Stephens Scown announced on 4th March that they had formally agreed a new shared ownership model with the regulators and tax authorities. In the press release it is suggested that this could open the way for other partnerships and professional firms to follow suit.
What is the structure of this model?
Stephens Scown have created a structure whereby a company, Stephens Scown Limited, has become a member of the partnership (LLP) and is entitled to a share of profits equal to the bonus pot. The new company is owned by staff through an Employee Benefit Trust. Under the scheme, all profits over a certain minimum threshold will go into a pool, with half being retained by the firm and half being shared equally among all participating members of staff.
Has the model been modified at all from the other ‘John Lewis’ models to reflect the legal nature of the business?
In the John Lewis model all 91,500 permanent staff are Partners who own 46 John Lewis shops across the UK. When the founder, John Spedan Lewis, set up the Partnership, he was careful to create a governance system, set out in the Constitution. Whilst that Constitution was commercial it was also democratic giving every Partner a voice in the business they co-own. The Stephens Scown model would appear to provide no vote for staff on the running of the business.
What challenges does a law firm present in terms of shared ownership?
Up until recent times it has not been possible for anyone other than a lawyer to be an owner and share in the profits of a law firm. The Legal Services Act 2007 has now made this possible. For larger stakes in the ownership or Management of a business a law firm will need to become an Alternative Business Structure (ABS) which is quite a complex task. Where the ownership stake is less than 10% an ABS is not required.
What are the desired aims of taking this approach to business structure?
Stephens Scown state that “this is all about giving everyone a real stake in the business” by ensuring that a part of everyone’s remuneration comes from a share of profits. For most law firms the opportunity for giving staff a real share in ownership has to be about tackling the increasingly competitive market for staff and trying to gain an edge over the competition. Staff turnover is a huge cost for law firms, with lost revenue opportunities, recruitment costs and the disruption that comes with it. Something like the scheme implemented by Stephens Scown might just give them the edge in competing for and then retaining talent.
How can a business manage the cultural change towards shared ownership?
It is unlikely that the scheme introduced by Stephens Scown has moved as far as the John Lewis model, with appropriate Governance and the “ownership” by all the staff. It is not clear how the voting takes place at LLP level in terms of the strategic direction of the business and, most importantly for the members of staff, on issues such as the “minimum threshold” for LLP member remuneration. If shared ownership is limited to a share of profits in any firm then the cultural change may be no more than that seen with the creation of one bonus scheme or another. That of itself my create some ‘disappointment’ that shared ownership does not come with more influence.
Culturally, the biggest challenge with increasing the participation in a law firm and broadening the ownership is the separation of a number of roles that were traditionally covered by the all embracing title of “Partner”. A Partner in a law firm is traditionally an owner, manager and fee earner.
As law firms start down the path of towards wider participation, the “ownership” card is no longer valid in day to day activities as the “ownership” group becomes everyone and they have, or at least should have, an equal interest in the overall performance and financial position of the firm. As such partners are no longer the only members of ownership group and control and influence are reduced.
Are there any risks? How are such models regulated?
The obvious risk is that the profits may not be sufficient to sustain the bonus pool. John Lewis announced on 10th March that staff bonuses were to be cut for the third year in a row to 10 % of their annual salary (in 2013 it was 17%). Staff are very quick to factor bonuses into their earnings expectations and if the bonus falls below these expectations then the firm’s competitive position in the talent market could be weakened.
The regulation of these models rests entirely with the business. John Spedan Lewis was a visionary when he set up the Partnership in 1864 and took care to establish a system of Governance. The real leap forward in law firms will be when the Governance system allows staff participation in key decisions as true owners of the business.