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Why lawyers make bad business decisions

June 02, 2016

Home Blog Why lawyers make bad business decisions

Remembering Dewey LeBoeuf

In October 2007, lawyers Stephen Davis and Steven DiCarmine of the fast-growing insurance and utilities law firm LeBoeuf, Lamb, Greene & McCrae LLP celebrated the merger they had just engineered with the white-shoe, but less lucrative Dewey Ballantine.

Davis, a mild mannered but supremely ambitious corporate attorney and head of LeBoeuf, would become the new firm’s chairman; DiCarmine had never practiced law but enjoyed the power of being Davis’s right hand in developing a global law firm to rival Skadden Arps. “The Steves” had an aggressive growth plan that wasn’t just through mergers; they also enticed lateral partners and kept other rainmakers by a new method: guaranteeing higher than market salaries unconnected to performance. At least a hundred partners soon held multi-year guarantees, more than a few at $5 million annually.

When the economy faltered a year later, the guaranteed partner pledges triggered a bleeding balance sheet, financial deceptions, and a stream of departures that turned into a river until May 2012, when Dewey LeBoeuf filed for bankruptcy, the largest ever of a law firm. Two years later, the Manhattan District Attorney issued a 106 count indictment of “the Steves” and CFO Joel Sanders for criminal fraud, but the trial last year resulted in acquittals on most accounts. Davis accepted a deferred prosecution deal to avoid another trial, but DiCarmine (along with CFO Joel Sander) are to be retried. DiCarmine last month announced a decision that appeared to be even worse that those he made that bankrupted a thousand lawyer firm and subjected him to the indictment: he would represent himself in the retrial, even though he had no trial experience (criminal or civil) whatsoever. (He relented last week under pressure from the judge and the legal community.)

Across the globe in 2007 another ambitious lawyer named Andrew Grech was receiving accolades for leading his midsized Melbourne labor law firm, Slater and Gordon, into a successful IPO; the first law firm to go public. Grech’s ambitions, like the two Steves, were global; in addition to acquiring Australian and UK personal injury law firms, he leaped at the opportunity to buy distressed UK professional services company, Quindell , for $1.3 billion. To ensure firm loyalty in a law firm without partner bonds, Slater & Gordon provided employee loans to buy $8 million dollars of the company’s stock. Within a few months, it was clear Slater and Gordon paid far too much for Quindell. Even worse, British personal injury law was amended regarding whiplash claims, devaluing personal injury cases. Slater and Gordon couldn’t meet its debt obligations; the stock plummeted; lawyers fled, and the decision makers, like the two Steves, may be facing criminal investigations.

When advisors need advice

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What makes such highly educated, otherwise risk-adverse, respected professional legal decision makers so terrible at making business judgments? Why can’t those who are paid more than $1000 an hour to advise the most sophisticated and powerful businesspeople make good decisions about their own business?

The very fact that they are lawyers is why.

Cognitive bias – an illogical deviation from rational judgement – is a common flaw with professionals, but it seems that the confident and quick decisions and the certainty of one’s own “rightness” makes this bias more pronounced in lawyers. The overestimation of the significance of past events (representational bias) and the having “known it all alone” (hindsight bias) are consequences of legal training and successful advocacy. What wins in courtrooms and provides confidence for clients seeking advice feeds these cognitive biases.

Two things can help lawyers overcome cognitive bias and improve business decision making:

  1. Simply recognize bias. Firms that have more active and vocal management teams are more effective in recognizing risks. Steve Davis famously managed without formal votes, but by a manipulated consensus that quashed dissent. His early decision to guarantee salaries worked in a booming economy and emboldened him to expand the guarantees. Andrew Grech was so sure that the Quindells acquisition was a steal and what the firm needed that he dismissed a clear-eyed due diligence; after all, his earlier acquisitions in Australia and the UK worked out well. In both instances the decision making attorney’s cognitive bias regarding a business decision was never challenged.
  2. Consult with experts with broader and deeper specific experience. The ability to try and win a bet-the-company case does not make the winning lawyer an expert on managing a company; an m & a expert may not in fact be the best person to look at their own firm merger potentials. Even less crucial business decisions, regarding vendor contracts, for instance, will be made better if managing lawyers and administrators listen to third party experts, rather than relying on their own limited experience.

The practice of law is changing because of the new analytic tools that assist lawyers in making better legal decisions; the business of law must change as well to allow managing lawyers make more informed business decisions. Both legal practice and business management must overcome the tendency toward cognitive bias to remain competitive in an environment with exponentially more information but with the same humans ultimately making decisions.

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