than overall business objectives, causing loss of business direction.

What is business direction? For the organisation in question it is an articulation of what success looks like. It is both its value proposition and its brand proposition. We want our legal businesses to embed our core values, including independence, within their value and brand propositions.

If business direction wavers, owners who are not practitioners can be of particular help. Their interest as owners is in the sustainability of the whole business, not the CV values of practitioners. Owners of businesses of which the value and brand propositions espouse professionalism and ethics will use their influence to align behaviours at an operational level to deliver those propositions. By being excluded from “operations” they focus on the sustainable value of the organisation, not the individuals.

Unlike practitioners, external owners of businesses which are damaged by “off-brand” incidents cannot seek re-employment elsewhere on the basis that it “wasn’t their fault”. So where synchronisation of ownership and operation is failing, non-practitioner owners can be better cross-practice watchdogs of conduct than collections of practitioner owners who, so long as it wasn’t them, can be assured of future sustainable earnings even if the business fails.

Our regulatory framework does not recognise the different behavioural drivers affecting owners and practitioners. Consequently we have no concept of fitness to own, only fitness to practise and to supervise others. Today, relying upon the revocation of practising certificates to monitor the behaviours of owners of modern law businesses makes little sense.

I think we should want to attract owners who value the brand “solicitor” and all it stands for. These people, whether or not solicitors, will demand high quality customer care because that is at the heart of the business proposition in which they are investing. A well run organisation that drives value by promoting professionalism and ethics is the best custodian of ethics you can find, irrespective of who owns it.

But this balance between the interests of owners and operators can tip the other way, particularly if there is a high concentration of ownership. If a narrow band of business owners, whether or not solicitors, perceive their ownership interest is significantly more valuable than their future career opportunities, then they may be tempted to forego professional integrity in a short term effort to shore up that value.  We need only look to other corporate governance pointers, guarding against repeats of the likes of Maxwell and others, to see how dangerous highly concentrated models can be.

As professionals we recognise the need for “know your client” rules. I think, in adopting alternative business structures, we also need “know your owner” rules, which should be calibrated to reflect the degree of influence an owner can have. Nor should we test fitness to own on the basis of fitness to practise, but rather on the person’s endorsement of the value proposition inherent in professional integrity. So long as owners value professional integrity, independence is assured.


NO

WALTER SEMPLE, WALTER SEMPLE GLASGOW

I say no. Why?

That independence is fundamental is not in issue. It resounds at the beginning of the Solicitors’ Code of Conduct and in every other lawyers’ code of conduct, national and international. The Justice Secretary has clearly said that a strong and independent legal profession in Scotland is fundamental.

Why is it so? Lawyers have a role in society which requires them to be organised in a different way from other commercial business people. Our society needs an independent judicial system. That includes not only courts and tribunals but also the legal profession, which is just as important in delivering impartial justice.

The Oxford Dictionary definition of independence is “not depending on the authority of another”. Independence describes a relationship between the independent person and others. It is fundamental because it insists on an environment where lawyers can best perform their role in the administration of justice. That requires observance of “core values” such as confidentiality, avoiding conflicts of interest and respect for the administration of justice. These take precedence over self interest or commercial benefit.

Currently the law and professional ethics refuse to allow ownership of law firms by non-lawyers, so as not to compromise professional independence. What is proposed to overcome this hurdle is an ABS where:

  • The new business entity will be subject to professional discipline;
  • The practising lawyers in it will be subject to professional discipline.

A nominated practising lawyer employed in the business entity will be directly responsible not only to his management board but also to the Law Society of Scotland to report breaches of professional rules.

An ABS regulated in this way may be owned by commercial companies such as banks, insurance companies or retailers of goods. The main objective of such businesses is profit. That is as it should be. But it is an environment which is quite different from that which insists on the core values of the legal profession. It creates a culture clash where economically dominant or influential parties’ main objective is to produce profit.

It also creates conflict with the legal system, in particular in the field of legal professional privilege. Privilege is necessary because it allows clients to consult lawyers without fear of disclosure to the court. It relies on lawyers keeping client confidentiality, an absolute obligation on solicitors according to the House of Lords in Prince Jefri v KPMG [1999] 2 AC 222.

Lord Millett said: “It is of overriding importance for the proper administration of justice that a client should be able to have complete confidence that what he tells his lawyer will remain secret. This is a matter of perception as well as substance. It is of the highest importance... that a solicitor... in possession of confidential and privileged information should not act in any way that might appear to put that information at risk of coming into the hands of someone with an adverse interest.”

Nothing in the ABS debate explains how privileged information can be shared with non-lawyer owners but withheld from the courts. The courts may refuse to recognise as entitled to privilege the clients of any ABS which has not met the legal requirement.

The 2005 EU Directive on Money Laundering was drafted so as to preserve the role of independent legal professionals. ECJ jurisprudence has so far refused to regard in-house lawyers as independent where their client is also their employer (see AM&S [1982] ECR 1575; AKZO (T125/03, T253/03), 17 September 2007, under appeal).

Where ethical problems arise in an ABS the nominated lawyer would be responsible to decide the proper course of action and to report breaches of professional rules to the Society. At the same time their job and perhaps their career might be at risk from refusing to support their employers. This situation is to be compared with that of the in-house lawyer whose client is their employer and whom the ECJ has refused to treat as independent. It is ancient wisdom that no one may serve two masters. Sooner or later the proposed system would lead to serious problems which the present system has so far avoided.

The proposal that equity should be available to employees and external directors, even up to an aggregate of 25%, does not breach independence. However the proposals for external ownership require a device giving an appearance of independence. Such a system would pose a higher risk of failure than the existing rules. It would betray an essential part of the system of administration of justice.