Source: Law360 - By Melissa Maleske
Law360, Chicago (May 17, 2016, 12:03 AM ET) -- As the U.S. and the corporate community become increasingly diverse, the law firms that don’t make efforts to address their diversity shortcomings will fall behind the competition, experts say.
In the broader corporate community that forms BigLaw’s client base, diversity pays off. Last year, McKinsey & Co. found that companies in the highest quartile of racial or ethnic diversity are 35 percent more likely to financially outperform companies in the bottom quartile. Also last year, Bersin by Deloitte found that the highest-performing companies — with higher cash flow, profitability and growth — make diversity and inclusion a priority and “align their diversity and inclusion strategy to organizational objectives.”
So it’s no surprise that corporations want to partner with law firms that have similar priorities. Corporate clients spend 25 percent more with legal teams that they consider "very diverse" than they spend with teams they see as “not at all diverse” or strictly male, according to legal research firm Acritas. So the sluggish-to-nonexistent progress reflected in Law360's 2016 Diversity Snapshot does not bode well for the future of firms that fail to move the needle.
"Competitive advantage will be derived by those firms that invest in diversity and understand the changing landscape," says Tom Sager, former general counsel at DuPont Co. and now a partner at Ballard Spahr LLP. "The demographics are so obvious to all now, and to be successful, over time you’re going to have to be a leader in this space, particularly as corporations wise up and understand that a lot of the work they do with the external world is done through their law firms."
Client Carrots and Sticks
Because of client demand, most law firms have become accustomed to submitting diversity demographics to clients and including the information in their pitches. A central component of DuPont’s famed legal model was law firm convergence, and diversity was one consideration the company used to trim down its panels, Sager says. The law department also doled out cash awards, trophies and public recognition to the firms that made the most progress on diversity.
“Of course, award aside, the big driver is consciously making the effort to give them more work,” Sager says.
Diversity incentives come in many forms within corporate legal departments. Microsoft’s 15 “premier provider” law firms receive bonuses of 2 percent of the prior year’s fees if they hit diversity goals, and offers additional bonuses for the firms that hit other benchmarks, such as partner and management committee diversity, diversity of relationship partners and diversity of partners who billed for Microsoft matters as reflected in the number of hours. Since 2008, the percentage of hours worked by diverse attorneys on Microsoft matters has risen to 48.2 percent from 33.6 percent, GC Brad Smith said last year.
In-house lawyers at Microsoft are also incentivized to hire diverse legal service providers: Senior legal department members only receive their year-end bonus if at least 75 percent of law firms received theirs.
Many general counsel also reserve the right to unleash punitive measures on law firms that aren’t measuring up. When Sager began sending law firms requests for diversity numbers and requesting more minority and female counsel be assigned to DuPont work, he dropped a few firms that reacted with “egregious conduct” that included making insensitive remarks and falsifying data, he says.
At a corporate legal operations conference earlier this month, Wal-Mart Stores Inc. associate general counsel Yoon Chang said that the company has fired outside legal suppliers who didn’t take the legal department’s diversity program seriously. The ability of in-house lawyers to take work away from firms that didn’t measure up gave them leverage in ensuring their outside counsel teams were diverse, she said.
MetLife Inc. general counsel Ricardo Anzaldua, a board member of the Minority Corporate Counsel Association, is another general counsel that is rolling out a program to hold firms accountable. At least one person on each of the company’s outside legal teams will have to be a minority or female lawyer. Additionally, in an effort to crack down on firms that roll out token minorities for pitch meetings only to minimize their role in the relationship down the road, MetLife lawyers check billing statements to ensure the lawyers in the pitch actually are performing their work.
When firms do not cooperate, Anzaldua will terminate relationships with firms, even mid project if necessary and possible, says MCCA CEO Jean Lee, who until earlier this year was an assistant general counsel at JPMorgan Chase & Co.
"One thing that everyone talks about and that I have personally seen is that [lack of diversity] affects your bottom-line business,” Lee says. “Firms are going to continuously lose business because companies are going to demand it because their consumer base and their clients are demanding it."
The Bigger Picture
In a highly competitive legal space, there is always another firm that can do the work just as well, even at the highest echelons, notes Leslie Richards-Yellen, the chief diversity officer at Hinshaw & Culbertson LLP and a former in-house lawyer. More and more, she says, corporations don’t just want to hire a law firm — they want to form a relationship that can add value to the corporation’s brand, and law firms add value when they are more diverse.
Making progress on diversity also reflects that a firm is introspective about its strengths and weaknesses, Richards-Yellen says.
“Diversity is really interesting for a law firm because to do it well, you have to understand how you operate, how bias operates in your culture, how you can develop talent and how you can develop talent consistently over time,” Richards-Yellen says. “If you understand all of that about your firm, then you’re a stronger competitor because you’ve got to be an organization a company would want to partner with. If you can’t improve, you will become a weaker competitor.”
What’s more, the legal space is one in which a diversity of viewpoints as well as a diverse appearance to the outside world can lead to better results for the client. Five people with different backgrounds are likely to see the world differently and cover more angles in building a legal and business strategy. An all-white, all-male legal team may not go over well with a diverse set of jurors.
The case for legal diversity isn't just about profits per partner. It's also about outcomes, abilities and the strength of an outside team.
"It's so often the case now that we're making pitches on behalf of corporations that are probably suffering from any number of biases in the minds of regulators, judges, juries, politicians," Sager says. "You need to begin to build out your team in a way that not only advances arguments credibly and with merit, but that reflects an entirely different group of advocates that are energized and passionate about the cause of the client they’re representing."
While progress may be sluggish, Leadership Council on Legal Diversity President Robert Grey says law firm leadership and future law firm leaders largely understand the business case for diversity and understand that to stay competitive, firms need to make wise business decisions including being socially responsible and working to build diverse pools of talent.
"It’s sort of inevitable that firms will feel the effects of the business case for diversity," Grey says. "To have the strongest communities professionally, culturally and otherwise will include the development of a diverse pool of individuals to make that happen. It's slow, it is sometimes discouraging, but it is inevitable."
--Editing by Mark Lebetkin and Philip Shea.