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Listing good for firm, good for profession


Cite as: (2008) 82(7) LIJ, p. 24

For some in the profession it remains a radical development, but Andrew Grech believes the public listing of Slater & Gordon will ultimately benefit the legal profession.

Slater & Gordon managing director Andrew Grech made good money last year. He took home a pay cheque worth $375,000, plus a slice of the $17.3 million that seven of the firm’s lawyers received in the public float last May.

The performance of his remaining shares also boosted his personal wealth (on paper) by about $4 million the day the firm hit the boards.

Others at Slater & Gordon also did well, with the firm’s last year’s annual report showing who the highest paid executives and directors were. It also revealed Mr Grech and fellow directors Peter Gordon and Ken Fowlie each had a beneficial interest in more than 60 million shares, worth about $80 million at the time of writing.

Having your yearly payslip and shareholding exposed to public scrutiny is one of the downsides of being a well-paid executive or director of a publicly-listed company. While many lawyers would recoil at the prospect, for those who work at Slater & Gordon, it is part of the trade-off that comes with external shareholders, an employee share scheme and being an owner of, rather than a partner, in a law firm.

While he may not like the details of his personal income and shareholding being so public, Mr Grech believes the increased transparency and accountability that comes with being a listed firm is good for his business, and will ultimately be good for the legal profession.

“When you try and break down why it is that lawyers aren’t held in the same regard as they were 10-15 years ago, a lot of it is about a lack of transparency. There is a lot of misunderstanding and even mystique in the general community about what being a lawyer is, and what it is not and I think lawyers have sometimes been a bit coy, or even ashamed of the fact they are making a profit and want sustainable, wealthy careers,” he told the LIJ.

“As a profession, the more we can lay bare the reality the better, so for that reason I am a big fan of transparency and a big fan of independent regulation, rather than self-regulation.”

Regulation and how to manage conflicts of interest have been central to the debate about the pitfalls of incorporation and public floats for law firms.

What happens if a listed firm is approached by a client to take a class action against one of the firm’s major shareholders? Will a big corporate buy shares in Slater & Gordon as a strategic move to stop the firm being able to act against it?

Questions of how firms balance their obligations to shareholders – directors must act in the best interests of shareholders – against a lawyer’s duty to the court and clients have been repeatedly asked.

Mr Grech said the firm faced the same competing pressures and obligations as it did before listing, stressing private law firms were also about returning profits to owners.

“For people to pretend that whether you are called a partnership, or an incorporated legal practice or a publicly listed, incorporated legal practice necessarily requires you to subvert your professional obligations first to the court, and second to your clients, is palpable nonsense,” he said.

In its prospectus, Slater & Gordon warned potential investors that clients come before shareholders, and duty to the court comes before both.

Mr Grech, who has been with the firm for 14 years and remains a major shareholder, said many critics had resorted to scaremongering without “any intellectual content to their discourse”.

“I am not saying there shouldn’t be any debate and if you ask the question ‘is there a new layer, a new possibility for conflicts because we are publicly listed?’ of course the answer is ‘yes’,” he said.

“The next and better question is ‘how can those conflicts best be addressed?’.”

The view that corporate regulations are in direct conflict with lawyer-client privilege is misinformed, he said.

“If people say that, it is because they don’t understand the carve-outs in the corporations law which, for example, don’t require you to make a disclosure if it would breach a confidentiality obligation.

“Our experience has been that listing presents no insurmountable conflict of interest. It certainly hasn’t to date.”

He also rejected claims that the incorporation and listing of law firms would result in diminished ethical responsibility among lawyers, who were no longer “partners” but “directors” alongside non-lawyers – arguing the changes to ownership structures offered an opportunity to strengthen management systems and regulatory requirements across the profession.

In preparing to become a public company, Slater & Gordon embarked on a major project to identify all its ethical and legal obligations and values. This involved drawing up policies, practices and structures to underpin those obligations and values, which was partly to comply with the Stock Exchange’s listing rules and partly to ensure compliance with corporate governance standards and the Australian requirements for incorporated firms.

So far, going public has been a winning move.

Slater & Gordon has continued to buy up firms at a heady rate, exceeded its profit forecasts and answered most critics who claimed its social justice values would be compromised by such a move.

Its share price, which at the time of writing was $1.33, remains well above the $1 issue price, despite the overall bear market which has wiped millions of dollars from the value of investors’ share portfolios.

The path has not been as smooth for Perth-based Integrated Legal Holdings (ILH), an umbrella company seeking to acquire law firms and legal service providers as standalone businesses.

Since its August stockmarket debut, its share price has crashed from an issue price of 50 cents and dipped below 15 cents in April. Since listing, it has bought two small practices in WA and posted a modest half-year profit of $895,412 in the six months to 31 December.

In April it announced Graeme Fowler, the former chief executive of listed financial planning and accounting group WHK, would take the reins as chief executive. Mr Fowler will attempt to drive ILH’s interstate expansion from Sydney.

Mr Grech said the contrasting listing experiences reflected the different business models.

“I understand what they are trying to do and I wish them all the best, but it is very different to what we have tried to do,” he told theLIJ.

“They are bringing together in a holding company a number of individual law firms, whereas what we have been successful in doing is growing organically and investing in the growth of our business and making it a better business by integrating other businesses into it.”

Slater & Gordon went looking for outside capital in order to build on its established markets of WA and Victoria. It is targetting practices in Queensland and New South Wales, as well as opportunities in regional and suburban areas and organic growth as part of plans to more than double its client base.

In the past 12 months, the personal injury litigation firm has added seven practices to its stable, is in the final stages of due diligence with another and has opened four new offices.

It now has 500 staff in 26 locations and has expanded its areas of practice to 15 (in its CBD offices).

Its net profit of $6.9 million for the first six months of 2007-08 was 56 per cent higher than its prospectus forecast. It has also upgraded its full-year revenue forecast by 12 per cent to $73.5 million, thanks to its slew of recent acquisitions.

The biggest challenge has been making sure the acquisitions are the right ones.

A comprehensive due diligence process and a disciplined approach to integrating the newly acquired firms are crucial. The firm has dropped acquisition plans during due diligence “a couple of times”.

Mr Grech admitted that for the principals of firms bought by Slater & Gordon “it is quite an adjustment”.

“There are positives and negatives, as there are with any process of change, but generally they say they are very pleased to be relieved of all the back-office functions so they can concentrate on serving their clients and training and mentoring their staff.”

He said listing had meant the firm was in a stronger position to retain staff and less vulnerable to the fluctuations in the [legal services] market. It could offer a broader range of remuneration options, including ownership at a relatively early stage in a lawyer’s career, than its competitors.

“The flexibility that our ownership structure offers people I think is probably unparalleled in the legal services industry,” he said.

To get the benefit of any shares allocated in employee share schemes, staff need to stay with a company for a period of time. The share price also needs to rise.

As for whether other firms would soon list, Mr Grech believed the current bear market would act as a deterrent, but said he had been contacted by others in the profession keen to explore the public company option.

New boss for Integrated

Integrated Legal Holding’s (ILH) chief executive Graeme Fowler believes his company’s model – which involves aggregating law firms in a similar way to the listed WHK Group’s consolidation of accounting and financial planning groups – can work.

“We are not lawyers, we are not looking to run law firms and we are not looking to manage the businesses or the clients or the staff,” he told the LIJ.

“We think the people best placed to do that are the people in the firms. What we are all about is supporting the firms in growth and improvement.”

He said it was not a matter of simply applying the WHK business model to the legal sector.

“How their businesses have traditionally run as partnerships may be the same, but there is no doubt lawyers and accountants are different and I am not just looking to come in with the accounting model and bang it on the table,” he said.

Mr Fowler said ILH – which wants to buy up to three firms over the next 12 months to add to the four Perth-based practices and an online legal document group it owns – did not need a big corporate team to execute its strategy. But he warned growth would take time.

“Don’t expect us to grow by buying a large number of firms quickly,” he said.

Incorporation alone would not automatically lead to improvements within a firm.

“What you do get by being part of a listed company is a focus and access to capital to develop your business. There are a lot of opportunities for firms to grow and expand and improve the range of services to clients but they are not going to get it by just incorporating.”

ILH is looking at firms in key centres around Australia with at least $5-$6 million in annual revenue and the ability to double that within a three-year period.

“A key part of our model is about getting their [principals’] income back to where it was when they joined the group and sold the business in the first place,” he said, referring to the group’s profit share model.

“We would be looking to do that within a four-to-six-year period.”

As for the share price – which has never traded at or above its 50 cent issue price – that would recover once the right business model was developed and executed, he said.


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