Ethical Values in the Marketplace

In the Harvard Law School case study “Slater & Gordon,” John C. Coates and Ashish Nanda, both professors at Harvard Law School, and Monet A. Brewerton look at the history of the world’s first publicly held law firm.

Founded in 1935 by William Slater and his brother-in-law Hugh Gordon, Slater & Gordon focused on unions, injured workers, and worker’s compensation. When Slater passed away in 1960, the firm continued his tradition.

In the 1980s, the firm faced a crisis: its core worker’s compensation business had suffered as a result of changing Australian regulation, and it lacked core leadership. Partner Jonathan Rothfield took over as sole proprietor for four years while he reoriented and expanded the business, making other partners non-equity. When they objected, Rothfield argued: “This firm is different from most. We aim to assist the underdog and provide legal services to the disadvantaged. To do this, we must be in business. To be in business, we must be profitable.”

The firm recovered, and business took off through the late 1980s and 1990s. It instituted a no-win, no-fee policy in 1994 that brought in a flood of new cases, then fine-tuned its case selection and out-of-court settlement strategies. By 2010, managing partner Andrew Grech was able to say, “We get successful outcomes with 98 percent of our cases.”

In 2001, Australia passed the Legal Profession Act, becoming the first jurisdiction in the world to permit law firms to incorporate. In the midst of a national expansion and seeking capital, Slater & Gordon took advantage. “In Australia, when you’re organized as a partnership, you must distribute all profits,” said Grech. “Any reinvestment has to be done after tax. In the corporate model, profits can be reinvested before taxation, and distributed profits can be taxed at the lower corporate rate.”

As it took on bigger cases and continued its no-win, no-fee policy, Slater & Gordon faced another capital crunch. (In Australia, lawyers are not paid in the discovery or investigation phase of a case as they are in the United States, so they must front their own costs.) The firm’s management team considered third-party litigation funding and taking on debt, but handing over control to a bank felt too risky, and third-party funding faced hurdles in Australian courts, which questioned whether funding agreements were enforceable.

A third option looked more appealing: outside equity. The firm began talking with an equity group that offered funding and suggested taking the firm public in two years—but wanted the firm to take on less risky cases in return. “Essentially, the PE firm was planning to come in, dress up the investment, and offload it as soon as possible,” chief financial officer Wayne Brown said. “We thought, ‘Why be taken by someone else on a beauty parade to be sold to the highest bidder? If they’re going to take a hefty fee out of listing us in two years, maybe we should just go for listing right now.’“

The management team began to consider seriously the effects of becoming a publicly traded corporation on its cases, clients, employees, and public reputation. They worried that disclosure rules for public corporations would require revealing the details of ongoing cases. “As we thought of everything we would have to release, we became less concerned,” Grech said. “We took some comfort from the details of the disclosure laws. There were carve-outs. We wouldn’t be required to make any disclosures that would breach client confidentiality.”

On May 21, 2007, Slater & Gordon listed on the Australian Stock Exchange. On the firm’s first day of trading, shares rose 40 percent. By any measure, the firm’s move was a success: in 2014, its 2,500 lawyers earned it nearly $150 million.

David B. Wilkins, Lester Kissel professor of law at Harvard Law School and faculty director of the Center on the Legal Profession, makes two points about this case.

• There are benefits to going public. Slater & Gordon used the capital gained in its IPO to expand in Australia and the United Kingdom. The organizational structure has other pluses. “It also gives them a transparent metric for how well they’re doing and the value of the firm,” Wilkins points out—when traditional law firms may struggle to put a dollar amount on their business value—as well as “a way to pay people who are no longer working at the firm,” since corporate income is no longer directly tied to employee hours served.
• Drawbacks, too. Slater & Gordon leadership carefully considered the consequences of going public on various stakeholders—a smart move. Corporate disclosure requirements also help to ensure a level of accountability not entirely at odds with traditional legal ethics. More recently, the firm has moved into the U.K. market. While its acquisitions there have focused on consumer law, it has moved into business law as well. How much is the firm retaining its public interest focus in the midst of expansion? “I think the jury is totally out on this,” Wilkins says. “They’ve tried hard to keep this self-understanding. But whether they actually can … is something that only time will tell.”