Shearman and Sterling, the venerable 131-year-old law firm known for advising on some of the highest-profile mergers and acquisitions in recent years, has been encouraging some of its own partners to leave.
This quiet trickle-a kind of reverse-centrifugal counterpoint to the centripetal corporate consolidations whose legal affairs have made the firm rich and famous-has been underway for about a year, said three recently departed Shearman lawyers, including two partners who said they were encouraged to leave.
It has a unique resonance not only because of the firm’s stature-it is among those old-line “white shoe” firms where, traditionally, partners are lifers-but also because it’s been only three and a half years since the firm actively laid off about 90 associates in a messy bloodletting some employees have since nicknamed the “Shearminations.”
Shearman and Sterling is hardly unique: As in many industries, lifers are becoming rarities in law. But an examination of Shearman’s numbers, put together from interviews with former partners and employees (the firm would not provide any official account), suggests that the firm is, at the very least, on the leading edge of that trend among New York’s white-shoe practices.
Shearman’s chief marketing officer, Jolene Overbeck, said it would be “highly inappropriate” to discuss individual departures. “Every law firm has partners leave for a variety of reasons throughout the year, and Shearman is no different in that,” she said. “We are no different than any law firm in the elite category.”
The number of Shearman partners who were told that their prospects at the firm were not good, according to a recently departed lawyer, was 22 or 23 last year, and a handful more in 2005. Another lawyer, a former partner of the firm, said he’d heard that between 17 and 20 were affected in 2004. According to the firm, there were 229 partners at the end of 2003, which would mean that at least between 7 and 10 percent of the then partnership has departed. Meanwhile, the firm has added lawyers in several areas, including bulking up its litigation department with eight new partners. At the end of 2004, there were 223 partners at the firm.
The encouraged departures appear to have applied not only to partners in New York, where the firm is headquartered, but to those in Europe as well. A current partner, who asked not to be named, said he knew of at least three partners in Germany in this situation.
“There are people who have left the firm whose practices no longer appeared to be as good a fit as they once were,” the partner said.
According to four former Shearman lawyers familiar with the events of the past year, the partners haven’t been asked to leave outright. Such a move would require 75 percent of the partners to approve it, said a former partner. Instead, the task of easing out their colleagues has fallen to the partners on the compensation and policy committees. They have given out predictions of future earnings-a calculation that affects each partner’s compensation-so low that the partners in question usually leave of their own volition.
One of the German partners eased out said that he had been told that if he stayed past 2004, his compensation would be reduced by 25 percent, the maximum that the partnership agreement would allow in one year.
“In the end, it was clear that they wanted the partners to leave,” he said.
Another partner, who was based in New York, described it as a “friendly departure,” but noted that he had a nondisclosure agreement preventing him from discussing the terms.
“It’s more dignified and less draconian. The effect is the same, ultimately-the power of the purse is very great,” said another former partner.
At a firm like Shearman and Sterling, where a telex number is still listed on the letterhead and the receptionist asks, doing her best Miss Moneypenny, “Would you like me to stay on the line until Ms. Overbeck picks up the phone?”, the significance of the departures is magnified.
The firm was started in 1873. Early clients included industrialist Jay Gould, railway magnates George Stephen and Donald Smith, members of the Rockefeller family and-in a relationship that persists and pays the bills to this day-James Stillman, whose National City Bank of New York was a corporate ancestor of Citibank.
When John Sterling, one of the founding partners, died in 1918, he left a $15 million bequest to Yale that was used to fund the Sterling professorships and a variety of buildings, including the Sterling Memorial Library. Thomas Shearman, his partner, became famous as a pro bono criminal-defense lawyer.
Since that time, Shearman and Sterling has been very much the kind of traditional firm where “making partner” was a last stop in one’s career, even for a young and promising lawyer.
“It’s amazing …. Many years ago, there had been the expectation that you put your time in as an associate and that partnership was for life. And that one had a reasonable expectation-after having worked so hard for eight, 10 years-that this was something that you could count on. This is evidence that that’s not always so anymore,” said the former Shearman partner who’d heard about the departures.
In the boom times of 1999 and 2000, according to the recently departed lawyer, the firm-like many others-made record numbers of partners in the M. and A. and capital-markets areas.
Since then there’s been a downturn in those areas, though the trade publications are already heralding the return of the deal.
The Shearminations only served to underscore the firm’s problems when the tech bubble burst.
They were among the first layoffs to be announced in New York after the economic downturn in 2001.
The event was notable for how it was handled, both internally and in the press. In mid-October of that year, about 10 M. and A. associates were laid off. But the firm didn’t come clean about the layoffs until over a week later, when associates received a late-Friday-afternoon e-mail saying “a number of associates will be leaving over the next few months.”
Firm management gave contradictory statements about the basis for the cuts. In one interview, managing partner Robert Treuhold claimed that the layoffs were based on performance. In senior partner David Heleniak’s memo, however, he cited “an economy in which many of our largest clients are letting people go by the thousands.”
“At the time, it created a huge issue in the firm. You felt that the firm wasn’t being honest,” said the recently departed Shearman lawyer.
So is this current bout the Shearminations, Part II?
“I’m just amazed that this is happening, but at the same time would like to think that this too shall pass,” the former Shearman partner said.
A recruiter was also surprised. “They’re somebody you think of as solid as a rock,” said Alisa F. Levin, a principal at the legal search firm Greene-Levin-Snyder.
The departures have created a firestorm inside the firm that reached its nadir in a memo sent anonymously to partners at their home addresses in the middle of January, right after the 2004 financial results became clear.
The memo, a copy of which was obtained by The Observer, was written on Shearman and Sterling letterhead and undated. It was significant not so much for the information it contained as for the way it solidified internally the notion that something was amiss at the firm. The anonymous writer savages the current leadership of the firm, calling for the resignation of the “senior partner and senior management.”
The memo sets forth the propositions that the Shearminations didn’t go far enough: Too few associates were laid off in 2001, the writer posits, and with the glut of associates, “profits, reputation, and morale continued to suffer.”
“We were then told we must lay off our partners because we were in a crisis-a crisis of our own making,” it reads. “As luck would have it, heads did roll-those of our partners.”
“It’s an anonymous communication. We have no idea who it’s from and why they sent it, and it’s got no credence whatsoever,” said Ms. Overbeck. “It was met with internal disdain.”
But not universally.
“Until that memo was written, it sort of hadn’t spilled into the broader consciousness of the firm, I don’t think,” said another former Shearman lawyer. “Obviously, in terms of the associates and the people outside the partnership being really attuned to what was going on, and the fact that there was some infighting within the partnership. I’m sure that the partners were aware of it. It only really became more widespread when that memo was written and leaked.”
What’s puzzling is that, as of late, the firm’s results have been more than respectable. Overall revenue was up 7 percent for 2004. The American Lawyer’s April issue has the firm tied for third place for the number of top 10 rankings they have in the deal-making league tables. The firm advised technology company SunGard, which was recently acquired for $11.3 billion by seven private equity firms, and it was recently retained by Morgan Stanley to assist in the defense upon the last-minute withdrawl of Kirkland and Ellis during the company’s battle with Ron Perelman.
But 2003-the year that seems to have prompted these decisions-was a rough one for Shearman and Sterling. The closely watched profits-per-partner figure was reported in The American Lawyer this past summer as declining 4.7 percent, to $1.215 million in 2003. For 2004, it’s up 2 percent.
Shearmanites speculate on a range of explanations for the encouraged departures. The obvious explanation is that the firm’s management was unhappy with 2003 and 2004’s profits-per-partner numbers. Though the results would be enviable for most firms, Shearman has watched its self-identified competitors-Cleary, Gottlieb and Skadden, Arps-hover around the $1.5 million mark, and others like Simpson, Thacher and Sullivan and Cromwell have inched much closer to the $2 million mark in the last American Lawyer rankings.
“I don’t think that there’s any secret to the fact that we would like to be pegging our profitability numbers to those of our peer firms. At some level, it’s a measure of success,” said the current Shearman partner.
“I don’t know that it’s about personal earnings as [much as] it’s about our measure of profitability as an institution and how we compare. You’ve got a lot of very competitive people” at Shearman, the partner added.
But one of the former Shearman lawyers added: “Part of their perceived problems are because of how they’re judging themselves.”
The firm openly acknowledges that it has been in past years overly dependent on its marquee mergers-and-acquisition practice, so it’s currently trying to build up asset management, litigation and other countercyclical practice areas-a move that seems well considered.
And as the bloodletting operation moved closer to the firm’s heart, it has been mostly corporate partners who have been encouraged to leave, and many have been around the “fifth-year vintage.”
“They’re trying to fix, in a funny way, problems which have been in the partnership for a number of years-bad management decisions on a number of fronts,” said the former New York–based partner who told The Observer he was encouraged to leave. “They’re trying to fix it in a very … what I would call an ‘unpartnership-like’ way. But that’s life in the big city. Frankly, for a lot people, I think it will be better. For me, it’s certainly better.”