Anticipating Scandal, Randomness and Unlikely Disasters in Law Firms

Anticipating Scandal, Randomness and Unlikely Disasters in Law Firms

By Nick Jarrett-Kerr

This article first appeared in Law Business review December 2011

Scandals such as the News International hacking incident are timely reminders that organizations can be brought to their knees by events which are highly improbable, often totally unpredictable but – if they happen – potentially catastrophic.  At a simple level, such events often (but not always) involve ethical breaches and emphasise the need to keep careful track of what is going on inside the organisation.   At a deeper level, however, standard risk management techniques are usually totally inadequate in the face of asymmetric and unpredictable events – even if they wanted to do so, it is well-nigh impossible for law firm leaders to control all activities of their firm in the rough and tumble of daily life.  In ethical situations, a robust firm culture can assist if it supports a fair, open and honest environment in which there is a high level of top down and bottom up trust.   Trust is, however, far from easy to achieve in law firms as lawyers are a sceptical lot and generally lack confidence in the firm’s leadership (upwards trust).  Even more difficult is the issues of the downwards trust which law firm leaders have (or should have) for other members of the firm.   There are not many firms where the leaders really know and trust what their partners are up to, or where they are happy to govern with a light touch assuming that their partners are at all times acting appropriately and with integrity.   Much of what partners do in their client work is repetitive and process driven, but advice is often given where clients are sailing close to the wind, or (as with News International) are trying to limit damage and are therefore putting pressure on their lawyers to behave in inappropriate ways.    In the professional services world, client pressures arguably brought about the demise of Arthur Anderson, and greed has tarnished the reputation of leading consultancy firm McKinsey arising from a recent insider trading investigation into the affairs of Raja Gupta who led the firm for ten years until his retirement a few years ago.   Could either of those firms have predicted those high-impact events, except with the benefit of hindsight?

Black Swan Events

Nassim Nicolas Taleb[1] defines a highly improbable event with extreme impact as a Black Swan event with three attributes: “First it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.  Second, it carries an extreme impact.  Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable”.  Classical risk management steps may have a part to play in the prevention of catastrophic albeit improbable disasters, but the very randomness of Black Swan events makes it impossible or difficult to plan for uncertainty.

In their client work, law firms tend to work across a practice spectrum with highly commoditised and systemised work at one end and tailored expert advisory services at the other end.  It is easier to supervise and control activities at the commoditised end of the spectrum than bespoke services which rely on brain-power, incisive thinking, cutting edge knowledge and dynamic service delivery by stellar experts.  Internally, partners of law firms manage their teams and individuals through daily interactions, feedback delivered “in the moment”, and on-the-job coaching.  Despite an increasingly technological world, much of the work of a law firm partner requires – and will continue to require – face-to-face contact with both clients and internally.

So the question then turns on the extent to which law firms can and should identify the likelihood and potential impact of scandals and things going wrong, and take steps to prevent or minimise the possibility of rogue behaviours, lapses of judgement or careless words.  The problem is of course that we tend to learn from both repetition and historical events from which we can apply an inductive process.  After all, it is difficult to apply inductive logic to events which have never happened before.  Consider for example the saying “it is difficult to get turkeys to vote for Christmas or Thanksgiving”.  This saying assumes that the turkey knows about Christmas or Thanksgiving.  But as Taleb points out[2] “Consider a turkey that is fed every day.  Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race “looking out for its best interests,” as politician would say.  On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey.  It will incur a revision of belief”.

Identifying Potential Ethical Risks

The first step in the classic risk management process is to identify possible risks and assess them for likely occurrence and impact

Many of the crises which have engulfed organisations arise from matters of ethics and integrity of behaviour. How these issues are handled will vary enormously from firm to firm depending on size and structure.  Some firms may decide that everything that partners get up to in their daily activities is entirely their affair and the small risk of misadventure is acceptable for the firm to bear as part of the rough and tumble of everyday life.  Other firms may take the view that ethical problems are likely to involve a very small minority of lawyers and that careful filtering out of potential trouble-makers will eradicate the risk.

However a law firm is structured (partnership, LLP, corporation or some alternative structure), it is self-evident that the collegiality of a people business requires both great care over membership selection and also a high degree of trust that all members can be relied upon to do the right thing. It is of course true that the values, norms and culture of the firm underpin the conduct of every member – at least most of the time.

But law firm leaders should always be asking themselves the difficult and challenging “What if?” questions. Performance pressures, stress, frustration, money worries and panic in the face of change can all cause depression and partner instability and can lead to anti-social or disruptive behaviour.  In hopefully rare cases, incidents of mental illness are not impossible to envisage. Some lawyers have also learned the hard way to take care that their private affairs do not impinge on their business affairs or cause conflicts of business.

Client pressure can also cause unwise or ethically unacceptable behaviour, such as overly-intimidating threats in pursuit of debts, or emails written in haste and repented later. As an example, it was reported recently that a partner and a former partner of a prominent London firm had been suspended by the Solicitors Disciplinary Tribunal after writing more than 6000 intimidating letters to individuals. What remains a mystery is the extent to which the leaders at the firm were aware of these letters at the time they were written.

The possibility of drugs and alcohol abuse also need to be assessed – not just in the light of damage to the firm’s reputation but also in relation to the cascading effect on other people resulting from addiction-related aberrant behaviours.  Law firm leaders must not just fall into the trap of considering wild and extreme bad behaviour.  Even normally mild mannered people can behave inappropriately in the heat of the moment.

Building Robust Systems

There are four things which a firm can do (or avoid doing).  First, an internal rule book can definitely help.  Many firms now have a partner code of practice which sets out the firm’s values and defines the expected behaviours of partners.  Hence, it helps to be able to discuss and agree some golden rules of behaviour and business ethics. Some firms also require partners regularly to declare private interests which may conflict, directorships that might cause conflicts of interest and any knowledge that they may have of any circumstances of which they should reasonably be aware which could affect the firm.  Lawyers can however be bloody minded in the face of rules.  Indeed the very impositions of best-intentioned control systems can also rebound and cause unexpected dire consequences. As Rosabeth Moss Kanter puts it[3] “Hemmed in by rules and treated as unimportant, people get even by overcontrolling their own turf, demanding tribute before responding to requests. They vent frustrations on others who are even more powerless. It’s like a cartoon sequence: The boss chastises a worker, who curses his wife, who yells at the child, who kicks the dog.”

A sound system of internal consistent and practical procedures reduces, but cannot eliminate, the possibility of poor judgement in decision-making, human error, control processes being deliberately circumvented by partners and others and the occurrence of unforeseeable circumstances.

Ethical considerations also sometimes form a difficult and somewhat grey area.  Cynthia Schoeman points out[4] that the Institute for Global Ethics has identified key areas of right versus right situations where leaders could face tricky ethical dilemma – short term versus long term, individual versus community, honesty versus loyalty and justice versus mercy. As she comments, “Dealing with situations where both options present a right choice is the toughest ethical challenge you will face. Your choice will be judged by others and could give rise to fissures, if not fault lines. How will it be perceived if you are merciful to the employee who stole because of dire need? What is the future impact of that choice? The challenge of right versus right dilemmas should not be underestimated. For example, how do you manage an employee whose loyalty to a former comrade overrides honestly in his/her decision not to reveal unethical conduct?”

The second step which firms can take is to reinforce the firm’s quality systems.  Training, file reviews, appraisals, client feedback and the increasing use of systemisation can all provide ways of developing the right behaviour and in some case can help to track aberrant or outlier behaviour.  Peer group reviews of major projects can also help to maintain quality while staff feedback (both formal and informal) can also provide early warnings of partners whose interpersonal behaviour has gone downhill.

Thirdly, firms can work to reinforce a robust culture where transparency, integrity, and fairness all build into a set of unwritten assumptions and rules (“the way things are done around here”) which highlight expected behaviours and clarify unacceptable conduct.   This area is, at best, a work in progress at many firms which are more characterised by the heterogeneity of the culture than any form of homogeneity in the sense of a normative environment in which day-to-day behaviour matches up to shared expectations of what ought to happen.  Even in firms with some form of prevailing culture, standards and the expected accompanying behaviours can also lead to possible trouble.  Targets and billing pressures can, for example, cause partners to make poor judgement calls.

The fourth action area is one of leadership. In an ideal world, the firm’s managing partner and department heads should be at least broadly aware of what their colleagues are up to.   In hindsight, leaders could have spotted (much earlier than they did)  many of the potentially catastrophic events suffered by newspapers with rogue reporters, banks with rogue traders, and professional service firms with partners who are collaborating with rogue clients. Management-by-walking-about can help to spot partners who are depressed, stressed or suffering an acute personal crisis.  I have also seen examples of sympathetic leaders who encourage a spirit of openness in which partners are encouraged to share and discuss problems, and to admit mistakes.

It is difficult and in some cases impossible to anticipate extreme or asymmetrical events, but the risk of ethical disasters and rogue partners can be reduced by robust systems.  In many cases, law firms cannot forecast natural disasters, countries facing sudden political or economic catastrophe, or clients suddenly going out of business.   Law firms can however reduce their exposure in the case of “accidents waiting to happen” through the building of robust systems, a dedication to the improvement of quality, the reinforcement of a positive and transparent culture and through consistent and watchful leadership.


[1] Taleb NN (2007) The Black Swan: The Impact of the Highly Improbable; Penguin Books

[2] Taleb NN (2007) The Black Swan: The Impact of the Highly Improbable; Penguin Books

[3] Kanter RM (2011) Powerlessness Corrupts;  Harvard Business Review July 2011

[4] Cynthia Schoeman (2011) Workplace Ethics: The New Fault Line Of Leadership; www. http://www.ethicsmonitor.co.za/New-Fault-Line.aspx