To be better strangers

Management themes such as client, knowledge and risk management, marketing and effective HR, are integrated through cultural ideals of teamwork, collegiality, communication and consensus. All are part of a management lingo that has penetrated the workings of the modern law firm, marking the move of many from a traditional partnership to corporate ideals. However, is this really the best way forward for a professional practice? Christopher Honeyman Brown, chief executive of ASB Law, asks whether law firms know just what they are risking when they embrace the concepts of the business world.

The words of William Shakespeare: “I do desire we may be better strangers,” may seem a strange position from which to start a review of independence in the modern 21st century, where so much importance is put on interactive human relationships in the business world. But the whole concept of independence depends ultimately on an absence or at the least a diminution of interdependence on other human relationships.

What does independence mean? The dictionary definition says: “The state or quality of being independent; freedom from dependence; exemption from reliance on, or control by, others; self-subsistence or maintenance; direction of one’s own affairs without interference.”

Why is independence such an important concept in the modern business world? Principally because those making business decisions want to know that they can rely on information, assessments, reviews and opinions that are used to support their decisions. And when that support is offered with the qualification of independence, it is typically escalated to a much higher level of reliability and trustworthiness than other material. This is particularly the case when financial decisions are being taken and even more so when those taking the decision are either less sophisticated or less informed.

An independent adviser is believed to be, in the words of Benjamin Franklin: “Lord of myself, accountable to none.” The way of the modern business world suggests, however, that this is nearly impossible to achieve.

There have been a number of financial failures over time and there has recently been a crop of failures that question what the apparently independent professionals were doing and why they did not blow the whistle before catastrophe struck. Indeed, some of these failures were so blatantly obvious, once the facts and circumstances came to light, that it is hard not to imagine that there was collusion between the executive management of the business and its external, independent advisers.

Examining the world of one independent professional, the financial auditor, true independence operates on three levels: professional, organisational and personal.

Professional independence

As the website of the Institute of Chartered Accountants in England & Wales (ICAEW) readily admits: “The integrity and accountability of the professions used to be taken as given. However, a more questioning public are increasingly looking for independent confirmation.”

The ICAEW sets out some fundamental principles for its members to follow and has recently updated these to include some detailed guidance on independence. For example, the guidance says: “Independence should be ensured by assessing and documenting, for each engagement, the actual or perceived threats to independence through self-interest, self-review, advocacy, familiarity and intimidation.” The International Federation of Accountants has issued a revised independence code, the principles of which will be, or have been, adopted by national institutions.

All these guidance principles are focused, however, on the standards expected of the individual members and the firms to which they belong rather than the governing body itself. A key ingredient of professional independence is the rigour with which the individual’s professional body guards itself from threats to its independence.

By law, only a member of a specified profession or professional body can carry out the role of auditor, charged with the independent review of and opinion on financial statements. In England, solicitors are governed by the Solicitors’ Act and regulated by the Law Society, which has laid down clear rules governing the conduct of solicitors. The courts will also comment on the conduct of solicitors where it is exposed within the context of court proceedings. Again, only persons qualified and admitted by the Law Society can act as solicitors.

These closed professional shops lead to an inherent lack of independence, which demands the very highest standard of conduct both by the professional body and its member. Hand in glove with this standard is the need to be rigorous in the enforcement of independence and to carry out that enforcement with a view to protecting the public rather than the professional body or its members.

It is difficult to see how this can be delivered if the professional body is a self-regulating body and apparent or perceived breaches of the principles of independence are not subjected to external scrutiny. The difficulty of self-regulation is that all too often, those sitting in judgement can “carry through” their own professional experiences and offer them in mitigation as they come to their conclusions on the breach under review. There is always a risk that outsiders will tarnish the result of any enquiry with a challenge of self-serving protection of the member under scrutiny, if the outcome of the enquiry is not to their liking.

Having said this, professional bodies are sufficiently aware of the need to satisfy the regulators, Parliament and the public, so that they are now actively seeking to improve the rigour of the policing of their membership. The key issue is whether or not the profession should be self-regulated or whether an independent body made up of non-professionals should have more say in that process.

Organisational independence

Most professions regulate member firms by controlling who can and cannot be members of those firms. Sometimes it is possible to have people who are not professionally qualified to be partners or part owners but membership of member firms must largely be by qualified people.

This though is not the key issue. The modern professional business long ago adopted a business-like approach to management. Many firms have adopted a more meritocratic approach to partners’ rewards, with appraisal schemes to direct performance and contribution towards specific areas. These strong, shared values and corporate-style culture all govern the behaviour of the individual.

Moreover, the recent wave of high-value, professional-negligence actions and settlements has meant that it is of paramount importance to keep insurance underwriters satisfied with the quality of risk-management systems and adherence by professionals within the business to those systems. The financial importance to an organisation of its ability to maintain adequate professional-indemnity insurance has become a priority. This leads to a need for partner supervision, a strong culture of consultation on non-standard opinions and a more processed approach to the conduct of work. The problem with a strong risk-management culture is that too often it leads to a controlling environment in which the individual is required to conform to a given standard.

While these issues are all developed in the interests of a healthy, well-managed and profitable business, they combine to have an impact on the individuals operating within the organisation.

A strong culture, where consultation with others is required and where risk managers must be brought into the validation or even origination of difficult opinions will result in the neutralisation of individual independence of action and expression of opinion. The professional, perceived by outsiders as being independent, will in fact be entirely dependent on the attitude of the organisation within which they are operating.

It is worth reflecting whether the strong corporate culture and consultative environment operating in Arthur Andersen might have operated to prevent one or more individuals working on the Enron business from speaking out independently of the approved line.

The structure of an organisation will also impact its independence. For instance, a corporate board that has a majority of executive directors will tend to operate in support of executive management and not necessarily in the interest of the shareholders to whom the directors are responsible. A professional services firm that is subjected to review by outsiders, or which has a properly structured approach to governance with external “directors”, will be able to claim more transparency in its operation.

Most important is the way in which the culture of the professional firm operates. A culture, which is mainly built around controlling processes, which work to prevent individuality, will be at risk. Alternatively, an empowering culture, where individuals are encouraged to speak their mind and express their own opinions, will be more likely to create an environment where potential failures can come to light. The key issue in such a culture is to ensure that there is no “blame culture” and that there is an appropriate balance between allowing the individual to speak their mind without harming the organisation. This is not always easy and will depend on the circumstances and the response when a failure is brought to light.

Personal independence

However well the professional bodies regulate and supervise independence, and organisations go about supporting and promoting independence, true success will depend on the way in which individuals operate and how they let the organisation in which they work impact on their personal and professional independence.

Another definition of independence, taken in the context of financial independence, might be that an individual has sufficient means for a comfortable livelihood. And herein lies the rub.

For modern-day professionals, there is a steady reliance on the regular flow of profit to support their lifestyle. And where the professional is living in a country where lifestyle is supported by debt to provide housing, education for children or by a need for personal-pension provision, the need to sustain income is of paramount importance.

Couple this over-riding financial need with an operating culture where the individual must be seen to go along with the collegiate line, not rock the boat or threaten the firm’s income streams, and a disaster is looming. Add further ingredients of performance-related profit shares, short notice periods and the threat of underwriters seeking assurance of individual compliance with operating procedures and standards, and the dangers are obvious.

Moreover, in the hunt for business, and, therefore, increased revenue for the firm and reward for the individual, professionals from all walks of life are often far too quick to persuade themselves that they can act on more than one side of a transaction; for example, the accountant acting for a company’s directors and its pension-fund trustees, or the solicitor acting for an equity house and bank in a financing transaction. Too often, the claim is made that the various parties have accepted the inherent conflict – but that doesn’t remove the threat of independence. A partner leading a major transaction, which is being worked under a contingency-fee arrangement, faces horrendous pressure as the transaction day draws nearer and some difficult issue that may threaten the transaction is unearthed.

What pressure can a partner absorb when faced with one of the firm’s leading clients who takes an aggressive stance to profit recognition? What happens when, by force of personality, a senior executive of a client dominates the personality of the professional to the point that the professional is eager to please and becomes prepared to bend their judgement to satisfy the executive? Threat of loss of the client relationship and all the consequences for continuity of partnership, or profit share, may well be more than enough to lead the professional to prejudice their own standard of professional independence, forego their inherent integrity and over-ride the firm’s operating procedures.

It is at ground level that independence has to operate effectively if the world is to rely on professional opinion. This means that professional organisations have to recognise the need to let the light in on their intellectual world. They must encourage a culture where individuals are free to express their professional judgement without fear, where their professional judgement cannot be prejudiced by the threat of reward systems, and where personal pressure cannot be brought to bear, as there are no threatening consequences.

It is individuals who are independent and who make organisations independent. This means the priority has to change to make independence the critical success factor and not profit. Perhaps the day will come when client-relationship management, whereby the professional really gets to know their client, will give way to allow the professional to be a better stranger.

Christopher Honeyman Brown is chief executive of ASB Law. He can be contacted at: christopher.honeymanbrown@asb-law.com.