The Law Firm as an Efficient Community
Ronald J. Daniels*
There is a substantial debate among law and
economics scholars as to why a large portion
of economic activity takes place within firms
rather than through individual market con-
tracts. The participants in this debate have
focused largely on the corporation, to the neg-
lect of other forms of organisation such as the
law firm, and have tended to generate
economic-based theories which emphasize the
importance of centralized control, ownership,
reputational capital, or asset-specific invest-
ment as the source of the firm’s relative effi-
ciency over market contracts. This article con-
tributes to the existing literature by insisting
on the importance of communitarian values to
the efficiency of the modem law firm. Viewing
the law firm as a mini-society, the author sug-
gests that the nature of a firm’s culture will be,
at least in part, determinative of economic suc-
cess of the firm as a whole and the personal
fulfilment of its members. After surveying the
existing economic theories and their deficien-
cies, the author examines how the notion of
firm culture supplies missing elements to the
theory of the firm. The explanatory value and
relevance of firm culture is then demonstrated
through a case study of law firm mergers and
the threat they pose to the long-term viability
of the firm.
Pourquoi l’activit6 6conomique s’organise-
t-elle a travers des associations, plut6t que de
prendre la forme de marchds individuels?
Cette question a suscit6 un vif int6rt au sein
de l’6cole
protagonistes ont pour la plupart concentr6
leur attention sur le module corporatif, tout en
n6gligeant les autres formes d’association
telles le cabinet d’avocats. Les thories 61abo-
r6es dans le cadre corporatif tendent a justifier
la sup6riorit6 du module associatif par rapport
au module du march6 individuel sur la base de
facteurs tels le contr6le administratif centra-
lis6, l’int6r& mat6riel des membres dans le
patrimoine de la soci6td, la r6putation de l’6ta-
blissement et l’investissement de la soci6t6
dans ses membres. L’auteur souhaite ajouter h
la litt6rature existante en analysant le r6le des
valeurs communautaires dans le fonctionne-
ment des cabinets d’avocats. En effet, sugg~re-
une mini-commu-
t-il, le cabinet ressemble
naut6, et la vitalit6 de sa culture sera au moins
en partie d~terminante de son succ~s 6cono-
mique et du d6veloppement personnel de ses
membres. Apr~s avoir expos6 les diverses
th6ories 6conomiques et montr6 leur incapa-
cit6 h fournir une explication enti~rement
satisfaisante du cabinet d’avocats, l’auteur
montre que la notion de culture procure le
compl6ment n6cessaire a une bonne compr6-
hension de son fonctionnement. I1 en donne
une illustration concrete en analysant le ph6-
nom~ne des fusions et le danger qu’elles repr6-
long terme du nou-
sentent pour la viabilit6
veau cabinet.
I am indebted to Gordon Haskins for his superb research assistance in preparing this article.
His contribution was especially valuable in developing the argument in the final part of this article
respecting the role of firm culture. Tim Heeney and Kelly Friedman also provided excellent assis-
tance. Debra Forman, the International Business and Trade Law Librarian at the University of
Toronto, Faculty of Law, furnished invaluable librarian assistance. Bruce Chapman, Marc Galanter,
Ron Gilson, Henry Hansmann, Jon Macey, Roberta Romano, Steven Richardson, and Michael Tre-
bilcock provided very helpful comments on an earlier draft of this article, as did participants in
workshops held at the Canadian Law and Economics Association Annual Meeting and at the
Georgetown University Law School. Finally, thanks are owed to the numerous senior partners at
Canada’s leading law firms who gave so generously of their time during the preparation of this
article.
McGill Law Journal 1992
Revue de droit de McGill
To be cited as: (1992) 37 McGill L.J. 801
Mode de citation: (1992) 37 R.D. McGill 801
McGILL LAW JOURNAL
[Vol. 37
Synopsis
Introduction
I.
The Modern Corporate Law Firm
H. The Theory of the Firm as Applied to the Corporate Law Firm
Introduction
A.
B. The Benefits of Joint Production of Legal Services
1. Task Specialization
Economies of Scale
2.
3.
Economies of Scope
C. The Existing Rationales and Their Limits
1. The Firm and Entrepreneurial Command
2.
3.
4.
5.
The Firm and Centralized Monitoring
The Firm and Ownership Rights
The Firm and Reputational Bonding
The Firm and Asset Specificity
a. Gilson and Mnookin: Diversification of Specialized
b. Galanter and Palay: Investment in Human Capital
Investment
Development
III. Firm Culture: Completing the Theory of the Law Firm
Introduction
A.
B. The Firm as Community
C. Creating Commitments to Community: The Role of Firm Culture
IV. The Urge to Merge and the Survival of the Law Firm
Conclusion
Introduction
Although, almost from the time that it was written, Ronald Coase’s seminal
article on the problem of social cost’ received widespread attention,2 the value
of many of his other works was only slowly recognized. This was particularly
“‘The Problem of Social Cost” (1960) 3 J.L. & Eco. 1.
2According to A. Shapiro, Coase’s article “would have qualified for the tabulation of most-cited
articles if the Journal of Law and Economics was indexed by Shepard’s” (“The Most-Cited Law
Review Articles” (1985) 73 Calif. L. Rev. 1540 at 1546).
1992]
AN EFFICIENT COMMUNITY
true of Coase’s “The Nature of the Firm,”3 which, despite being written in 1937,
did not receive serious consideration until the 1970s.4 However, in relatively
short order, his central insight that firms arose as a way of economizing on the
costs of market contracting became widely accepted, spawning a vast literature
devoted to economic analysis of organizational forms.’ Interestingly, during the
first decade and a half of its life, the new institutional economics was used only
fleetingly to analyze the structure and the form of non-corporate organizational
forms.6 Among the forms of organization neglected by mainstream institutional
economists has been the modem corporate law firm, an oversight corrected only
recently by Gilson and Mnookin, 7 and Galanter and Palay.’ The lack of schol-
arly attention devoted to the structure of the corporate law firm 9 contrasts mark-
edly with the extensive attention that it has received in the popular press.
This article constitutes one more attempt to correct the neglect of the cor-
porate law firm by law and economics scholars. The core claim of the article is
that examination of the corporate law firm can yield important benefits, not only
3(1937) 4 Economica 386, reproduced in G.J. Stigler & K.E. Boulding, eds, Readings in Price
Theory (Homewood, Ill.: Richard D. Irwin, 1952) 331.
4Coase himself has lamented that “The Nature of the Firm” is “much cited and little used” (R.
Coase, The Firm, theMarket and theLav (Chicago, Ill.: U. Chicago Press, 1988) at 62). The article
was recently the subject of a special issue ((1988) 4 J.L. Eco. & Organ. 1).
5See, for instance, 0. Williamson, The Economic Institutions of Capitalism (New York: Free
Press, 1985) [hereinafter Economic Institutions]; Markets and Hierarchies: Analysis and Antitrust
Inplications (New York: Free Press, 1975); A. Alchian & H. Demsetz, “Production, Information
Costs, and Economic Organization” (1972) 62 American Economic Review 777; B. Klein, R.
Crawford & A. Alchian, “Vertical Integration, Appropriable Rents and the Competitive Contract-
ing Process” (1978) 21 J.L. & Eco. 297; M. Jensen & W. Meckling, “Theory of the Firm: Man-
agerial Behavior, Agency Costs, and Ownership Structure” (1976) 3 Journal of Financial Econom-
ics 305; S. Grossman & 0. Hart, “The Costs and Benefits of Ownership: A Theory of Vertical and
Lateral Integration” (1986) 94 Journal of Political Economy 691.
6Scholars taking the non-corporate form seriously include: H. Hansmann, “Ownership of the
Firm” (1988) 4 J.L. Eco. & Organ. 267; Alchian & Demsetz, ibid. at 785-90; E. Fama & M. Jensen,
“Separation of Ownership and Control” (1983) 26 J.L. & Eco. 301; “Agency Problems and Resid-
ual Claims” (1983) 26 J.L. & Eco. 327. The latter invoke the new institutional economics to
explain organizational forms as diverse as the conventional corporation to the Catholic Church.
7R. Gilson & R. Mnookin, “Sharing among the Human Capitalists: An Economic Inquiry into
the Corporate Law Firm and How Partners Split Profits” (1985) 37 Stan. L. Rev. 313 [hereinafter
“Sharing among the Human Capitalists”]; “Coming of Age in a Corporate Law Firm: The Econom-
ics of Associate Career Patterns” (1989) 41 Stan. L. Rev. 567 [hereinafter “Coming of Age in a
Corporate Law Firm”].
8See M. Galanter & T. Palay, “Why the Big Get Bigger: The Promotion to Partner Tournament
and the Growth of Large Law Firms” (1990) 76 Va. L. Rev. 747.
91n this article, I use the terms corporate law firm and law firm interchangeably. This is because
my focus is exclusively on the large corporate law firm. Such firms are denoted by their commit-
ment to servicing the needs of corporate as opposed to individual clients. Although much of the
analysis developed in this article may be easily applied to non-corporate law firms, there are sev-
eral distinctive challenges being faced by small and medium-sized firms that need to be accounted
for in considering their growth and performance, and which are ignored in this article. The oper-
ation of the corporate law firm is extensively explored in R. Nelson, Partners with Power (Berke-
ley: U. California Press, 1988); “Ideology, Practice and Professional Autonomy: Social Values and
Client Relationships in the Large Law Firm” (1985) 37 Stan. L. Rev. 313. See also, S.S. Samuel-
son, “The Organizational Structure of Law Firms: Lessons from Management Theory” (1990) 51
Ohio State L.J. 645.
REVUE DE DROIT DE McGILL
[Vol. 37
in terms of understanding the particular nature of professional service organiza-
tions, but also in terms of developing a deeper appreciation of both the limits
and strengths of the general theory of the firm which lies at the heart of the new
institutional economics. Such examination presents some surprising and hith-
erto only dimly understood evidence on the role of non-efficiency values such
as community, solidarity, and mutual respect and concern in justifying the firm
form of organization. Although both law and economics and communitarian
scholars have generally assumed that laws and institutions modelled on wealth
creation are inhospitable to non-efficiency values, I claim, by reference to the
modem corporate law firm, that these values can co-exist in certain contexts
without serious tension. Indeed, I go further by arguing that efficiency may
require that organizations give pristine expression to communitarian values.
Although this claim may be somewhat novel for legal scholars, it is something
that sociologists and organizational behaviourists have known for decades, as
reflected in the importance they attach to the strength and quality of a given
firm’s corporate culture in determining its competitiveness.” I claim that, at
least in the setting of the modern corporate law firm, firm culture constitutes an
important, indeed, essential component of the theory of the firm. By taking cul-
ture seriously, the behaviour and structure of the corporate law firm can be
much more easily explained.
The article develops this argument in several distinct stages. Part I sketches
the structure and role of the conventional corporate law firm. Part II evaluates
the existing range of general and specific theories offered by institutional econo-
mists to explain the structure of the modem corporate law firm. I find that each
of these theories provides only an incomplete rationale for the corporate law
firm. In Part III, I argue that by considering the role of non-efficiency values,
such as community, a more persuasive rationale for the corporate law firm can
be generated. Essential to the inculcation and maintenance of community values
is firm culture. Part IV considers the challenges to the community of the tradi,
tional law firm that are posed by the recent merger wave that has gripped Amer-
ican and Canadian law firms. It also identifies and evaluates some of the inno-
vations deployed by law firms to safeguard their internal community. Finally, in
the article’s Conclusion, the implications of this argument for other forms of
organization, particularly the corporation, are considered.
I. The Modern Corporate Law Firm
The modem corporate law firm specializes in the delivery of complex legal
services to large, sophisticated corporate clients. The services provided by cor-
porate law firms take the form of advice rendered to clients on how to maximize
the value they can lawfully receive from transactions executed within the con-
tours of the existing legal framework.” One of the hallmarks of the corporate
10Infra, note 85 and accompanying text.
“As Gilson has observed:
[W]hat business lawyers really do –
is simply this:
Lawyers function as transaction cost engineers, devising efficient mechanisms which
bridge the gap between … [the] world of perfect markets and the less-than-perfect real-
their potential to create value –
1992]
AN EFFICIENT COMMUNITY
law firm is the wide scope and depth of its expertise. The same law firm may
have legal specialists practising in areas as diverse as tax, anti-trust, securities,
real estate, bankruptcy, litigation, and commercial law. The corporate law firm’s
distinctive strength comes from its ability to create ad hoc teams of lawyers
drawn from a number of different specialties to provide legal services to clients.
For example, the tide of mergers and acquisitions that swept North American
markets during the 1980s routinely required lawyers from a number of different
practice areas to work together in structuring these transactions or defensive
responses to them.
The highly specialized nature of the corporate law firm’s production func-
tion is also reflected in the extensive reliance the firm places on support staff
–
para-legal and administrative. The existence of para-legal staff enables the
firm’s lawyers to devolve responsibility over relatively mundane, routine tasks
such as reviewing and filing court documents, preparing and filing incorpora-
tions and corporate changes, and examining and registering real estate titles.
Another important feature of the law firm is the presence of a large, highly dif-
ferentiated administrative staff, which allows lawyers to benefit from sophisti-
cated legal research services, round-the-clock secretarial and word processing
capability, and other sundry services (catering, messenger, telecopier, etc.).
Most law firms are structured as professional partnerships.12 For the most
part, the partnership form of organization means that law firm partners have
unlimited personal liability for debts incurred by the partnership. Consequently,
each partner’s personal wealth is at risk of being seized to satisfy debts incurred
by other members of the partnership in the course of partnership business. In
addition to personal liability, partnership status also confers clear rights upon
partners to participate in the firm’s management. Usually, these management
rights stipulate an entitlement to be kept apprised of the firm’s activities and
financial status, to be consulted on relatively normal course changes, and to be
able to vote directly, often on the basis of supra-majority voting rules, on core
changes. Partnership status also includes a right to share in whatever income
remains at the end of an accounting period after all fixed claimants have been
ity of effecting transactions in this world (“Value Creation by Business Lawyers: Legal
Skills and Asset Pricing” (1984) 94 Yale L.J. 239 at 255).
12In some American states, law firms can be organized as true limited liability corporations, per-
mitting limited liability for lawyers and even allowing non-lawyer investors to hold equity in the
firm. These firms are, however, exceptional. Although other American states and at least one Cana-
dian province, Alberta, permit law firms to incorporate, the benefits of incorporation are largely
confined to the realization of certain tax benefits. The firm does not enjoy limited liability insofar
as creditor claims are concerned, nor are non-lawyers entitled to hold equity interests. See J.R. Pri-
chard, “Incorporation by Lawyers” in J. Evans & M. Trebilcock, eds, Lawyers and the Consumer
Interest (Toronto: Butterworths, 1982) c. 10. American data on limited liability is reviewed in B.C.
Eaton & D. Church, Business Organizations: Professional Corporations and Associations (New
York: Matthew Bender, 1992) vol. 17 at 9-44.2 to 9-46. See also the debate between Carr, Mathew-
son and Gilson respecting the role of unlimited liability as a barrier to entry into the legal profes-
sion: J. Carr & F Mathewson, “Unlimited Liability as a Barrier to Entry” (1988) 96 Journal of
Political Economy 766; John M. Olin Program in Law and Economics, Unlimited Liability and
Law Firm Organization: Tax Factors and the Direction of Causation (Working Paper No. 63) by
R.J. Gilson (Stanford: Stanford Law School, 1990).
McGILL LAW JOURNAL
[Vol. 37
paid. In this respect, partners are the residual claimants upon the firm’s income
stream, i.e., they can only withdraw funds from the partnership after all fixed
claims have been paid. The actual level of participation among lawyers varies
from firm to firm depending on the criteria used in the compensation calculus.
Some firms employ a lockstep system whereby all lawyers at the same level of
seniority earn the same income, whereas most other firms rely on a more com-
plex, non-mechanistic sharing system that includes attention to seniority, mar-
ginal productivity, and efforts directed at firm promotion and development. 3
Another characteristic of partnership is secure, often life-time, tenure. Although
the constitution of most firms stipulates that partners can be removed from the
partnership without causing the entire partnership to dissolve, such action
occurs only rarely, and is accompanied by extensive procedural protections for
the departing partner.
Although, for the most part, partners in the modem corporate law firm are
all lawyers, not all lawyers in the firm are partners. Until recently, most firms
were organized around a two-tiered hierarchy of partners and associates. 4 Asso-
ciate lawyers are typically recruited directly from law school and hired on the
basis of fixed salaries, employment at will, and commitments on the part of the
firm to furnish some on-the-job training and to consider the associate for pro-
motion to partner after a fixed interval of from 5 to 10 years. In return, the law-
yer agrees to furnish legal services to clients under the supervision and guidance
of the firm’s partners.15 The level of partner oversight diminishes quickly as the
newly minted lawyer establishes her competence. Indeed, well before they are
promoted to partnership, most associate lawyers will enjoy substantial control
over small and medium-sized transactions, and will have had extensive client
contact, perhaps even to the point of serving as the lawyer responsible for
co-ordinating all of a particular client’s needs within the firm. The extensive
period of time a lawyer serves as an associate with a firm provides partners with
a deep pool of information upon which to base a decision regarding promotion
to partnership. Obviously, the more elaborate the set of actual observations of
associates under a variety of conditions, the more confident partners can be
about the associates’ suitability for partnership promotion. Given defects in the
13Examples of lockstep firms are Clifford, Chance in Britain and Cravath, Swaine, and Moore
in New York City. For a further discussion on the systems available to compensate partners and
the incentives each create, see “Sharing among the Human Capitalists,” supra, note 7 at 339.
14Traditionally, Canadian law firms have relied on a third tier in the cog of the firm machinery:
apprentice or articling students. Upon graduation from law school, students will be hired for an
apprenticeship period with a law firm. Although the student provides valuable services to the firm
during this period, the principal purpose of articling is to allow the firm to determine whether the
student should be invited to re-join as an associate lawyer at the end of the period. On average,
most firms will hire back 50% of the students as associate lawyers.
15For a full explication of this relationship, see A. Leibowitz & R. Tollison, “Earning and Learn-
ing in Law Firms” (1978) 7 J. Legal Stud. 65. Under the “up or out system” that is used by most
corporate law firms in determining promotion to partnership, associate lawyers not recruited to
partnership are expected to seek out other employment, invariably in a smaller, less prestigious
firm or in the in-house counsel department of a corporate client. The rationale for the “up or out
system” is described in “Coming of Age in a Corporate Law Firm,” supra, note 7 at 571ff; Depart-
ment of Economics and Institute for Policy Analysis, Up or Out Rules in the Market for Lawyers
(Working Paper No. 9017) by B. O’Flaherty & A. Siow (Toronto: University of Toronto, 1990).
1992]
AN EFFICIENT COMMUNITY
market for human capital, internal recruitment and promotion is the principal
mechanism for sourcing the firm’s labour needs.
II. The Theory of the Firm as Applied to the Corporate Law Firm
A.
Introduction
Despite the passage of more than fifty years, the general framework that
Coase used to organize his inquiry into the nature of the firm still retains its fun-
damental force. Coase’s central insight was that the rationale for the firm is
lodged in its comparative advantage over markets (standard spot contracts) in
organizing economic activity. As market transactions become more expensive,
it makes economic sense to carry out the activity in question within the firm.
Despite a relatively high degree of agreement among scholars on the value of
thinking of the firm in relation to markets, there is a considerable divergence of
views respecting the exact source of the firm’s advantage over the market. It is
this divergence that has spawned multiple theories of the firm.
What is the source of the divergence of views over the rationale for the
firm? To begin with, this dispute reflects the difficulties in actually defining
firms and markets. Depending on what content is poured into these meanings,
very different rationales for the firm can be derived. Not surprisingly, the greater
the distinction between firm and market, the easier it is to proffer a distinctive
rationale for the firm. Nevertheless, rigid distinctions between firm and market
have been slowly blurred by the tendency of commentators to define the firm
and contract in terms of the other. On the one hand, the firm has been viewed
by some scholars as nothing more than “a nexus of contracting relationships.”’16
On the other hand, various scholars have placed increasing emphasis on the
complex nature of contracting relationships.” The greater complexity that is
admitted into the definition of contract, in terms of multiple underlying objec-
tives of contracting parties (mutuality, solidarity, and fairness) and in terms of
the richness of internal governance mechanisms, the more closely contract
begins to resemble the structure of the firm.
Compounding the threshold definitional challenges are other difficulties
in defining norms of human behaviour in private transactions. Scholars hold
differing views of the motivations and capacities of individual actors in com-
mercial activities. The starkest divide is between those scholars viewing com-
mercial actors as wholly rational, self-interested wealth maximizers, and
those scholars who view such actors as motivated by a wide range of economic
and non-economic objectives.'” Yet, even within the camp of scholars wedded
16Jensen & Meckling, supra, note 5 at 310: “It is important to recognize that most organizations
are simply legal fictions which serve as a nexus for a set of contracting relationships among indi-
viduals.” [emphasis added]
17See generally I. Macneil, The New Social Contract: An Inquiry into Modern Contractual Rela-
tions (New Haven: Yale U. Press, 1980); S. Macaulay, “Elegant Models, Empirical Pictures, and
the Complexities of Contract” (1977) 11 L. & Soc. Rev. 507.
18This issue is ably canvassed in R. Ellickson, “Bringing Culture and Human Frailty to Rational
Actors: A Critique of Classical Law and Economics” (1989) 65 Chi. Kent L. Rev. 23.
REVUE DE DROIT DE McGILL
[Vol. 37
to the vision of hominus economicus, there is substantial disagreement over the
extent to which individuals can and will adhere to rational self-interested beha-
viour. Williamson, for instance, argues that limited foresight and opportunistic
behaviour will prevent actors from realizing outcomes that maximize joint
welfare.19
In view of the divergence in the core underlying assumptions embedded in
each theory of the firm, how can the merits of each theory be objectively eval-
uated? To start, any inquiry into the nature of the firm should be based on defi-
nitions of the firm and the market that are, as much as possible, kept separate
and distinct. To do otherwise would invite confusion by sacrificing expository
clarity. Accordingly, market contracts should be viewed as short-term, arm’s-
length, presentiated contracts, while the firm should be viewed as a stable, long-
term community with elaborate internal adjustment mechanisms to resolve con-
flict and direct change. In terms of the debate regarding the motivations and
capacity of commercial actors, consistent with the theory’s aspiration to be a
positive statement of the rationale for the firm, analysts should eschew assump-
tions based on how commercial actors should behave, and should rely instead
on how they actually do behave. And, although the motivations of human con-
duct are infinite and complex, some light can be shed on this issue by taking
seriously the context in which the firm has arisen. It is not difficult to imagine
that the motivations and capacities of lawyers in establishing a law firm differ
markedly from the shareholders, managers, creditors, and employees, all of
whose efforts are responsible for the creation and operation of the large
publicly-held corporation. Simply, depictions of the “commercial man” that are
applied generically across a range of contexts are too crude to be of use to
analysts.
One final but fundamental caveat before proceeding to a review of existing
theories: in considering the case for the corporate law firm, it is important to
avoid the pitfalls of crafting a rationale for the firm on the basis of the putative
benefits of joint economic activity. On its own, the fact that joint activity pro-
duces benefits tells us little, if anything, about where that activity should be
located. To answer the question why law firms exist, it is necessary to determine
why firms can better accommodate the benefits of joint economic activity than
can markets.
To ensure that the issue of the benefits of joint economic activity does not
become entangled with the rationale for the firm, I begin by briefly enumerating
the specific benefits to be derived from jointly supplied legal services. I then
consider the various theories propounded to explain why these benefits are best
obtained within the corporate law firm. I locate the more specific theories of the
law firm in the more generalized theories of the firm form. I argue that each of
these theories is plagued by endemic defects which, as I show in Part III, can
only be corrected by considering the role of community values in vindicating
the economic and non-economic aspirations of lawyers.
19Supra, note 5 at 44-52.
1992]
AN EFFICIENT COMMUNITY
B. The Benefits of Joint Production of Legal Services
The benefits of joint production of legal services reflect conventional eco-
nomies associated with joint production of goods and other, more specialized
benefits that are related specifically to provision of professional services. Many
of these benefits are inter-related, the recognition of which should not be
obscured by separate enumeration and evaluation.
1.
Task Specialization
The first benefit of the joint provision of legal services is the realization of
specialized production. As in the case of Adam Smith’s renowned pin factory,
joint production of legal services enables individuals to specialize in the per-
formance of tasks that are best suited to their abilities and inclinations.” When
coupled with the ability to exchange goods and services, specialized production
generates non-trivial increases in production. In the case of legal services, the
linkage between joint production and specialization reflects the ability of a
group of lawyers to parcel out different tasks contained in a given legal trans-
action amongst themselves on the basis of their relative expertise. In aggregate,
legal advice pertaining to a certain transaction –
the product they supply –
will be of higher quality than advice tendered by a generalist who lacks the
same concentrated expertise.21
Why is a specialist’s legal advice superior to that supplied by a generalist?
After all, one could argue that corporate law advice proffered by a generalist is
of far greater use than that of a specialist. It could be claimed that corporate law
is more than technical legal expertise, that there are significant advantages from
being able to stand back and “get the big picture,” and that, even if a role is con-
ceded for expertise, there are few legal problems that cannot be solved with time
well-spent in a law library. Against this argument, however, is the reality of a
dramatic proliferation of law in the corporate/commercial area that requires
more sustained and concentrated effort by lawyers to keep abreast of legal
developments. Witness, for example, the volumes of legislation, subordinate
legislation, interpretive guidelines, and judicial and administrative decisions
that constitute the “law” in either the public securities or tax areas. Surely, with-
out single-minded devotion to an area, it is hard to imagine how a lawyer could
honestly claim to be an expert in one of these fields. This is especially the case
in areas where the law changes rapidly, and where developments in one area
impact on the law in ways which are obscure and complex. And, even ignoring
technical facility in the law, it is clear that in a world in which governmental and
20According to Adam Smith, in the absence of task specialization, a sole pin maker could
“scarce, perhaps with his utmost industry, make one pin a day,” while a small factory of ten work-
ers that encouraged task specialization could, “where they exerted themselves, make among them
twelve pounds of pins in a day” (The Wealth ofNations, ed. by A. Skinner (England: Penguin, 1981
(originally published in 1776)) at 109-10).
21The impact of specialization on the legal profession has been addressed by Chief Justice Rehn-
quist, “The Legal Profession Today” (1987) 62 Ind. L. Rev. 151. For an earlier discussion of the
impact of specialization, see H. Stone, “The Public Influence of the Bar” (1934) 48 Harv. L. Rev.
1 at 9-10.
McGILL LAW JOURNAL
[Vol. 37
quasi-governmental agencies are vested with considerable discretion in inter-
preting and applying the law, the specialist’s familiarity with the individuals and
the institutions administering the law is of considerable benefit.22
2.
Economies of Scale
A second important benefit of joint production of legal services is the reali-
zation of economies of scale. Economies of scale arise when the fixed costs
required to produce a single unit of output can be reduced by increasing the out-
put of the good, thereby spreading these costs among a greater number of goods
produced. In the case of legal services, economies of scale can result from the
cost savings that can be generated by spreading the costs of certain fixed inputs,
like libraries, accounting, time-recording, data collection, and word processing
facilities, over a greater number of lawyers. Indeed, these economies may be so
great that a lawyer wishing to go into solo practice would face insuperable bar-
riers in entering the market for corporate law.
Data on the magnitude and existence of economies of scale in corporate
law practice are scarce, and the data which do exist are contradictory. While
conceding a role for economies of scale in the provision of legal services, some
commentators have either downplayed their importanceP or claimed that they
are exhausted quickly as the number of lawyers sharing responsibility for com-
mon expenses increases.24 Yet, other commentators have come to the opposite
conclusion, finding that the per lawyer costs of operating a law firm decrease
significantly as the size of the firm increases.’ This view receives support from
the bevy of articles appearing in legal trade journals heralding the explosion in
new and wondrous technological innovations aimed at automating various legal
activities.’ For instance, many firms are now purchasing computers that will
store and access firm legal memoranda and opinions, as well as providing stand-
ard form precedents with optional terms that can be used in a variety of different
transactions. Since the up-front costs (measured in terms of hardware costs and
22For example, a lawyer well-versed with the individuals and institutions administering a given
area of law may be able to save her client a considerable amount of effort, time, and money by
crafting transactions in a way that conforms to the unwritten preferences of legal administrators
or by having access to officials in a governmental agency that may be more sensitive to the needs
of a given client. Currently, the best concrete example of this is in the domain of securities law.
23See “Sharing among the Human Capitalists,” supra, note 7 at 316-17.
24A. Leibowitz & R. Tollison, “Free Riding, Shirking, and Team Production in Legal Partner-
ships” (1988) 18 Economic Inquiry 380. Indeed, in a study of 1967 and 1972 United States census
data, the researchers found that scale economies were realized in law firms when they moved to
five partners, but, holding receipts constant, more than five partners led to an increase in fixed
expenses (ibid. at 388).
25See Altman & Weil, Inc., Management Consultants, Economic Survey of Canadian Law Firms
1982 (Ardmore, Penn.: Altman & Weil, Inc., 1982) at 44. In their survey of Canadian law firms,
Altman and Weil found that the ratio of total costs to gross receipts is higher in small firms than
in large ones. For sole practitioners, 55% of their gross income was devoted to overhead, for firms
with 2 to 6 lawyers, it was 52%, for firms with 7 to 11 lawyers, it was 50%, and for larger firms,
it was even lower.
26See, for instance, E. Warner, “Large Law Firms Moving toward Automated Office” Computer
World (21 May 1984) 23.
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AN EFFICIENT COMMUNITY
software customization costs) of these technologies are basically independent of
the number of final users, one would expect that the per lawyer costs of these
purchases would decrease as the number of lawyers sharing these costs
increases.
3.
Economies of Scope
Economies of scope are generated by the joint production of complemen-
tary goods. In a legal setting, these complementary goods come in the form of
legal advice in different specialty areas. For instance, if a lawyer or group of
lawyers providing litigation services to a client can offer corporate law advice
to that client at a lower cost than a competitor supplying corporate law services
alone, then this would constitute an economy of scope. The reason that these
economies exist lies in the capacity of fixed investments in specific human capi-
tal to be applied to other uses than the one for which the investment was origi-
nally made. For example, at least part of the investment a lawyer makes in
acquiring securities law expertise can be used to support the development of
expertise in other, more specialized, corporate areas like mergers and acquisi-
tions or reorganizations. Given the highly specialized nature of legal practice
discussed above, “satellite” expertise is usually developed across different law-
yers rather than in the same lawyer. Similarly, once in the course of effecting
a certain transaction, a lawyer has acquainted herself with the details of a
client’s affairs, then, by having the original lawyer participate in other transac-
tions involving the same client –
even ones implicating areas of and lawyers
with different legal expertise –
the original investment in client-specific human
capital can be recycled, thereby enabling a client to utilize the same lawyer or
group of lawyers for consecutive transactions. Obviously, the more labyrinthine
a client’s organizational structure and business activity, and the less capable a
client is of “framing” her problems in “legalese”, the greater the savings to the
client from recycling.27
Empirical investigation of the existence and magnitude of economies of
scope is limited. The data that do exist are fragmentary and anecdotal. Never-
theless, a frequent theme in legal trade publications is the efficacy of cross-
selling techniques, e.g., trying to encourage clients to utilize a lawyer or group
of lawyers for legal services other than that which the client originally
demanded.’ This theme is evident in suggestions that law firms channel energy
into harnessing “the play on each department, the drawing from each depart-
ment, the building on each department.”29 If accurate, this would seem to sup-
port the existence of economies of scope.
27 Economies of scope in the setting of the law firm are discussed in “Sharing among the Human
Capitalists,” supra, note 7 at 316-18.
28One firm which has very successfully exploited economies of scope in fuelling rapid law firm
growth is Skadden, Arps, Slate, Meagher and Flom. Under an ingenious scheme devised by the
firm, clients fearful of being embroiled in a takeover brawl were required to provide Skadden with
a non-refundable retainer in order to have access to the firm’s expertise should they be engulfed
in a takeover. To entice clients to sample the range of non-mergers and acquisitions specialty ser-
vices offered by the firm, clients were encouraged to spend down their retainers on other services
in the event a takeover did not materialize.
29R. West, “Megafirms: Is Bigger Better?” (1985) 11 Litigation News 1(4) at 1.
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C. The Existing Rationales and Their Limits
Given the benefits enumerated above of joint production of legal services,
why is the firm superior to the market in harnessing these benefits? In this dis-
cussion, I canvass the various rationales for the law firm and identify their
defects.
1.
The Firm and Entrepreneurial Command
According to Coase, the main rationale for the firm lies in the centraliza-
tion of managerial power which enables the firm to allocate resources more effi-
ciently than can the price mechanism of the market.” By relying on the fiat of
the “entrepreneurial coordinator,” costs incurred in market contracting such as
search, negotiation, and enforcement of contracts are minimized.” Recognition
of the benefits of the firm form does not, however, obscure the fact that there
are natural limits constraining the size of the firm. These limits reflect decreas-
ing returns to the entrepreneurial function, increased potential for entrepreneur-
ial mistake as the scale of transactions increases, and certain cost advantages of
small-scale production. 2 In the case of the law firm, however, Coase’s central-
ized direction model would appear to have little or no explanatory force. Law
firm decision-making is simply too diffuse, too cumbersome, and too consen-
30Coase, supra, note 3 at 392.
31Ibid. at 390-91.
32Evaluated at a general level, Coase’s rationale has been subject to strong criticism by Alchian
and Demsetz, and by Hart for his failure to identify the power of the entrepreneur coordinator’s
discretion. In particular, these critics question whether “fiat” is any more effective in a firm than
a contractual setting. Alchian and Demsetz observe that
[i]t is common to see the firm characterized by the power to settle issues by fiat, by
authority, or by disciplinary action superior to that available in the conventional mar-
ket. This is delusion. The firm does not own all its inputs. It has no power of fiat, no
authority, no disciplinary action any different in the slightest degree from ordinary con-
tracting between any two people (supra, note 5 at 777).
If command in the firm ultimately turns on the threat of severance, then this is no different than
in the market. A customer disappointed, for example, with the quality or price of a supplier’s goods
will simply withdraw her patronage, which is, of course, akin to the severance. Indeed, Alchian
and Demsetz underscore this point by arguing that, in both the firm and the market, the transfer
of discretionary power to certain parties is entirely voluntary, resulting in a form of “consensual
coercion” (ibid.). In the end, Alchian and Demsetz claim that the rationale for the firm resides else-
where, whereas Hart tries to save Coase’s hypothesis by introducing the notion that managerial dis-
cretion in the firm is rooted in ownership of physical assets (Program in Law and Economics, An
Economist’s Perspective on the Theory of the Firm (Discussion Paper Series) by 0. Hart (Cam-
bridge: Harvard Law School, 1988)). That is, to the extent that the entrepreneur coordinator has
discretionary power, this power emanates not from the existence of bureaucratic hierarchy, but
from the greater effectiveness of the severance threat when it is coupled with the ability to deprive
employees of the physical instruments of work. Yet, this claim is itself vulnerable to ambiguities
inherent in ownership title. As realist legal scholars such as M.R. Cohen long ago argued, the law
seldom vests property rights in one exclusive owner (“Property and Sovereignty” (1927) 13 Cor-
nell L.Q. 8). Instead, property can be best thought of as being subject to multiple, sometimes con-
flicting levels of entitlement. Once such complexity is admitted, it is less clear that ownership of
physical assets provides the unfettered power necessary to justify the command based model of the
firm. Moreover, Hart’s refinement neglects the role that other community based expectations and
sanctions within the firm can play in magnifying the pain of severance.
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AN EFFICIENT COMMUNITY
sus-ridden to be able to conform to Coase’s highly centralized, bureaucratic
vision of the firm.3″ And, in view of the reliance on human capital in the pro-
duction of legal services, refinements of Coase’s theory offered by Hart and oth-
ers, which emphasize control over physical assets, are unable to salvage the
model in the setting of the law firm?
2.
The Firm and Centralized Monitoring
Alchian and Demsetz have argued that the rationale for the firm lies in its
effectiveness, as compared to market contracts, in attenuating the natural pro-
pensity of firm employees to engage in opportunistic behaviour, such as
shirking and perquisite consumption.’ According to these scholars, joint pro-
duction, especially when it is accompanied by a separation between investors
and producers, is prone to agency costs. These costs are pervasive and plague
production orchestrated by the firm, as well as market contracts. The scope for
agency costs is explained in part by the difficulties in crafting optimal compen-
sation arrangements that correlate financial rewards with actual marginal pro-
ductivity.36 These difficulties are attributable to the problems inherent in ascer-
taining the value of worker marginal products when production is undertaken by
more than one agent. When the value of a final product or service produced is
the by-product of numerous workers, inspection of the output alone rarely yields
much insight as to the intensity of efforts made by identifiable workers. Thus,
to control agency costs involved in joint production, it is best to concentrate on
input monitoring, which the firm, because of certain advantages, is believed to
be able to do more efficiently than alternative market arrangements. Interest-
ingly, the principal advantage cited by Alchian and Demsetz is Coase’s
co-ordinating entrepreneur. 7 By virtue of her role as a central party to all input
contracts, her ability to alter membership of the team unilaterally, and her status
as residual claimant, it is the co-ordinating entrepreneur who can lay claim to
being the most effective monitor and manager of input behaviour.
Unfortunately, as a rationale for the law firm, the metering model’s
dependence upon the co-ordinating entrepreneur renders it open to the same
criticisms that were levelled against Coase. Whether the co-ordinating entrepre-
33For a recent discussion of the challenges posed to law firms by these attributes, see R. Taylor,
“Is Anybody in Charge Here?” Canadian Lawyer (June 1990) 31.
31To be fair, Hart recognizes the limits of his theory in understanding the structure of profes-
sional organizations having excessive reputational rather than physical capital investments. He
even refers to the notion of firm culture as figuring in the rationale of such firms, but does not
develop the claim (“Incomplete Contracts and the Theory of the Firm” (1988) 4 J.L. Eco. & Organ.
119 at 136-37).
35Alchian & Demsetz, supra, note 5 at 777-81; shirking occurs when a worker fails to render
her maximum effort in the performance of her duties. Perquisite consumption occurs when a
worker diverts law firm assets to her own use. For an early, though generally less known exposition
of this argument, see J. McManus, “The Costs of Alternative Economic Organizations” (1975) 13
Canadian Journal of Economics 334 at 344-45. For a general review of the literature on agency
costs, see J. Ziegel et al., Cases and Materials on Partnerships and Canadian Business Corpora-
tions, 2d ed. (Toronto: Carswell, 1989) c. 5.
36Alchian & Demsetz, ibid at 779-81.
37Ibid. at 781-83.
McGILL LAW JOURNAL
[Vol. 37
neur is favoured for her discretion or for her monitoring efficiency, the decen-
tralized decision-making that occurs in the law firm belies the importance or,
indeed, even the existence of her role. However, McChesney offers a theory for
the law firm that, while based on monitoring efficiency, does not turn on the role
of a co-ordinating entrepreneur.38 McChesney argues that since clients are billed
on a piecework basis, firm management can, by accessing the firm’s central data
bank, observe the number of hours worked by each lawyer in the firm, which
can then be used as a proxy for effort, which, in turn, can then be used as a
proxy for marginal productivity. With this information in hand, the firm can
then adjust compensation levels to correspond to the marginal product of indi-
vidual lawyers. The advantage to the law firm over market contracts derives
from the fact that once elaborate client billing systems are in place, no addi-
tional investment is required to achieve effective metering.
The difficulty, of course, with McChesney’s refinement of the Alchian and
Demsetz monitoring hypothesis relates to the coarseness of hours worked as a
proxy for actual marginal productivity. By relying solely on hours worked as a
basis for gauging value of the legal outputs created, the firm may overcompen-
sate lawyers whose logged hours include time spent day dreaming or attending
to personal matters. Unless the firm’s compensation committee can probe the
minds of its lawyers, there is no easy way to identify the amount of real mental
energy lawyers devote to resolving legal problems for clients. Thus, in order for
the monitoring story to stand as an independent rationale for the law firm, it is
necessary to confront and address the problems occasioned by sole reliance on
central time-keeping systems as mechanisms for controlling agency costs. That
is, without some confidence that the hours of input measured constitute a mean-
ingful proxy for actual effort and output, the metering model is deficient.
3.
The Firm and Ownership Rights
The existence of vested property rights, particularly the right to claim the
revenues remaining after all fixed claimants have been satisfied, is central to the
theory that is ultimately advanced by Alchian and Demsetz to explain the struc-
ture of the modem professional partnership.39 By conferring equal shares in the
residual income generated by the firm on partners, members of the firm will be
deterred from engaging in opportunistic behaviour. In other words, by making
workers owners, the problems occasioned by the separation of principal and
38F. McChesney, “Team Production, Monitoring, and Profit Sharing in Law Firms: An Alterna-
tive Hypothesis” (1982) 11 J.L. & Soc. 379. According to McChesney, profit sharing’s more
important role is as a means for conferring “commission-like” rewards on partners who undertake
successful client promotion activities, rather than as a mechanism that facilitates optimal
monitoring.
39Alchian and Demsetz noted that “[i]n ‘artistic’ or ‘professional’ work, watching a man’s activ-
ities is not a good clue to what he is actually thinking or doing with his mind” (supra, note 5 at
786). So significant was this problem that Alchian and Demsetz effectively abandoned the input
metering rationale for the law firm in favour of a rationale based on the capacity of vested property
rights to control agency costs. The premium on ownership denotes a significant shift in emphasis
by Alchian and Demsetz. Now, instead of external monitoring by a central entrepreneur
co-ordinator, it is self-monitoring promoted by ownership that controls agency costs.
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AN EFFICIENT COMMUNITY
agent are eradicated. However, Alchian and Demsetz concede one defect in
relying on ownership rights to control agency costs: in order for ownership to
work, the size of the partnership must be kept relatively small, and further,
admission to partnership must be extremely selective so that the “work charac-
teristics and tendencies to shirk” of owners are known in advance.4″
Alchian and Demsetz’s retreat from the external monitoring rationale for
the law firm in favour of an ownership-based model has been criticized by
McChesney.” The relatively small ownership stake that individual lawyers have
in large law partnerships casts doubt on the capacity of profit sharing to promote
efficient monitoring. Law partners, as rational economic actors, will recognize
that only a minuscule percentage of the gains from monitoring will accrue to
them and will, therefore, refrain from vigorous monitoring. Given this disincli-
nation to monitor, McChesney argues that the sharing principle is a flimsy foun-
dation upon which a theory of the firm can be built.
Although McChesney is correct in pointing out the potential for sub-
optimal monitoring that accompanies fractional ownership interests, his whole-
sale rejection of ownership-induced monitoring goes too far. In its most extreme
forms (i.e., docket fudging, falsified expenses), opportunistic behaviour will be
monitored and disciplined by partners –
not only because of the unfairness that
partners suffer when some partners are compensated for work that they did not
do, but also because of the risks to the partnership as a whole from client-
initiated sanctions.42 And, even short of the threat of external discipline via
aggrieved clients, partners will engage in some level of monitoring because of
the firm’s reliance on variable ownership interests that are at least partially sen-
sitive to marginal productivity.43 To the extent, therefore, that a partner’s mar-
ginal productivity declines, and this decline is not explicable by some justifiable
excuse, she can expect to suffer some diminution in take-home income.’
40Ibid. at 786.
4tSupra, note 38.
42Once clients detect docket irregularities, they can be expected to initiate legal action against
the lawyer and, perhaps, even against the firm for failure to detect the wrongdoing (gatekeeper lia-
bility). Professional disciplinary action against the lawyers is likely to follow. No doubt, such atten-
tion is likely to effect a devastating blow to the reputational capital of the affected law firm. Clients
may conclude on the basis of one observed incident of wrongdoing that the firm is plagued by
opportunism, reflecting a widespread and weak commitment to honesty and integrity within the
firm or, more benignly, a lack of effective safeguards against isolated wrongdoing. Even worse,
because of the joint and several liability structure imposed by law on most law firms, firm members
may find that they are personally liable to the extent of their entire wealth for all uninsured lia-
bilities incurred by the shirking partner (including damages for fraudulent activities against clients)
in the event of personal bankruptcy.
43Fama and Jensen argue that variable rate compensation is central to the control of agency costs
within the professional partnership (“Separation of Ownership and Control,” supra, note 6;
“Agency Problems and Residual Claims,” supra, note 6). For a more extensive discussion of part-
nership compensation arrangements in the context of the law firm, see “Sharing among the Human
Capitalists,” supra, note 7 at 390ff. Gilson and Mnookin observe that for firms eschewing lockstep
compensation schemes, there is some attention to merit in awarding compensation, although other
factors, including seniority, personal misfortune, etc., may come into play (ibid. at 390-91).
“Diminished marginal productivity will be detected partly through review of annual time dock-
ets and partly through collegial monitoring. Insofar as the latter is concerned, partners will have
REVUE DE DROIT DE McGILL
[Vol. 37
4.
The Firm and Reputational Bonding
Another rationale for the law firm is based on the presence of certain
defects in the market for legal services, such as information asymmetries, and
on the utility of reputational signals, such as brand names, in conveying credible
information to consumers on the quality of legal services.45 Although the sever-
ity of information asymmetries in the provision of corporate law services may
have been attenuated somewhat by the growing use of in-house counsel by cor-
porate clients, gaping holes remain in the amount of information consumers of
legal services possess.46 Specifically, consumers will have difficulty effectively
evaluating the differential quality (and sometimes even the price) of legal ser-
vices on an ex ante basis. These information asymmetries reflect several differ-
ent problems. First, information asymmetries are caused by the dearth of legal
expertise possessed by most consumers of legal products. Lacking the requisite
technical skills, most corporate clients will be unable to evaluate effectively the
quality of services they have consumed. These problems are compounded in the
case of solicitors work because of the long time periods that may transpire
before defects in a transaction’s execution are detected. Second, even if a con-
sumer has the requisite skill to evaluate legal services expost, that ability does
not assure her that the services provided on the next transaction will be of simi-
lar or greater quality. Legal services are discrete products. The fact that services
provided today were performed in a satisfactory manner does not, in itself,
assure the consumer that tomorrow’s products will meet the same quality
standards.
One possible way of countering the “experience” nature of legal services
would be to engage in more vigorous search-related activity prior to contract
formation. However, owing to the considerable time and energy that a lawyer
would have to expend in investigating the affairs of the client and the laws im-
pacting on the transaction, this is likely to be a very costly and labour-intensive
activity. Predictably, the greater the expense that is entailed, the less effective
an incentive to monitor the value of each other’s performance because identification of shirking
within the firm may increase the income of the “whistle blower.” If it is assumed that real law firm
receipts remain constant from accounting period to accounting period, the task of carving up the
partnership pie can be likened to a zero sum game –
the only way to acquire a real increase in
income is by reducing the ownership interest of another partner. Inevitably, the justificatory basis
invoked to support such a transfer will be couched in terms of the superior effort and performance
that is rendered by one member of the firm in relation to others. To be credible, these claims will
have to be supported by explicit reference to lacklustre performance by specific partners. Although
norms of collegiality may make partners uneasy about publicly identifying shirking partners, many
of the procedures and institutions devised by the firm to determine the level of ownership interests
are aimed at teasing out this information in a way that avoids public recriminations and debate.
For example, a number of firms have established partnership review committees that solicit each
partner’s views respecting the work habits and efforts of other partners over the relevant account-
ing period. This information is then used to allocate partnership interests.
45The role of information asymmetries and the ability of reputational signals to overcome innate
problems is examined by Gilson & Mnookin, “Sharing among the Human Capitalists,” supra, note
7 at 360-65; Leibowitz & Tollison, supra, note 24. More generally, see Klein, Crawford & Alchian,
supra, note 5; Grossman, “The Informational Role of Warranties and Private Disclosure about
Product Quality” (1981) 24 J.L. & Eco. 461.
46The impact of inside counsel on the nature of legal services is discussed further below.
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AN EFFICIENT COMMUNITY
pre-contractual search-related activity will be in overcoming asymmetries. And,
even if meaningful comparison shopping could occur ex ante, intervening
events may cause the type of services actually required to deviate from the ser-
vices specified in the initial contract. Once a transaction is under way, it is dif-
ficult for a consumer to “reshop” the transaction. By this time, both the con-
sumer and the lawyer will have made asset-specific investments in the
relationship that will impede the ability of other firms to bid on the transaction
in its new form. Finally, to the extent that asset-specific investments are not
determinative, time constraints will dull whatever incentive consumers have to
re-evaluate the transaction.
To redress the problems confronted by corporate clients in obtaining suf-
ficient information about the quality of legal services that will be performed on
their behalf, lawyers will attempt to signal their commitment to quality through
various devices. One of the most effective devices is the use of reputational
bonds. Essentially, by investing in a brand name, lawyers can signal their com-
mitment to deliver quality services to their clients. A brand name can be devel-
oped fairly passively. For instance, simple word of mouth endorsements may be
sufficient to earn a diligent, honest, and effective lawyer a good reputation.
Alternatively, a lawyer may, through various professional and non-professional
activities, for example, speaking engagements at professional associations, writ-
ing of law review articles, high profile public interest work, etc., deliberately
work at developing a public reputation. Many of these activities will be non-
remunerative and consequently, constitute a form of direct investment in repu-
tation. Finally, a lawyer may initiate an advertising campaign aimed at trumpet-
ing the quality of her services to potential clients. In any of the above scenarios,
the costs to a lawyer from failing to meet the standards of performance implicit
in a given reputation may, depending on the transparency of the complaint proc-
ess, be devastating. A complaint deemed to be valid will depreciate the currency
of the lawyer’s reputation and its intrinsic signalling value.47
While serving as an important component of any rationale for the law firm,
the reputational rationale is beset by a failure to identify the precise ways in
which the firm is able to cultivate and sustain reputation. Put simply, the repu-
tational theory of the firm focuses on only one half of the story: emphasizing
the value of reputation to consumers without exploring how, especially in the
context of decentralized production of legal services, commitments to excel-
lence by lawyers are inculcated by the firm. In this respect, the reputational the-
ory reveals itself to be parasitic on other theories of the firm dealing with con-
straints on agency costs (and is therefore vulnerable to their deficiencies).
5.
The Firm and Asset Specificity
Two final rationales for the law firm are based on Williamson’s seminal
insight that the comparative advantage of the firm resides in its superior ability
47Not only will the individual lawyer’s reputation suffer but her firm will as well. Perhaps the
clearest demonstration of negative reputational spillovers is the damage done to the reputation of
Lang Michener as a result of the illegal activities of Martin Pilzmaker. See T. Reid, “Lang Miche-
ner Senior Partner Angry over Firm’s ‘Strategic Silence”‘ Law Times (26 February-3 March 1990)
McGILL LAW JOURNAL
[Vol. 37
to redress opportunism problems in settings involving high levels of investment
in capital assets (either physical or, in the case of the law firm, human assets)
that are specific to a particular relationship.” Because “specific assets” have
much lower economic value in second best uses, parties to a commercial rela-
tionship involving asset-specific capital are vulnerable to strategic defection.
Defection is an attractive strategy because it facilitates a division of expost sur-
plus different from that which is merited on the basis of ex ante investment.
According to Williamson, the firm, because of its dispute resolution capacity, its
monitoring role, and its integrated ownership, is thought to be a more economi-
cal way of controlling strategic opportunism than spot market contracts that lack
these characteristics.49 Williamson’s basic insight regarding the superior capac-
ity of the firm to control asset-specific opportunism has been ingeniously used
by Gilson and Mnookin,” and by Galanter and Palay” in the development of a
rationale for the law firm. Each of these theories will be assessed in turn.
a. Gilson and Mnookin: Diversification of Specialized Investment
The rationale for the corporate law firm that has been developed by Gilson
and Mnookin starts with an acknowledgement of the highly unstable nature of
demand for specialized corporate law services, which can impose severe,
though short-lived, income losses on lawyers. This instability is a function of
the high sensitivity of demand for specialized legal services to exogenous
changes in macro-economic conditions.” Since lawyers prefer a more stable
pattern of earnings to one which results from unfettered market fluctuations,
they will try to limit the variability of expected income receipts. But, owing to
various constraints, self-help strategies (principally insurance against income
reductions) are of only limited utility in achieving this objective. 3 As a conse-
quence, Gilson and Mnookin argue that the best way for lawyers to smooth
future income flows is by entering into an agreement with other lawyers having
different areas of specialization and therefore different, perhaps even negatively
correlated, risks of income losses in response to macro-economic changes. Typ-
ically, such agreements provide for the imposition of taxes on lawyers experi-
encing strong demand for their services in certain economic conditions, the pro-
ceeds of which would be used to subsidize the income of lawyers suffering tepid
demand in the same conditions. The rationale for the firm is based on the oppor-
tunism that inevitably accompanies these arrangements. By amassing a stock of
4SSee Economic Institutions, supra, note 5 at 52-56.
49See 0. Williamson, “Transaction-Cost Economics: The Governance of Contractual Relations”
(1979) 22 J.L. & Eco. 3; Economic Institutions, ibid.; “The Modem Corporation: Origins, Evolu-
tions, Attributes” (1981) 19 Journal of Economic Literature 1537 at 1543-44.
50See “Sharing among the Human Capitalists,” supra, note 7 at 332ff.
5 tSupra, note 8 at 772ff.
52 1n a robust economic climate, for instance, the demand for certain services usually accompa-
nying expansionary economic conditions, for example, securities law, will escalate, while demand
for other specialized services, for example, bankruptcy law, will decline. When, of course, the
economy moves into recession, the demand for these services will reverse.
53These constraints range from the demands of specialization which make it difficult, if not
impossible, for a lawyer to be a specialist in specialties having negatively correlated risks to insur-
ance market failures created by adverse selection and moral hazard problems.
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AN EFFICIENT COMMUNITY
indivisible reputational capital, the firm is able to impose an exit tax on lawyers
who seek to leave the firm when economic conditions render them liable to the
redistributive tax. That is, because a departing lawyer will be unable to take her
pro rata share of firm reputation with her, the costs of opportunistic defection
will increase. 4 So long as a lawyer’s share of firm reputational capital is of
greater value than the retained subsidy, lawyers will refrain from leaving and
will agree to pay specified subsidies.
While offering a plausible explanation for the corporate law firm, Gilson
and Mnookin’s analysis is plagued by several difficulties. First, although having
considerable surface plausibility, the theory fails to explain the existence of sev-
eral variants on the standard diversified-service law firm.’ If the firm’s capacity
to control defection from income-smoothing arrangements is the core rationale
for the firm, what accounts for the choice of the firm form of organization for
legal partnerships specializing in only one area of the law?56 A second set of
concerns respecting the analysis relates to the necessity of the firm in enforcing
sharing arrangements. Despite the claim that the firm and its indivisible repu-
tational capital is needed to bond adherence to ex ante income-smoothing agree-
ments, it is by no means certain that for most lawyers any external constraint
is needed to enforce compliance. Unless lawyers are operating in final periods,
meaning that their remaining working life is short, the vulnerability of defecting
lawyers to future adverse changes in economic conditions would seem more
than sufficient to bond their performance. 7 After all, once a lawyer defects from
a sharing arrangement, retaliation would demand that she not be admitted back
into the firm when economic conditions change in a way that favours the
renewal of her attachment to the firm.” Finally, even assuming that an external
constraint on opportunism is necessary to enforce income sharing arrangements,
it is not clear that indivisible firm reputation is able to play this role. If a
lawyer’s individual reputation is sufficiently developed to eclipse the value of
herpro rata share of the firm’s reputation 9 or if a lawyer is able to free-ride on
54See “Sharing among the Human Capitalists,” supra, note 7 at 354.
551nterestingly, the actual pattern of specialization in fully diversified firms poses another prob-
lem for the thesis. Since securities lawyers could probably diversify away most of the risk of cycli-
cal economic downturn by marrying their practice with that of bankruptcy and litigation lawyers,
what accounts for the expansion of firms’ into areas of legal specialization that would seem to
enhance, not reduce, their vulnerability to economic downturns?
56The fact that a number of boutique firms exist and can survive despite exclusive concentration
in specialties ranging from tax to bankruptcy law casts doubt on the iniportance Gilson and Mnoo-
kin place either on human capital diversification or on the efficacy of the firm in enforcing income
sharing arrangements.
57See, for instance, R. Axelrod, The Evolution of Cooperation (New York: Basic Books, 1984)
5SAlthough a defecting lawyer may be able to gain admittance to another law firm (and its inter-
nal income transfers) when economic conditions reduce the value of her marginal product, and then
to leave the firm when economic conditions increase the value of her product, reputational effects
within the relatively closed legal community will limit the number of times that this game can be
played.
591n the world of Gilson and Mnookin, individual reputation is inseparable from and dependent
upon the global reputation of the firm. The recognition value of the firm’s brand name is given
pride of place, while the reputational value of individual lawyers is limited or non-existent. Yet,
at 126.
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the firm’s reputation after departure’ –
assumptions –
the strength of the reputational constraint will be diluted.
both of which are not far-fetched
b. Galanter and Palay: Investment in Human Capital Development
Like Gilson and Mnookin, Galanter and Palay’s rationale for the firm owes
a debt to Williamson’s focus on asset-specific investments, and on the capacity
of internal compensation and governance arrangements to nullify the incentives
for welfare-reducing opportunism. However, Galanter and Palay chart a slightly
different course by focusing on infirmities in the trading relationship that exists
between junior and senior lawyers.” This relationship arises from the desire of
senior lawyers to exploit fully the rents generated by their reputational capital
by leveraging off the labour of junior lawyers.62 The gain to the senior lawyer
accrues in the differential in the retail and wholesale rates for the junior lawyer’s
human capital. However, the fact that the senior lawyer earns profit from the
relationship does not mean that the junior lawyer is being abused.63 The expe-
rience gained through close interaction with the senior lawyer enables the junior
lawyer to further develop the general skills acquired during formal legal train-
ing. Without this supervised, on-the-job training, the junior lawyer would be
unable to develop as quickly into a lawyer having surplus reputational capital.
The difficulty, however, with bilateral trade in services between senior and
junior lawyers emanates from the time and energy that the senior lawyer will
this characterization seems unrealistic for many lawyers in the firm. For some subset of lawyers
in the firm, the highly decentralized delivery of legal services (allowing close personal interaction
between client and servicing lawyer), in combination with opportunities for external evaluation of
performance by clients and third parties in the legal community (these opportunities can be found
in judicial or administrative proceedings or in negotiations with opposing parties), facilitates the
development of reputations that are specific to individual lawyers and substantially independent of
the firm. In the event that these lawyers decide to depart from a law firm, it is conceivable that
their aggregate investment in reputational capital (the sum of firm and personal reputation) would
be unaffected or, perhaps, even enhanced. That is, the loss that is suffered from any foregone share
of firm reputation may be minuscule compared to the value of their personal reputation. Obviously,
for these lawyers, indivisibilities in reputational capital impose little or no constraint on opportun-
istic defection from the firm.
60Since at least part of the value of a firm’s reputation is its brand name value, which serves as
a bond of excellence in service for all lawyers associated with the firm, a departing lawyer may
be able to rely on her association with the firm as a way of signalling proficiency in the law to
prospective clients and employers. The only way for a firm to control the use of its brand name
in the aftermarket is by public denunciations of departing lawyers to the broader community. But
such denunciations may harm the firm as much as or more than the departing lawyer. This is
because airing the firm’s dirty laundry in public, i.e., alleging defection on internal implicit con-
tracts, casts doubt on the firm’s ability to identify and recruit lawyers whose distinguished profes-
sional qualifications are complemented by high moral character. If clients are told that the firm
failed in picking a departing lawyer, then implicitly the value of the firm’s bonds respecting its
other lawyers is suspect. Moreover, public denunciations have an air of sour grapes about them.
Clients may suspect that actions initiated against departing lawyers –
especially if these lawyers
are able to take prized clients with them – may be seen to be motivated more by vindictiveness
than by an effort to correct market signals.
61Supra, note 8.
62Ibid. at 770-72.
63See Leibowitz & Tollison, supra, note 15.
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AN EFFICIENT COMMUNITY
expend in acquainting the junior lawyer with her distinctive approaches to legal
problem solving and with the unique requirements of her clients. This course of
instruction is extremely intensive, and often extends over a period of many
years. Although at the outset of their relationship, the senior lawyer could
choose from among many potential juniors, once a junior is selected, and the
investment in training made, the senior lawyer is, within some bounds,
“locked-in” to that junior.64 This will cause the senior lawyer to have a strong
interest in safeguarding the survival of the relationship. The difficulty, however,
is that this “lock-in” effect fetters the ability of the senior lawyer to discipline
opportunistic juniors. If clients are “grabbed” from the senior lawyer, if work is
performed at a standard that is unacceptable to the senior lawyer, or if the junior
lawyer terminates the relationship prematurely, the senior lawyer’s welfare will
be reduced.6′ The danger of these losses may cause senior lawyers to forego the
gains from leveraging on their reputation, thereby jeopardizing the training of-
junior lawyers.
According to Galanter and Palay, the tensions inherent in a senior-junior
relationship can be resolved by using the promise by the senior partner of a pro-
motion to partnership should the associate prove competent.66 The “carrot” of
partnership will encourage the junior lawyer to refrain from opportunistic
behaviour that could jeopardize the interests of her senior lawyer, as this con-
duct is bound to reflect badly on the junior lawyer at the time that the partner-
ship decision is made. However, this device is not without its flaws; for just as
the senior lawyer fears opportunism by the junior lawyer, so, too, does the jun-
ior lawyer fear that the senior lawyer will behave opportunistically in making
the partnership decision.67 Recognizing that partnership entails a sharing of both
revenue and decision-making with the junior lawyer, the junior lawyer will quite
naturally fear that the partnership decision will be unduly delayed or not carried
out in a bona fide manner. In these terms, the law firm’s comparative advantage
stems from its ability to assuage the junior lawyer’s concerns. By constructing
a governance structure that is uniquely related to the interests of both parties,
the firm is able to encourage parties to make asset-specific investments required
by trade in legal services.6″
The difficulty with the Galanter and Palay thesis lies not in its description
of the gains from trade in services, but rather in its failure to provide concrete
64Prior to Galanter and Palay’s work, Leibowitz and Tollison investigated the potential for
opportunistic behaviour in the context of the senior-junior lawyer relationship. The researchers’
work was undertaken in response to the charge that law firms exploited neophyte lawyers byoffer-
ing only meagre starting wages. They argued that these wages could be justified on the basis of
the risks of opportunism that law firms faced in training lawyers. Since lawyers can easily transport
the benefits of generalized legal training to other firms, law firms will, in the absence of contractual
safeguards or reductions in salary, be reluctant to bear the costs of training new lawyers. This phe-
nomenon accounts for the relatively low starting wages of lawyers (ibid. at 66-68).
OGalanter & Palay, supra, note 8 at 773-75.
661bid.
671bid at 776.
6sGalanter and Palay argue that there is a need for a governance structure to “monitor behaviour,
to adapt the agreement to changed circumstances, and to ensure that the parties actually perform
agreed upon changes” (ibid. at 773).
McGILL LAW JOURNAL
[Vol. 37
evidence of how the governance structure employed by the firm mitigates the
opportunism dangers previously identified. Although Galanter and Palay
believe that the governance structure of the firm will control opportunism by
monitoring behaviour, by adapting the agreement respecting the trade in ser-
vices to changed circumstances, and by ensuring that parties perform agreed-
upon exchanges, 9 the precise way in which the governance structure achieves
this task is not fully explicated. Further, if the core rationale for the firm is
related to solving intra-firm disputes, particularly across the partner-associate
axis, what assurances do associates have of fair treatment given the concentra-
tion of voting power vested in the hands of the partners? Problems with the
“trade in services” rationale for the law firm are further underscored by the exis-
tence of such contractual bonding devices as the “up or out system,” which, as
Gilson and Mnookin have persuasively argued, are able to provide credible
assurances of fair treatment in partner promotion decisions and are not depend-
ent on intricate firm governance structures.70
MI. Firm Culture: Completing the Theory of the Law Firm
A.
Introduction
Review of the existing claims advanced to explicate the rationale for the
modem law firm is a somewhat discouraging exercise. In the course of unravel-
ling the economic logic of the law firm form, several glaring and fairly funda-
mental gaps were exposed. These gaps included such puzzling features of the
firm as how centralized monitoring systems can detect and deter lapses in men-
tal effort, how the debilitating effects of the rational apathy spawned by systems
of fractionalized ownership are controlled, how the firm is able to instill internal
commitments to excellence that are necessary to generate and support brand
name reputation and, finally, how the propensity to defect from asset-specific
investments can be tempered. Unless answers to these puzzles can be supplied,
the rationale for the law firm is destined to remain incomplete and, therefore,
defective.
Fortunately, answers to these questions can be provided and, in the course
of doing so, a new, more robust theory of the law firm, premised on the law
firm’s role as a mini-society of sorts, can be developed. In this society, elemen-
tal characteristics of the firm, such as the premium its members place on coop-
eration, collegiality, conformity, and continuity, coalesce to inculcate and sus-
tain shared commitments to professional excellence. The stronger these
commitments to excellence, the less severe the various types of opportunism
that work to subvert the benefits of joint economic activity. In part, this com-
mitment to excellence is derived from externally imposed group sanctions that
range from mild opprobrium to permanent ouster. But an equally important part
of this commitment is the result of a subtle process in which individual prefer-
ence functions are modified in a way that renders firm members hostile to indo-
691bid.
7″Sharing among the Human Capitalists,” supra, note 7 at 380-81; O’Flaherty & Siow, supra,
note 15.
1992]
AN EFFICIENT COMMUNITY
lence and inclined to industry. The catalyst behind these external and internal
incentives is firm culture, and since this cultural component will not flourish in
the hostile climes of spot contracts, it supplies the missing ingredient that com-
pletes the theory of the law firm.
B. The Firm as Community
The starting point for the theory of the law firm as a mini-society is a re-
cognition of the role that community interaction plays in enabling individuals
to realize fundamental and deeply cherished aspirations.7′ At the core of these
aspirations is the desire to be able to consummate and sustain close personal
relationships that are based on a foundation of equal participation, mutual
dependence, trust, respect, and compassion, all of which are captured in the con-
cept of solidarity. 2 These relationships are prized not necessarily for their
instrumental character, but rather for their value as pure consumption goods.
And, although the benefits from such relationships have been traditionally asso-
ciated with family and political associations, the workplace is increasingly
becoming an important venue for communitarian ideals to be vindicated.73 This
is especially so given the changing complexion of the nuclear family and the
limited opportunities available for meaningful participation in political life.74
Interestingly, despite the conventional view that economic and communi-
tarian values are in fundamental tension with one another, exploration of joint
workplace activity reveals that important linkages exist between these values.
Not only are communitarian values not necessarily in tension with economic
ones, but, in some settings, conduct that vindicates one set of values will simul-
taneously contribute to the realization of the other. If, for instance, deep attach-
ments to the workplace community can be created, and if these attachments are
based on a high degree of respect for other members of the community and a
willingness, indeed, enthusiasm, for cooperative enterprise, then important effi-
ciency benefits are likely to follow. At the simplest level, these benefits flow
from the sense of well-being and satisfaction that individuals will develop when
participating in and contributing to cooperative enterprise. As a considerable
71Powerful support for the communitarian ideal can be found in the work of critical legal studies
scholars. See, for example, G. Frug, “The Ideology of Bureaucracy in American Law” (1984) 97
Harv. L. Rev. 1276; D. Kennedy, “Legal Formality” (1973) 2 J. Legal Stud. 351; R. Unger, “The
Critical Legal Studies Movement” (1983) 96 Harv. L. Rev. 561.
72Macneil describes “solidarity” or trust as a
web of interdependence, externally reinforced as well as self-supporting, and expected
future cooperation. The most important aspect of solidarity … is the extent to which it
produces similarity of selfish interests, whereby what increases (decreases) the utility
of one participant also increases (decreases) the utility of the other (I. Macneil, “Eco-
nomic Analysis of Contractual Relations: Its Shortfalls and the Need for a ‘Rich Clas-
sificatory Apparatus”‘ (1981) 75 Northwestern U. L. Rev. 1018 at 1034).
73See M. Walzer, Spheres of Justice (New York: Basic Books, 1983) at 300. Walzer likens the
firm to a political community: “The firm is like a town … because it is unlike a home …. It is a
place not of rest and intimacy but of cooperative action. It is a place not of withdrawal but of deci-
sion” (ibid.).
74See, for instance, P.C. Weiler who argues for enhanced worker control over workplace
decision-making (Governing the Workplace (Cambridge: Harvard U. Press, 1990) at 168ff).
REVUE DE DROIT DE McGILL
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body of human resource literature has found, a worker not alienated from her
work environment is much more productive and innovative than one who is.75
At another level, however, communal attachments yield important effi-
ciency benefits by expanding the range and effectiveness of mechanisms that
can control the agency costs innate in joint economic activity. It is the vaunted
role of communal attachments in small, homogeneous communities that encour-
ages individuals to refrain from violating community norms which, in the case
of communities based on shared economic goals, can include wealth maximiza-
tion. Deviations from transcendent global goals will, depending on severity,
subject the wrongdoer to the opprobrium of the entire community. This oppro-
brium can be expressed in community acts ranging from mild censure to out-
right ouster. In any event, unlike the anonymity of more conventional sanctions,
it is the very personalized and public recrimination of a community member by
the community that gives these sanctions their potent sting. How much more
difficult it is to face the disappointment and anger of co-workers when their
friendship and esteem is a valued good. Predictably, the greater the strength and
depth of community attachments, the more psychologically crushing diminished
or severed relationships will be.
Yet, community attachments should not be viewed simply as a crude form
of hostage-taking that commands virtuous conduct because of the potential for
forfeiture of pre-existing psychological investment. Community affiliations can
work at a much more complex level to elicit commitments to valued behaviour.
The subtle interplay of support, encouragement, and competition that exists in
most firms provides a fertile environment for these commitments to gel. Com-
munity reinforcement may be especially significant when individuals, although
deeply committed to the realization of certain values, are inclined to conduct
themselves in a manner that is inconsistent with those values because of the
intervention of other, more superficial desires and preferences.76 For instance, an
individual who is naturally disinclined to hard work may seek out employment
in settings in which commitments to industry and initiative are lauded. By vol-
untarily joining such a community, the shirker may hope that her innate propen-
sity for indolence is suppressed, perhaps even permanently modified, by the
community’s collective expression of support for more virtuous behaviour.77
75See, for example, H. Hansmann, “When Does Worker Ownership Work? ESOPs, Law Firms,
Codetermination, and Economic Democracy” (1990) 99 Yale L.J. 1749. Hansmann argues that
worker participation in economic decision-making yields important benefits. Greater opportunities
for participation in communal decisions increases workers’ psychological satisfaction, renders
decision-making more cooperative, less adversarial, and prepares workers for participation in
broader democratic decisions.
76C. Sunstein, After the Rights Revolution: Reconceiving the Regulatory State (Cambridge: Har-
vard U. Press, 1991) c. 2 at 57-60. In other words, even though an individual may be predisposed
to conduct which is antithetical to values that are associated with a given community, her mem-
bership in that community may constitute a deliberate effort to strengthen other parts of her char-
acter which are desirous of vindicating these community values.
771n the context of the law firm, see R. Nelson, who asserts that “[s]tanding in the [law] firm,
whether it is measured in terms of income, governing authority, client responsibility, or even mak-
ing partner, depends on personal success and achievement. It is a privilege won, not an office that
is assured” (“Practice and Privilege: Social Change and the Structure of Large Law Firms” (1981)
1992]
AN EFFICIENT COMMUNITY
Acknowledgment of the role that communal attachments can play in rein-
forcing commitments to certain types of desired behaviour provides important
insight into the rationale for the law firm. Within the firm, the identity of con-
tracting partners matters, especially when, as in the case of professional partner-
ships, so much of the firm’s wealth is based on the quality of its human capital.
In contrast to the sporadic, short-term, and relatively anonymous market con-
tracts, the firm provides a stable environment for communal attachments to
develop. As William Ouchi has argued,
[firms] can create an atmosphere of trust between employees much more readily
than a market can between the parties to an exchange. Because members of an
organization assume some commonality of purpose, because they learn that long-
term relationships will reward good performance and punish poor performance,
they develop some goal congruence. This reduces their opportunistic tendencies
and thus the need to monitor their performance. 78
Although Ouchi relates the effectiveness of the firm to its hierarchical surveil-
lance, evaluation and direction, he finds that non-hierarchical clan attributes –
involving the union of objectives among individuals whose interests are inter-
are also important.79 In this respect, the firm’s ability to control
dependent –
endemic opportunism is a direct function of its capacity to inculcate a set of
ideals that foster commitments to productive behaviour, and to create the neces-
sary interpersonal attachments within the community that will ensure that these
commitments are realized.” This, of course, implicates the issue of firm culture.
C. Creating Commitments to Community: The Role of Firm Culture
Firm culture is the medium by which certain transcendent community val-
ues are transmitted to members of the firm. Until relatively recently, the role of
firm culture in enhancing organization efficiency has been a somewhat
neglected topic.81 Nevertheless, in the last decade, organizational theorists have
95 American Bar Foundation Research Journal 95 at 102). One example of this phenomenon are
people who decide to join such organizations as the military to bring discipline and organization
to their lives.
78″Markets, Bureaucracies, and Clans” (1980) 25 Administrative Science Quarterly 129 at 134.
790uchi describes the relationship between goal congruence and the clan form in the following
way:
In these organizations (those resembling the clan form), a variety of social mechanisms
reduces differences between individual and organizational goals and produces a strong
sense of community. Where individual and organizational interests overlap to this
extent, opportunism is unlikely and equity in rewards can be achieved at relatively low
transactions cost (ibid. at 136-37 (citations omitted)).
8The role of the law firm in inculcating professional commitments has received empirical con-
firmation. See FK. Zemans & V.G. Rosenblum, The Making of a Public Profession (Chicago:
American Bar Foundation, 1981). They found that law firm experience was more important than
law school training in shaping ethical commitments (ibid. at 171-78).
81A general exception is D. Kreps, “Corporate Culture and Economic Theory” in J. Alt & K.
Shepsle, eds, Perspectives on Positive Political Economy (New York: Cambridge U. Press, 1990)
90. Kreps’ attempt to fashion a theory of the firm on the basis of corporate culture is referred to
in Hart, supra, note 34 at 136. In the context of the law firm, Gilson and Mnookin explore the role
of firm culture in controlling “unobservable conflict.” They argue that “[t]hrough some combina-
tion of selection and socialization firms can create a powerful internalized work ethic” (“Sharing
McGILL LAW JOURATAL
[Vol. 37
begun to explore the nature and impact of different cultures on organizational
success.”s In considering the content of firm culture, most organizational theo-
rists draw on the work of anthropologists and sociologists, each of whom
emphasize different aspects of culture. 3 Whereas anthropologists emphasize the
material aspects of culture (e.g., concrete artifacts of various groups), sociolo-
gists tend to focus on the process of learning culture, on the patterns of meaning,
and on the rules governing the behaviour of members in a group. Despite the
surface differences between these two approaches, organizational theorists have
been able to draw on obvious commonalities in generating insights about firm
culture.’ Organizational theorists have harnessed these traditional definitions of
culture to develop a multi-tiered theory of firm culture.” The first tier of firm
culture is the artifacts of the firm, and are found in the physical and social envi-
ronment in which members of the group work.86 The second tier of corporate
culture is perspectives, which is focused upon imparting meaning to the objec-
tive elements of culture that are easily observed in a large organization. 7 The
among the Human Capitalists,” supra, note 7 at 375). Despite, however, their identification of firm
culture as an important constraint on opportunistic activity, the researchers place considerable reli-
ance on law school socialization processes and on general commitments to the professional ideal’
in explaining how firm culture operates. As a consequence, their theory does not explain the par-
ticular role of the firm in inculcating pre-existing values and commitments. To understand why
firm culture works, it is, I believe, necessary to consider the role for the communitarian commit-
ments discussed above.
Peters & R.H. Waterman, In Search of Excellence (New York: Harper & Row, 1982).
82For a popular exposition of the linkages between culture and organizational success, see T.J.
83For a review of the different approaches to culture, see Papers of the Peabody Museum of
American Archaeology and Ethnology, Culture: A Critical Review of Concepts and Definitions by
A.L. Kroeber & C. Kluckhohn, vol. 47 (Cambridge, MA: The Peabody Museum of American
Archaeology and Ethnology, 1952) in which the authors identify 164 different definitions of culture
(ibid. at 35).
8T”hese include acceptance of the role of custom and of both subjective and objective compo-
nents to culture. The acceptance of custom has several implications: (i) thatculture is learned rather
than genetic in nature; (ii) that culture is shared by group members rather than being an idiosyn-
cratic attribute; (iii) that culture is transgenerational and cumulative; and (iv) that culture is sym-
bolic in nature and patterned in our lives. The acceptance of both subjective and objective elements
of culture implies that the way in which a group perceives its environment is at least as important
as the actual artifacts and material products of a society in defining culture (A.F. Buono & J.L.
Bowditch, The Human Side of Mergers and Acquisitions: Managing Collisions Between People,
Cultures, and Organizations (San Francisco: Jossey Bass, 1989) at 136).
85Definitions of organizational culture are explored by E. Schein, Organizational Culture and
Leadership (San Francisco: Jossey-Bass, 1985) a,6. See also C.C. Lundberg, “On the Feasibility
of Cultural Intervention in Organizations” in P.J. Frost et al., eds; Organizational Culture (Beverly
Hills: Sage, 1985) 169 at 171; W.G. Dyer, Jr., “The Cycle of Cultural Evolution in Organizations”
in R. Kilmann et aL, eds, Gaining Control of the Corporate Culture (San Francisco: Jossey-Bass,
1985) 200 at 202-04.
86Physical artifacts include such things as the architecture of the flagship building, the office
configurations within the building, and the amenities and benefits provided to employees. Social
artifacts include hierarchical structure, common forms of expression, and shared stories and myths
about group members, corporate founders, and leaders or notable employees. See Lundberg, ibid.;
Dyer, ibid. at 202; Schein, ibid. at 14-15.
87Perspectives are the socially shared rules and norms applicable in a given situation; they pre-
scribe the bounds of acceptable behaviour, such as the way an employee addresses her superiors
and fellow employees, and they provide solutions to common problems that group members
encounter in organizational activities.
1992]
AN EFFICIENT COMMUNITY
third tier of firm culture is devoted to the values that form the evaluative basis
upon which organizational members ground their judgments of situations, acts,
objects, and people.”8 The fourth, and most basic, level of culture is assump-
tions, which are the tacit premises that underlie all the other levels of culture. s9
The ability of a law firm to create and maintain commitments to certain
transcendent values is a function of the strength, quality, and durability of its
culture. Although there are clear and important differences in the content of cul-
ture across law firms, these differences are usually found at the level of artifacts
and perspectives. For instance, virtually all elite corporate law firms share a
deep commitment to the values of excellence and integrity that stand at the core
of the professional ideal.9″ By and large, commitments to this ideal are promoted
through the example of senior partners of the firm whose leadership position is
a function of their personal success and achievement. The pressure to emulate
the habits of senior lawyers is further reinforced by the promotion-to-partner-
ship tournament. After a protracted training period, during which time an asso-
ciate’s values and conduct are subject to close scrutiny, those associates invited
to join the partnership will have done so only by manifesting the necessary com-
mitment to the professional ideal.9 The commitment to the professional ideal is
further reinforced by a variety of external, i.e., non-firm factors, including
standardized professional training regimes 92 and a myriad of professional orga-
nizations that bring lawyers with the same specialized interests together to
explore various legal problems and their solutions.
Yet, despite important commonalities at the level of assumptions and
values, inspection of the components of law firm culture at the levels of arti-
facts and perspectives discloses significant differences that can generate very
distinctive law firm environments. This is seen best by way of illustration.
Take, for example, two hypothetical law firms, one an established, old-style
firm offering a full range of corporate legal services (“Blue Ribbon”), the other,
a relatively young firm specializing in cutting-edge tax work (“Boutique”).
While Blue Ribbon’s founding myth may emphasize its long and distinguished
88Typically, values are more abstract than perspectives, and include an organization’s general
goals, ideals, standards, and sins.
891t is, of course, difficult to maintain crisp distinctions between each of these levels of culture.
90The role of the professional ideal in the context of the legal profession is discussed in S.
Macaulay, “Lawyers and Consumer Protection Laws” (1979) 14 L. & Soc. Rev. 115; “Control,
Influence, and Attitudes: A Comment on Nelson” (1985) 37 Stan. L. Rev. 553 at 556-57; Nelson,
supra, note 9; D. Ruschemeyer, “Professional Autonomy and the Social Control of Expertise” in
R. Dingwall & P. Lewis, eds, The Sociology of the Professions (London: MacMillan, 1983).
9 1Among the values that an associate with partnership aspirations will have to exhibit is an anti-
pathy to incompetence and a revulsion for slacking and self-indulgence. These values will lead
those who finally ascend to the partnership to be vigilant in their condemnation of shirking
colleagues.
92See, for instance, B. Garth, “Legal Education and Large Law Firms: Delivering Legality or
Solving Problems” (1989) 64 Indiana L.J. 433; P. Kissam, “The Decline of Law School Profession-
alism” (1986) 134 U. Penn. L. Rev. 251.
93The recognition that lawyers receive in these fora from their colleagues is based, not only on
their virtuosity in technical legal problem solving, but also on the high ethical standards that they
adhere to in their legal practice.
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history,94 particularly the role it played in facilitating the rise of large industrial
and financial clients, Boutique’s founding myth may focus on its relative youth,
its more progressive clients, and its formation as a breakaway from or response
to the failings of other mainstream firms. Devotion to these myths is related to
other important cultural differences between the two firms. Given the premium
that Blue Ribbon may place on continuity of client relationships, it will find that
it has to offer a full range of legal services to its clients in order to mitigate any
incentives for other firms to grab its clients. In sharp contrast, Boutique’s found-
ing myth may be strengthened by the fact that its relations with clients are rel-
atively bounded and short-lived. Moreover, confining its practise to one special-
ized area –
even to the extent of turning away work that is deemed extraneous
to the firm’s core interests –
has powerful symbolic value in underscoring Bou-
tique’s self-perceived elite status.
Differences in the artifacts and perspectives of the two firms may also be
found in their views regarding the expectations each has in relation to the
amount of time lawyers should be devoting to legal practise and to other com-
mitments. In order to ensure that its lawyers are at the cutting edge of legal
developments in the tax area, Boutique may place a premium on its lawyers
devoting prodigious amounts of time and energy to transactional work. Outside
social and community commitments may be frowned upon, and pro bono work
devalued. In contrast, Blue Ribbon may insist that its lawyers balance their
devotion to business clients with various social and political activities, including
the maintenance of pro bono commitments to various public charities. These
commitments will allow its lawyers to develop the sensitivities and skills that
are necessary to realize the essence of the professional ideal. Further differences
between the two firms may be found in their internal hierarchical structures.
Differences may be evident in the time periods necessary for ascension to part-
nership (short for Boutique, long for Blue Ribbon), in the voting rules for major
partnership decisions (simple majority for Boutique, consensus for Blue Rib-
bon), in the reliance on the use of non-lawyers as senior decision-makers
(embraced in Boutique, rejected in Blue Ribbon),95 and in the sensitivity of mar-
ginal productivity measures in compensation and billing practices (high sensi-
tivity in Boutique, low sensitivity in Blue Ribbon).96
In sum, despite shared commitments to the core values and assumptions of
the professional ideal, when the various artifacts and perspectives of the two
94The imprint that founding partners can leave on law firms is explored in R.T. Swaine, The Cra-
vath Firm and its Predecessors, 1819-1947 (New York: Ad Press, private printing, 1946); W.K.
Earle, Mr Shearman and Mr. Sterling and How They Grew (New Haven: Yale U. Press, 1963).
95For example, firm members may fear the prospect of non-lawyer managers constraining their
client servicing activities, in terms of the scope of research and analysis required for resolution of
a given legal problem, in an effort to meet crass cost considerations. Or, they may worry that the
delicate balance between the lawyer’s obligations to client and public will be tipped inappropri-
ately toward the former.
96Admittedly, as Gilson and Mnookin observe, the more dependent the firm is on merit-based
compensation, the less effective the firm becomes in diversifying away the risks of specialized
human capital (“Sharing among the Human Capitalists,” supra, note 7 at 340). But, in a setting in
which lawyers have chosen not to diversify these risks by cobbling together a firm with different
specialties, this shift to merit-based compensation may not be important.
1992]
AN EFFICIENT COMMUNITY
hypothetical law firms are closely examined they reveal some very important
differences in the content of overall law firm culture. But difference does not,
of course, imply superiority of one form of culture over the other. Both firms
can be taken to have created a culture that comports with the demands of the
market segments that each is trying to satisfy. For instance, the more traditional
culture of Blue Ribbon would not mesh at all well with the needs of highly
aggressive, risk-perverse clients, whereas the maverick culture of Boutique may
not fit the more conventional needs of old-style family enterprises. In either
case, the mere expression of a distinctive vision of the firm’s community, when
coupled with the intense personal relationships that are formed among individ-
uals within the firm, can greatly contribute to the control of agency costs
through more traditional measures such as metering, ownership, and reputatio-
nal indivisibilities. As such, protection of successful firm culture is essential to
the survival of the firm. This issue is explored further in the following section
in the context of mergers which, given their capacity to upset the internal envi-
ronment of the firm, are capable of destroying firm culture.
IV. The Urge to Merge and the Survival of the Law Firm
Law firms in a number of industrialized countries have undergone rapid
growth over the past decade, and, in some jurisdictions, even longer.97 For
instance, of the 50 largest Canadian firms, none of the firms had more than 100
lawyers in 1960 or 1970, and, in 1980, one firm had 100 lawyers but, by 1990,
19 firms had more than 100.9′ Galanter and Palay have analyzed the pattern of
law firm growth in the United States, and have found that an exponential func-
tion is best fitted with the data collected. 99 This exponential function has, they
argue, been operative since 1922. Exponential growth means that the size of the
large American firms grew by a constant or increasing percentage each year.
Canadian law firm growth patterns seem to parallel the American trends.
Despite some anomalous years, the trend in the Canadian data, as measured .by
aggregate numbers of partners and associates, shows that Canadian law firms
grew by constant or increasing rates during the period 1960 to 1990.”
97The significance of rapid growth can be best appreciated by comparing the growth rates of the
leading corporate law firms in five major Canadian cities (as measured by the total number of law-
yers employed by these firms) with the number of lawyers in private practice in the corresponding
provinces. Although yielding equivocal results for the period 1962 to 1980, the data are arresting
for the most recent period 1980 to 1989: during this period, save for Nova Scotia, the growth rate
of corporate firms was far in excess of the growth rate bf lawyers generally. The difference in the
rates ranged from a multiple of 1.7 for British Columbia to a multiple of 3.5 for Quebec. For a more
comprehensive discussion, see R.J. Daniels, “Growing Pains: How and Why Law Firms Grow”
U.T.L.J. [forthcoming].
9sThe data were collected from the Canada Law List (Toronto: Carswell, published annually).
The sample of 50 firms was constructed by identifying the largest law firms in five Canadian cities,
Vancouver, Calgary, Toronto, Montreal, and Quebec in 1990, and following the number of lawyers
back each year until 1960.
9 9Supra, note 8 at 756-65.
10Robust growth is exhibited most starkly by Toronto firms in the last decade; in 7 of the 10
years in the period 1980 to 1990, Toronto law firms grew in excess of 8% per annum. For 6 out
of 10 Vancouver firms and 5 out of 10 Montreal firms, comparable growth rates were exhibited.
McGILL LAW JOURNAL
[Vol. 37
Typically, law firm growth has been effected by conventional recruitment
of newly minted lawyers directly from law school, followed by a protracted
period of ascension to partnership. Nevertheless, over the last decade, law firms
have exhibited a willingness to grow by deploying a variety of other instru-
ments, among which the most interesting is that of the merger.101 Mergers can
be effected between two relatively equal-sized firms or between firms having
different sizes, and involve the integration of two separate partnerships into one.
In contrast to conventional recruitment, merging allows the immediate realiza-
tion of scale and scope economies and ensures that client demands are met with
alacrity. And, unlike other growth instruments, for example, lateral recruitment,
mergers allow “acquiring” firms to obtain the expertise of “target” lawyers
without jeopardizing the acquired firm’s investment in reputational capital.
Despite the value of the merger instrument in vindicating growth objec-
tives, its use poses some very serious challenges to the survival of the law firm,
particularly in light of the emphasis that the theory developed above places on
the constancy of community attachments and on the distinctiveness of culture
in facilitating the benefits of joint production.” Put simply, when two firms are
merged, unless they each possess visions of community and culture that are
highly complementary, there is a good chance, perhaps as high as 50%, that the
merger will fail.1 3 In the main, failure can be traced to the inability of lawyers
in the two merging firms to agree on a vision of the merged firm that is com-
patible with each of the pre-existing firms’ cultural artifacts and perspectives. 1
4
0
Especially given the premium that lawyers place on consensus-based decision-
making, pre- or post-merger negotiations can easily founder on the shoals of
divergent visions of the good community.0 5 These disputes may be manifest in
relation to a number of different issues, including different styles of practice,
billing conventions, forms and methods of compensation, internal governance
’01The merger instrument has been increasingly relied on in a Canadian setting to achieve law
firm growth. For instance, in the year 1989 there were seven mergers in Canada involving a total
of 1117 lawyers, by far the highest recorded amount of merger activity ever in Canada. Similar
dependence on the merger instrument has been exhibited in the United States.
102Recent examination on the impact of various types of exogenous shocks on the structure of
the law firm can be found in R. Gilson, “The Devolution of the Legal Profession: A Demand Side
Perspective” (1990) 49 Maryland L. Rev. 869; Nelson, supra, note 77; Samuelson, supra, note 9.
lO3p. Pritchett, After the Merger: Managing the Shockwaves (Homewood, Ill.: Dow Jones-Irwin,
1985) at 10-16.
104See, for instance, Buono & Bowditch, supra, note 84:
One of the underlying reasons why mergers and acquisitions often fail to achieve the
level of operational and financial performance predicted by the precombination feasi-
bility studies is the conflicts and tensions that emerge when companies try to combine
disparate and, frequently, dramatically different cultures (ibid. at 134).
See also A.F. Buono & J.L. Bowditch, “When Cultures Collide: The Anatomy of a Merger” (1985)
38 Human Relations 477.
’50n consensus based decision-making structures, Nelson observes that there is limited scope
for authority of leadership:
Other members of the firm have the same legal right (as senior management) to par-
ticipate in the firm, and there are norms of consultation …. Firm leaders for the most
part must ‘ask for’ rather than ‘order’ compliance…. Hence, while the privilege of
leadership is not bound by rules, it is bound by a functional requirement to reach some
consensus with one’s partners (supra, note 77 at 127).
1992]
AN EFFICIENT COMMUNITY
systems, promotion practices, etc. The more intense the disagreement on these
issues, the less likely that lawyers will be able to weave a new culture from the
fabric of the pre-existing firms. Not surprisingly, the less successful a merged
firm is in resolving these conflicts, the more alienated its workforce will
become, and the less effective the firm form will be in controlling endemic
agency costs.” 6 Once impaired in its capacity to control agency costs, the sur-
vival of the firm becomes questionable.” 7
The severity of the debilitating conflicts that follow from a merger among
law firms is a function of several different factors. The most important factor
determining the severity of post-merger conflict is the model chosen by merging
parties to reconcile divergences in culture. Buono and Bowditch identify three
different models for resolving conflict: (i) cultural pluralism, (ii) blending, and
(iii) takeover; each of which can illicit different degrees of resistance by work-
ers in the merged entity depending on context.’08 Cultural pluralism is perhaps
the least obtrusive way of handling divergences in culture as it implies that the
cultural identity and independence of each of the merging firms should be pre-
served in the successor entity. Underlying this model is the assumption that a
variety of cultural perspectives and commitments will galvanize the firm.
Blending is an attempt to synthesize a new culture from the cultural elements
of the combining firms. This strategy is, however, often undermined by the pro-
pensity of workers to retain commitments to their original culture. It also
requires extensive, time-consuming negotiation to be successful. The final
model is the takeover, which implies the complete eradication of the culture of
one of the combining firms, and its replacement with the culture of the other
firm. Although having considerable surface appeal, insofar as its capacity to
obviate costly and time-consuming debates over firm identity, it enhances the
risk of permanently alienating workers from the “acquired” firm.
Extrapolating from the problems of determining idealized cultural content
in the surviving firm produces the issue of whether, in fact, lawyers in the com-
bining firms will be responsive to the entreaties of senior partners and will mo-
dify their behaviour in a way that is compatible with the imperatives of the
newly defined culture. The issue as to whether firm culture can be successfully
manipulated by senior management is an open question in the human resources
literature.’ 9 On one side are the pragmatists who claim that a corporation can
change its culture by mere emulation, while, on the other side, are cultural plu-
1061n the context of combining corporations, clashes in firm culture have been attributed with
responsibility for a number of different problems, including high levels of employee absenteeism
and turnover, distracted work effort, disputes over preferred policies, and increased customer dis-
satisfaction. All of the problems are together referred to as the “merger syndrome.” See Buono &
Bowditch, supra, note 84 at 243; M.L. Marks & P.H. Mirvis, “The Merger Syndrome” Psychology
Today (October 1986) 37.
07The magnitude of the threats to law firm existence is powerfully illustrated by the publication
of a recent book devoted to the mechanics of law firm terminations. See R. Hillman, Law Firm
Breakups (Boston: Little, Brown, 1990).
‘0Supra, note 84 at 143-47.
109See, for instance, J. Martin, “Can Organizational Culture be Managed?” in Frost et aL, eds,
supra, note 85, 95.
REVUE DE DROIT DE McGILL
[Vol. 37
ralists who emphasize the impediments to successful modification of culture by
management, particularly the initiation of successful firm cultures by workers,
not management.1 Questions concerning the capacity of senior managers to
change firm culture following a merger are particularly apposite in the law firm
setting. In view of the privileged position of the professional ideal in the law
firm, specifically the importance it attaches to individual autonomy and integ-
rity, it will be difficult to radically alter cultural commitments in the new firm.
This is especially so when lawyers hold extremely strong pre-existing commit-
ments to the community and culture of each of the combining firms.
Concern over the disintegration of law firm culture was a theme frequently
echoed in a series of interviews conducted with senior partners in 40 of Cana-
da’s leading law firms, especially among those firms recently involved in a law
firm merger. As could have been predicted from the theory developed above, for
mergers involving firms of roughly equal size and intensity of commitments to
a pre-existing culture, the blending and pluralist models of cultural determina-
tion were most frequently invoked.”‘ The former, not surprisingly, mired mem-
bers of the two firms in an extremely belaboured, often contentious, determina-
tion of which artifacts and perspectives of the combining firms should persist
in the surviving firm. Consistent with the discussion of law firm culture in Part
III, and contrary to the claims of some organizational theorists,I 2 even when
firms chose their partners on the basis of complementarities in culture, substan-
tial effort had to be devoted to the reconciliation exercise. It is significant that
frustration with resolving many of these issues at the outset of the relationship
caused some of the combining firms to abandon gradually their commitment to
a blending model in favour of a more pluralistic model in which lawyers would
be permitted to retain many of their previously formed cultural commitments,
despite the obvious risks this posed to the success of the merger. Nevertheless,
for these firms, and even for those firms choosing the pluralist model at the out-
set of the merger, the need to create some level of common culture was inescap-
able. Without some irreducible core of common culture, partners feared that the
firm would find itself embroiled in repeated internecine disputes over a range
of mundane issues, including promotion policies, office allocation, income dis-
tribution, client conflicts, etc.1
In these terms, the differences between the
l10For an analysis of the process of change in firm culture, see T.E. Deal, “Cultural Change:
Opportunity, Silent Killer, or Metamorphosis?” in Kilmann, et a., eds, supra, note 85, 292 at 292;
H.M. Trice & J.M. Beyer, “Using Six Organizational Rites to Change Culture” in Kilmann, ibid.,
370. The work of Peters & Waterman, supra, note 82, is illustrative of the pragmatist approach.
“1 The takeover model did not mesh well with the equal bargaining power possessed by the
combining firms, as, in order for it to work, one of the firms would have had to concede a weaker,
less robust firm culture, an unlikely admission to be made in view of its detrimental impact on the
level of sharing in firm net revenues by lawyers from the putatively weaker firm.
112J. Van Maanen & S.R. Barley downplay the problems of creating new cultures from mergers
of professional firms owing to the apparent homogeneity of law firm cultures, which they attribute
to common socialization processes involved in professional accreditation (“Cultural Organization:
Fragments of a Theory” in Frost et al., eds, supra, note 85, 31 at 38).
1 3The fusion of both diversity and homogeneity in modified pluralism models offers important
lessons, not simply for law firms undertaking a merger, but for non-merging firms as well, given
the stresses placed on the firm form by rapid growth. Even though not disrupting firm culture in
as dramatic and abrupt fashion as a merger, rapid law firm growth can introduce strains on the
1992]
AN EFFICIENT COMMUNITY
blending and the pluralist models of acculturation are rendered less significant
at a level of principle, being models that are distinguished mainly by the balance
struck between cultural homogeneity and diversity.
The way in which homogeneity and diversity have been accommodated in
Canadian law firms following a merger (or, more conventionally, following sus-
tained, rapid growth”‘) is intriguing. For the most part, firms have opted for the
creation of a firm environment in which orthogonal sub-cultures would be tol-
erated. In these settings, lawyers simultaneously accepted a core set of values
and assumptions common to the entire firm, while also embracing a separate set
of non-conflicting values and assumptions particular to that group. The defini-
tion of subgroups within the surviving firm usually, but not invariably, tracked
previous affiliations to the combining firms, meaning that the cultures of the
combining firms still persisted in the new entity. Over time, it was hoped that
these sub-cultures would become gradually integrated with the rest of the firm,
creating a stronger, more dynamic firm culture. However, against these wistful
aspirations, some firms acknowledged the fear that counter-cultures incompat-
ible with the core of the dominant culture would grow from these sub-cultures,
resulting in the disintegration of the firm, because of either debilitating internal
conflicts over styles of practice or the departure of groups of lawyers to other
firms offering a more congenial environment in which their culture could thrive.
Irrespective of the precise way in which a balance between homogeneity
and diversity was struck in merged firms, it was manifestly clear from our inter-
views that concern over the content of firm culture, although not always iden-
tified by that name, was a major source of apprehension among merging firms.
Many partners acknowledged that a failure to rectify inevitable and serious con-
flicts respecting the content of culture in the surviving firm threatened to tear
these mergered firms asunder. In these terms, these data, although anecdotal and
fragmentary, furnish support for the claim that culture is an important compo-
nent of the rationale for the law firm.
Conclusion
In this article, I have sought to examine the structure and rationale for the
law firm partnership. In reviewing the theories traditionally advanced to explain
the firm, I have found that each overlooks a crucial component of the role
played by the firm in realizing the benefits of joint productive activity. This
missing component is the firm’s capacity to create and sustain community affil-
iations. These affiliations are vaunted for both their consumption and instru-
mental value. At the foundation of the firm’s capacity to foster community
capacity of the firm to disseminate its core values to new recruits and to shore up commitments
to these values in more senior lawyers. In the absence of a tightly defined community, led by lead-
ers of exemplary moral character and professional distinction, the firm’s culture is subject to grad-
ual but certain erosion.
114There is reason to expect that rapid growth can have just as destructive an effect on firm cul-
ture as a merger. For instance, Galanter and Palay observe that rapid growth “changes the character
of the firm. Informality recedes, collegiality gives way, notions of public service and independence
are marginalized …..”.(supra, note 8 at 756). See also Samuelson, supra, note 9 at 657.
McGILL LAW JOURNAL
[Vol. 37
attachments is its culture. Those firms able to create a set of intense commit-
ments to a culture that is consonant with producer and consumer preferences
will enjoy greater economic success. The case study of law firm mergers under-
scores the importance of firm culture to the survival of the firm.
The question raised by this article, and which merits further attention by
organizational theorists, is whether and to what extent firm culture supplies any
useful insight on the rationale of other forms of firm organization, particularly
the conventional limited liability corporation. On one hand, many of the defects
with some of the standard rationales for the firm form are implicated in the case
of the corporation, suggesting that there is room for these theories to be embel-
lished and improved, perhaps by considering community and culture. On the
other hand, once one strays from firms supplying professional services toward
more rigidly bureaucratic organizational forms, the scope for community attach-
ments seems correspondingly narrowed. However, while the nature of commu-
nity and culture in a large, multinational corporation may differ markedly from
the small, professional firm, one suspects that some of these elements are still
present, buttressing the effectiveness of the relatively crude set of economic car-
rots and sticks that are the exclusive preserve of the agency theorist.
The issue of why agency theorists have not devoted greater attention to
exploring the role of culture and community in fostering organizational effi-
ciency is puzzling. Perhaps part of the resistance can be traced to the deep-
rooted reservations with the anti-liberal sentiment that percolates throughout the
communitarian ideal, particularly the support it lends to the establishment of
homogeneous, exclusionary political societies, which endanger the values of
liberty and autonomy so dearly privileged by classic liberalism.”‘ Yet, the infir-
mities plaguing communitarianism in political society may be less important
when the community that is sought to be created is the firm; for the firm, unlike
political communities, is seldom erected on a foundation of ethnic, religious, or
national homogeneity.1 6 In these terms, the firm as community holds consider-
able potential for realizing the communal aspirations of individuals, without
jeopardizing the core tenets of the liberal vision of the good society. As such,
it commands our attention.
“I5See, for instance, A. Kronman who, criticizing the collectivist vision of Milan Kundera,
argues that such a society would be a “monstrosity …. The great fugue (described by Kundera)
would indeed remove us from the state of nature, but it would also deprive us of the sense of sep-
arateness that underlies our notions of moral duty and personal achievement” (“Contract Law and
the State of Nature” (1985) 1 J.L. Eco. & Organ. 5 at 30). See also M. Trebilcock, An Exploration
of the Limits of Freedom of Contract [unpublished] (on file with the author).
” 6Not that this has always been true. The legal profession is a case in point. Mainstream Cana-
dian and American law firms have at one time or another discriminated in the hiring of Jews (Com-
ment, “The Jewish Law Student and New York Jobs – Discriminatory Effects in Law Firm Hiring
Practices” (1964) 73 Yale L.J. 625); Catholics (E. Smigel, Tie Wall Street Lawyer (Indiana: Free
Press of Glencoe, 1969) at 45); Blacks (D. Holley & T. Kleven, “Minorities and the Legal Profes-
sion: Current Platitudes, Current Barriers” (1987) 12 Thurgood Marshall L. Rev. 299); and women
(C. Fuchs Epstein, Women in Law (New York: Basic Books, 1981) at 383; M. Huxter, “Survey of
Employment Opportunities for Articling Students and Graduates of the Bar Admission Course”
(1981) 15 L.S.U.C. Gazette 169) –
though in the last decade or so rates of discrimination seem
to have lessened dramatically.
