Where Were the Leaders? How a Failure of Leadership Doomed Dewey
A year before Dewey & LeBoeuf disintegrated, I went to 1301 Avenue of the Americas in New York City to meet the firm’s chairman, Steven Davis.
I approached the security desk, showed my ID, and listened as the guard contacted Mr. Davis to hesitantly say Ms. Dewey was on the premises.
Even then, the gig was starting to end.
The storied firm filed bankruptcy on May 28 amidst a blaze of finger-pointing, chagrin and disbelief. However, to students of leadership – and law firm leadership, in particular – the only surprising feature of the implosion was what took so long.
The firm announced its merger in late August 2007, touting 1,300 lawyers and revenues that would approach $1B. By early 2009, the firm had already missed its budget by 40 percent and cut off partner draws to junior partners for fear of breaching its loan covenants with Citibank, to which it owed hundreds of millions of dollars.
And yet, the firm wobbled on for a few years more, collecting more than 100 lateral partners, many of them trophy lawyers who came at a steep price. In 2011 alone, the firm lured 37 new partners, trading their capital contributions for guarantees of future profits.
Is Dewey a precursor of future law firm failures or an isolated spectacular disaster? That’s a popular topic among law firm leaders these days. All we know for sure is that there is a paradigm shift going on among law firms that should be heeded, with fewer elite firms able to charge premium rates and a scramble to be among those who survive.
Chaos and change always magnify the importance of leadership, and in the aftermath of Dewey, it is imperative that those elected to lead law firms not only enjoy the mantle of power, but also embrace the responsibilities of their position.
Here are Seven Lessons of Law Firm Leadership that were not present at Dewey, and which could help your firm deal with the challenges it will face.
#1 – Confront reality. Davis may go to jail or face criminal charges for his delusion and inability to deal with hard facts and communicate them to others. Fear ruled the day, rather than sober judgment and clear communication.
In hindsight, his behavior and that of CFO Stephen DeCarmine certainly resemble a classic Ponzi sceme, robbing tomorrow to pay today. However, only Davis’ biggest foes believe he was consciously engaged in anything other than panicked delusion that he could overcome huge pension liabilities and a crashing financial market by building out the firm in new markets for a better tomorrow.
Reality also requires proper alignment of risk and reward. Private law firm partners – in general – do little to reap the magnitude of monetary rewards that typically are given to entrepreneurs and Wall Street types who take true risk in return for the upside of potential great profit, rather than sell legal advice by the hour.
#2 – Do not add gasoline to a fire. Dewey’s leaders not only poured fire on the flames, they threw in more matches with every public statement that things were fine and every lateral partner they hired.
I remember having lunch with one of the savviest legal marketing experts in the country in early April when the American Lawyer issued an unprecedented revision of the firm’s revenue numbers for 2010, from $910M to $759.5M and for 2011 from $935M to $782M. We had only one question for each other: How many days until the firm went under? The answer turned out to be 56.
Lesson number one, two and three of any type of management is don’t lie. And lesson one, two and three of media relations is don’t lie. Because if you do and you are caught, you will pay dearly.
In addition to being either reckless with facts or dishonest, the firm also doubled down over and over and over – the most likely reason criminal charges could come – bringing in new talent. As late as January 2012, the firm lured eight lawyers from the old-line Johannesburg firm Werkmans Attorneys. Davis & Co. saw the acquisitions as the risk-taking needed to build a global law firm; in retrospect, they appear to have been simply keeping their Citibank line of credit afloat with new capital contributions.
#3 – Learn business finance. The firm made two critical mistakes in its financing beyond its errors guaranteeing and paying excessive partner compensation.
First, they got crunched in the credit squeeze that took down tens of thousands of companies. Their error was not to get squeezed – far mightier institutions did as well, and many failed. Their error was to go perilously far out on a limb without any apparent awareness of the risk. They compounded the error by panicking when Citibank started to squeeze. If you live on lines of credit, you can die on lines of credit.
Second, they turned to the capital markets in 2010 with a $125M bond offering that, it turns out, went to pay past debt. The problem is, they told the insurers who invested that it was for expansion. In the rare instances when corporate firms have resorted to ‘investment’, it almost always replaced partners who could or would not make further capital contributions.
Finally, and as a side note, it may be better practice to not encourage one’s partners to personally bank where a firm holds its line of credit.
#4 – Tomorrow may never come. So plan for tomorrow, but manage for today. Millions of less powerful small business owners got squeezed as the financial markets seized and collapsed beginning with Lehman Brothers in 2007. Lawyers feel immune from the pressures that afflict the Borders, Blockbusters, Countrywides and CIT Groups of the world. And, in general, they are more protected than most. However, the more lawyers drive for corporate compensation unattached to the value they produce, the more endangered they become.
To guarantee hefty partner compensation to any partner – let alone 100 – is foolhardy at best.
#5 – Know merger math: One plus one has never equaled three. Law firm mergers should seek to join two strong entities that complement and add synergies, rather than cover the other’s faults. However, like Hugh Hefner wanting to marry a Playboy bunny, LeBoeuf sought to add glisten and shine to its boring and practical insurance and energy practices with the luster of Dewey Ballantine, which was already a failing enterprise in 2007.
And while the merger was touted as a great global achievement, it went unsaid that both brought substantial debt to the union: LeBoeuf came with $150M in debt, including $81M in unfunded pension obligations; and Dewey brought $122M in debt, including $108M in unfunded pension obligations. It’s never great to start a new life with a total of $272M in debt, including $189M in unfunded pension obligations.
Perhaps that’s what Ralph Baxter, chairman of Orrick, saw when he asked for $25M guaranteed over five years to take on Dewey just six months earlier.
#6 – Embrace real change, not just its illusion. Dewey & LeBoeuf and similar global monstrosities are created by consultants who charge law firm leaders vast amounts of money to create organizations with little proven value. This has been peddled as change.
It’s clear there is a tremendous future in international legal advice. However, it’s equally clear that no firm has ever branded its way to a reputation for exceptional skill and service. It’s also clear that the world’s elite corporations continue to turn to firms like Wachtell Lipton; Skadden; Cravath; and Sullivan & Cromwell for their most important matters. While those firms are quite aware of trends in the legal market, they also understand their ultimate value is the advice they give rather than the number of lawyers they have in each global outpost.
#7 – Balance humility and hubris. I recently interviewed Mel Immergut, who is concluding his 18-year run as the chairman of Milbank, and we talked about the qualities of “leadership type people”. I asked whom he considered a role model, and he said certainly not a lawyer in terms of management. Instead, he named Don Tyson, who built Tyson Foods and was a friend and client of Immergut for decades. Like many successful leaders, Immergut looks to corporations around him and their leaders for lessons. The truth is many lawyers have the capability to lead, but very few have been tested in the salt mines of reality.
We live in an era when many law firms fancy themselves to be businesses, but very few law firm leaders think as real CEOs do. Consider that Dewey & LeBoeuf was the 23rd largest law firm in the world by revenue when it blew up; by that measure it is the equivalent of GE or Berkshire Hathaway, according to the Fortune Global 500 (they are 22nd and 24th on the Fortune Global 500, with Petrobras actually 23).
Would Warren Buffett have blinked, prevaricated, miscommunicated and fled like so many Dewey partners?
If the profession is to remain strong – and its law firms sustainable for good times and bad - lawyers who dare to lead should learn real leadership comes from within and brings with it tremendous responsibility for janitors and secretaries, associates and partners and organizations themselves.
Only the strong survive, which the failure of Dewey & LeBoeuf proved once again.
Katrina Dewey is the founder and CEO of Lawdragon.com, the online legal media company. She has written about law firm leadership since 1989. And while technically related to the firm's progenitor, Thomas Dewey, her forbears are the very distant country cousins to the famed and failed presidential candidate.