Risk management for law firms   chapter 2 ark 2009 by meg block
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Risk management for law firms   chapter 2 ark 2009 by meg block Risk management for law firms chapter 2 ark 2009 by meg block Document Transcript

  • Chapter 2: Governance of conflictsand new business intakeBy Meg Block or a tight-knit clearance committee. This team has no personal stake in theIntroduction outcome of the clearance decision; itFor many law firms, conflicts management places the interests of the firm aboveis one of the most challenging elements of the special interests of the practitioner.risk management. In the Risk Roundtable This team also assesses business ethical2009 Law Firm Risk Management Survey, conflicts; it analyzes the quality of the41 percent of respondents ranked conflicts work, considers client relationships, andmanagement as their top concern, and weighs the associated business risks asthree-quarters of respondents included it in well as ethical ones.their overall list of concerns.1 The following discussion describes the Conflicts clearance can no longer distributed hub-and-spoke and centralizedbe managed as a hub-and-spoke process pyramid models in absolute terms. The truthwith clerical staff and lawyers. This is more complex: these two models are thetraditional model’s clerical core produces endpoints of a spectrum of solutions. I find– because of lack of training and authority the contrast illuminating, not just simplistic,– over-inclusive and under-analyzed and hope you do too.reports. The distributed recipients of thesereports are time-constrained lawyers who Backgroundare strongly incentivized not to look at The need for changes to the governanceconflicts issues too closely; they want the of conflicts clearance has been growingwork. Involvement in conflicts clearance by for 65 years. First, there has been anan ethics lawyer or general counsel is by unrelenting drive towards corporateinvitation only. globalization since World War II, resulting The risks associated with this model in complexly structured multi-nationalare simply too high to continue: party corporations. The breadth of theserelationships in a global economy are too corporate families makes the ethical dutycomplex; competition for business and legal of loyalty a complicated one to navigate.talent is too fierce; practicing lawyers are not Second, in the past twenty years therespecialists in ethics; and the consequences have been an unprecedented number ofof a mistake in terms of expense and law firm mergers,2 which has increasedprofessional reputation are catastrophic. law firm size,3 the breadth of their client The new governance model is a base, and the likelihood of conflictingpyramid with a skilled research team that business relationships.provides nuanced research to a centralized Third, in the wake of major corporatedecision maker – be it an individual lawyer and accounting scandals at the turn of the 11
  • Chapter 2 century, the relationship of lawyers and high demand, these complex clearances their clients was changed by new laws and must happen quickly. revised ABA and state ethics rules. Section In February 2009, the ABA House of 307 of the Sarbanes-Oxley Act of 2002, Delegates approved changes to Model Rule modifications to the ABA Model Rules 1.6 1.10, ‘Imputation of Conflicts Of Interest: and 1.13, and associated state ethics rules General Rule,’ that make it easier for law set up a fundamental tension between firms to resolve conflicts of interest by lawyers’ duties of loyalty and confidentiality screening5 a lateral from participation in a to their clients and public expectation that conflicting matter. Now that the model rule upstanding lawyers will ‘blow the whistle’ on has been revised, practice standards will wayward ones. Law firm management has now evolve via state adoption of the change recognized the safest way to avoid the issue and case law, especially in the areas of is to avoid problem clients. Hence the need client notification and consent. Other likely for a new business and conflicts decision- areas of interest include: documentation of making body that stands apart from lawyer firm policy and ability to prove compliance; and practice group interests and focuses on and application of technology to ensure the greater good of the firm. enforcement of a screen. Fourth, in the years just preceding and following the 9/11 terrorist attacks, What’s needed? the US, UK, and EU passed a number of The new model for conflicts clearance is anti-money laundering laws4 to ensure based on the following irrefutable truths: that professional service firms ‘know their clients.’ The laws require due diligence to: Clearance must be based on all the facts. Verify the identity of a client or Clearance must be fast. service beneficiary; Clearance must consider business as Verify the purpose and intended well as ethical issues. nature of the business relationship Clearance (or non-clearance) must before it is established; and benefit the firm, not the individual. Actively monitor the business relationship. Following is a discussion on how these truths translate into governance. To prove compliance, these tasks also add a record-keeping requirement to new client Clearance must be based on all acceptance and conflict clearance. the facts Finally, lawyers are opportunistic and, Regardless of the governance model, consequently, mobile. Their success in conflicts and intake clearance must be changing firms depends on the clearance based on all the facts, and those facts of conflicts. It cuts two ways. Laterals must are increasingly complicated. There is a be able to bring their most profitable spectrum of clearance and intake services clients with them, and the recruiting law based on research, analysis, quality firm must be sure that the lateral’s prior assurance, and documentation. The experience will not jeopardize its existing following sections show how the governance representations. As top legal talent is in models stack up.12
  • Risk Management for Law Firms: From Policy to PracticeThrow it over the fence (hub-and- Research, screen, maintain, throw itspoke model) over the fence (specialization model)The most basic (and risky) governance The top end of the hub-and-spoke modelmodel is the hub-and-spoke model, where is to have more highly skilled staff conductclerical personnel simply search the party conflicts searches. Typical research includes:names provided by originating lawyers. Noresearch is done to confirm whether the Confirmation of the proper spelling ofnames are correct or if all pertinent names party names;have been provided. The resulting reports Verification that all pertinent partymay not even be reviewed for false hits; names have been submitted (basedthey are ‘thrown over the fence’ as is for the on area of law);requesting lawyer to analyze. Identification of corporate families Clerical staff report through intermediary for new clients; less consistentlymanagers to the executive director and researched for adverse parties andthere is minimal to no involvement of other related parties;ethics lawyers. Staffing is negligible as Comparison of party names with thethere is no research, the searches take names found on the US Treasury’sminutes to run, and lawyers bear the full Office of Foreign Assets Control (OFAC)burden of analysis. With this level of staff Specially Designated National (SDN)competency, maintenance of the conflicts list or in specialist databases (such asdata is rare. Staffing ratios can be as low World-Check); andas one conflicts clerk (with part-time back Recent ‘newsworthy’ stories for new clients.up) to 300 lawyers. In this top-end model, researchers are divided into levels of expertise and specialization. The Ethics Ethics job titles vary widely committee committee Executive and include clerks, director General General Intake counsel counsel committee coordinators, searchers, researchers, specialists, analysts, leads, and resolvers. For illustration, Department manager Originating lawyer the job responsibilities of three tiers have been described and named simply Level One, Level Originating lawyer Originating Two and Level Three. lawyer Conflicts clerks Level One Level One is the entry- Originating lawyer Originating level position. Personnel lawyer perform all conflictsFigure 1: The hub-and-spoke model searches (including the 13
  • Chapter 2 responsible for the maintenance Ethics of anti-money laundering committee General Intake documentation, terms of engagement (firm letters and counsel committee outside counsel guidelines), and waivers. Department Originating manager lawyer Level Three Level Three personnel are usually former practicing lawyers or Originating lawyer Originating lawyer highly experienced administrative Level 1 personnel who have been Level 2 promoted from Level Two. They Level 3 Originating Originating review the triaged work of Levels lawyer lawyer One and Two. They are subject matter specialists (for example, Figure 2: The specialization model litigation, corporate transactions, bankruptcy, intellectual property OFAC SDN or specialist databases) and are prosecution, lateral hiring), have frequent trained to remove duplicate and clearly false contact with originating lawyers, and drive hits from conflicts reports. They also perform the conflicts resolution process. They have straightforward confirmation (such as phone the authority to resolve straightforward calls to verify ambiguous party names). issues. Issues they cannot resolve are laid out for resolution by the originating lawyer. Level Two Level Threes are sometimes authorized to After four to six months, Level One personnel draft engagement, waiver, declination, and begin to be promoted to Level Two positions disengagement letters. Their actions are and Level Ones are replaced. Level Twos guided by frequent, formal contact with the are responsible for the quality assurance general counsel, members of an ethics or of Level One work. They are given more business intake committee, and members of complicated tasks, such as analyzing and a hiring committee. annotating new client-matter and lateral- With the increased level of service comes hire reports to highlight potential issues, increased professionalism and staffing. The researching corporate family membership, ratio goes from 1:300 to 1:50. Professional and maintaining corporate family trees and certifications include paralegal certification, ethical walls in the conflicts database. Masters of Business Administration, Masters Level Twos are also responsible for the of Library Science, and Juris Doctor (JD). unceasing maintenance of the conflicts As these professional degrees indicate, database; a significant task when one conflicts analysis requires sound reasoning, considers constant mergers and acquisitions, investigative and analytical skills, and strong the transience of corporate families, the business judgment. To analyze potential inevitable enjoining of new parties, and conflicts, the team must have a working the need to update the description of a knowledge of legal ethics, international matter as it progresses. Finally, they are business, and firm-defined positions on the14
  • Risk Management for Law Firms: From Policy to Practiceresolution of conflicts issues. In addition, the identity and suitability of new clients andthey require significant on-the-job training; the nature of the proposed work. The modela six-month ramp up is not unusual. changes to a pyramid because at the apex isConsequently, in this top-end model, they are a team of specialized lawyers responsible foremployees with a high retention value. clearance. They are responsible for deciding An added benefit of this hierarchical (in concert with practice group leaders,structure is that it keeps personnel motivated members of the management committee,through the long period of on-the-job and the general counsel) whether new worktraining. As law firms move from the low to and new clients should be accepted. In thistop end of the hub-and-spoke model, the model the role of the originating lawyer is toadministrative manager of the department provide sufficient information for a clearancealso moves from a professional administrator determination to be made.to a lawyer. The JD credential is critical forcredibility; as much as they loathe conflicts Clearance must be fastclearance, lawyers are reluctant to turn it over In the hub-and-spoke model, clearanceto anyone who has not been similarly trained. decisions are distributed to the requesting lawyers. Consequently, they control the timeGive them the answer (pyramid model) it takes to clear conflicts, secure waivers, andBecause of the riskiness of conflicts clearance establish the terms of engagement – unlessand new client acceptance, the largest and the situation requires escalation to a highermost progressive law firms have centralized authority, such as a general counsel orthe entire process, usually under the auspices intake committee. Lawyers’ complaints withof the general counsel. As with the top-end this model focus on the poor quality of thehub-and-spoke model, in-depth research is information, the unintelligibility of conflicttiered. Additionally, it is also focused on the reports, and the consequent amount of workbusiness aspects of the matter, for example, they have to do to clear conflicts, not the duration of time. Not so with the pyramid model. Once the originating lawyers have submitted the General background information for counsel conflicts checks and new business intake, elapsed time becomes Practice and firm leaders paramount. Clearance is expected within at most two days, Conflicts Originating lawyers lawyer and preferably within hours. Centralized staffs – especially in Level 3 global firms – provide coverage Level 2 24 hours a day, seven days a week. To meet these time Level 1 requirements (which are realistic from a competitive perspective), the staffing ratio in the pyramidFigure 3: The pyramid model model goes from 1:50 to 1:20. 15
  • Chapter 2 Clearance must consider business although they do frequently complain about as well as ethical issues the big cases that got away because of small Adapting the old adage, “You can win the matter conflicts. battle, but lose the war,” a firm can clear Firms that look at their client base the conflicts battle and lose a client. Both critically and strategically inevitably implement general practice firms and practice boutiques a centralized new business clearance must be attentive to client sensitivities, be process in manual, semi-automated, or fully they corporate family relationships, patent automated form. The benefits of formal, firm or trademark prosecutions, or subtle cross- management review include: practice challenges to loyalty. These business perspectives can only be provided by the Objective consideration of whether a firm’s most experienced business leaders new client is a good client for the firm. and are particularly difficult to harness Insertion of a neutral third party in the hub-and-spoke model, where the into head-on-head disagreements involvement of senior firm members is by between partners. invitation from the originating lawyer. Formal oversight of proposed business In the centralized pyramid model, on arrangements; no more ‘giving away the other hand, the conflicts lawyer has the the store’. judgment and authority to involve the senior Formal review of billing and payment members of the firm when needed. Moreover, history for new matters of existing clients: the conflicts lawyer has the stature to get why take on more bad business? senior members’ attention on a timely basis. Oversight by practice areas for ‘fit’ of An alternative technique to surface work and staffing. client sensitivities is to circulate a new business report. These reports come in two The consistency with which decisions are flavors: the first publishes the description made can diffuse personal tensions and and associated parties of matters before prune and reshape a firm’s client base approval; the second publishes the over time. description, parties, and client-matter A centralized conflicts clearance and identification (ID) of clients and matters after new business intake process also leads approval. From a clearance perspective, the eventually to a structured matter close and report of business under consideration is client disengagement processes, which much more useful than the one that reports mark the end of an active representation the fait accompli. The technique is not really or relationship. Increasingly recognized effective, however, as the communication for their importance, client and matter of the information depends on busy lawyers closing change the ethical considerations actually opening and reading the report. for conflicts of interest. It is possible to be adverse to a former client (Client A) as Clearance (or non-clearance) must long as the new work for Client B is not benefit the firm, not the individual substantially related to the work done for Many, many law firms characterize themselves Client A. Matter closing also starts the as assemblies of solo practitioners. In firms retention period of the representation’s with this culture, partners do not judge the files. From a data perspective, matter clients and proposed business of others – closing is a milestone that is used to16
  • Risk Management for Law Firms: From Policy to Practiceupdate matter descriptions and associated consider client relationships, and weigh theparty names. The marketing department associated business risks. Their responsibilityuses the milestone to secure case studies is to the firm, not individual practitioners.and promote additional services. In short, Automation, although expensive, helps withadditional rigor in closing matters and accuracy, speed, and documentation.disengaging, as a result of the centralizedprocess, leads to better client information Meg Block is managing director at Bakerand more efficient conflict analysis. Robbins & Company. She can be contacted at mblock@brco.com.Can automation help?Although expensive (it takes ‘a village’ Referencesto program all the tendrils of the 1. See www.RiskRoundtable.com.conflicts clearance and new business 2. The high water mark for mergers was inintake process), automation does bring 2001, with 82 mergers completed in the US.additional benefits including: See Hildebrandt International, ’Mergerwatch: 2004 US law firm merger activity’, 6 January Intelligent routing of information; 2005. Available at http://www.hildebrandt. straightforward decisions are expedited com/Publications/Pages/PublicationDetail. and tough decisions are sent on to those aspx?PublicationGuid=674733dc-8b93- who can make them. 4b1e-98a7-d3218dfe83cd. Improved data quality through validated 3. For example, in 1986, AmLaw 100 firms had data entry. 25,994 lawyers; in 2008, AmLaw 100 lawyers Increased efficiency via pre-population totaled 81,992 – a threefold increase. of known data and synchronized 4. For example, the UK Terrorism Act 2000, USA updates of firmwide systems; type Patriot Act 2001, UK Anti-terrorism, Crime once, use many. and Security Act 2001, UK Money Laundering Time-based triggers to move Regulations 2003 and 2007, and the EU decisions through bottlenecks or Hague programme. solicit updated information. 5. The Model Rules’ definition of screened Consistent gathering of intake applies to ”situations where screening of a documentation for long-term reference. personally disqualified lawyer is permitted to Application of ethical wall and remove imputation of a conflict of interest confidential security at matter inception. under Rules 1.10, 1.11, 1.12 or 1.18.”In conclusionThe risks associated with conflicts clearanceand new business intake can no longerbe managed as a hub-and-spoke processwith clerical staff and lawyers. A skilled,centralized team – likely to be led by alawyer – is needed to provide nuancedresearch to a centralized decision-makingbody. This team must also assess businessethical conflicts, evaluate the quality of work, 17