The next ethics meltdown? Law firms need to stop and think about incentives

With Barclays firmly in the spotlight for what is politely referred to as market manipulation, I was struck by Robert Peston on the Today Programme today pointing out that the tragedy of Barclays is in fact a tragedy for us all because (in his words): we need these institutions.

I’ll leave a critique of the Banks to others, but this latest crisis is a timely reminder of the concerns about light touch, principle based regulations for all professions and regulators (See former General Counsel, now acting CEO Tom Kilroy’s excellent post on that here).

Another thing that struck me was the Bank CEO on the Today programme who declined to lay the blame explicitly at Bob Diamond’s door but very cannily pointed out that the agressively competitive culture of Barclays was what had made it so successful.  The unspoken nuance was, I think, that this same aggressively competitive culture was responsible for the market manipulation which is (one suspects) about to hoist Diamond by his own petard. We can get a sense of how this culture influenced behaviour from this excerpt in today’s FT (£):

During that period, senior Barclays managers expressed concern about media reports noting that Barclays’ Libor submissions were higher than average – suggesting it was a riskier proposition for other banks looking to lend money, the FSA said in its notice.

This concern “in turn resulted in instructions being given by less senior managers at Barclays to reduce Libor submissions in order to avoid negative media comment. The origin of these instructions is unclear,” the FSA said.

As with News International, a corporate has constructed (accidentally or deliberately) a willful blindness and let ‘culture’ and ‘incentives’ send the messages (with the possibility of a few judicious phonecalls helping things along the way).  But let me turn to my main concern.

Law firms are, if press reports are to be believed, increasingly looking to incentivise staff through bonuses and equity sharing schemes.  I hope they are thinking very carefully about the extent to which the financial pressure that they operate under as institutions is translated through to staff via targets, bonuses and equity sharing schemes.   Law firms are alerady prone to competitive and agressive cultures.  Exacerbating that is risky .  Partners, particularly now that de-equitisation is a real rather than distant risk, as well as associates, are vulnerable to the pressures to keep their numbers up.  This risks catostrophic ethical failure at firms.  How serious that risk is, time will tell; but there needs to be careful thought about how incentives influences culture within law firms if short term expediency is not to trump long term sustainability.

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