THE NEW CLOSED SHOP: WHO’SCHEQUES DECIDING ONAND PAY THE? CITY THE MAKE UP OF REMUNERATION COMMITTEES High Pay Centre About the High Pay Centre
The High Pay Centre is an The High Pay Centre was formed independent non-party think tank following the findings of the High established to monitor pay at the Pay Commission. The High Pay top of the income distribution and Commission was an independent set out a road map towards better inquiry into high pay and boardroom business and economic success. pay across the public and private sectors in the UK, launched in 2009. We aim to produce high quality research and develop a greater understanding of top rewards, company accountability and For more information about our work business performance. We will go to highpaycentre.org communicate evidence for change to policymakers, companies and Follow us on Twitter @HighPayCentre other interested parties to build a consensus for business renewal. Like us on Facebook
The High Pay Centre is resolutely independent and strictly non- partisan. It is increasingly clear that there has been a policy and market failure in relation to pay at the top of companies and the structures of business over a period of years under all governments. It is now essential to persuade all parties that there is a better way.
2 Cheques and Contents the City
4 Foreword
5 Executive Summary
8 The Big-4, the Magic Circle and the Corporate Elite
10 Partners in the ‘Big-4’ accounting firms: organisation, remuneration and influence
26 Partners in the ‘Magic Circle’ law firms: organisation, remuneration and influence
32 Conclusion: transparency, incumbency, remuneration and countervailing power
26 Notes and sources
3 High Pay Centre Foreword
Deborah Hargreaves Given the high levels of disclosure, the pay of top bosses has attracted The legal and accountancy much opprobrium from public and professions are an integral part of policymakers alike. our corporate landscape. They are important guardians of business Professional services firms are more behaviour and fulfil a vital public role opaque, but their pay can approach in holding companies to account. the levels of the corporate world. This makes them part of a highly- However, their disclosure of financial paid corporate and City elite. It also information has lagged behind that raises questions about their ability of our big public businesses. to challenge the entrenched high pay culture. Chief executives of quoted companies are required to reveal This report is our attempt to most of the details of their complex understand the forces at work in pay packages in their annual remuneration of top accountants reports. Corporate remuneration and lawyers and how they reports and policy are also voted on contribute to the top pay culture of by shareholders. the City.
4 Cheques and Executive Summary the City
Lawyers and accountants are part The Big-4 all originated in the UK of a closely-connected corporate although they have built large global elite that is paid extremely well. We businesses. They are a spectacular estimate that the nine elite law and British success story. Between them, accounting firms covered in this they are responsible for the auditing report, paid around 1,400 partners of 96% of FTSE 350 companies and more than £1m last year. But while also run thriving consultancy arms. public company executives must The proportion of profit accounted disclose most of the details of their for by consultancy ranges from pay packages, remuneration for just over 20% at PwC to over 50% professional services firms has at KPMG. slipped below the radar. Remuneration practices at the Big-4 The professional firms are crucial are also comparable with those at to effective corporate governance. large corporations. Average ‘profit They grow out of society’s deep- per partner’ is just over £700,000 seated distrust of the power of per year for each firm, although business. As such, they ensure this is not divided equally across all that company accounts are true partners. We estimate that there are and accurate, and that companies around 270 partners across all firms obey the law. Without functional, earning over £1m per year. The effective lawyers and accountants, senior partners at PwC, Deloitte and a fair and open economy that enjoys KPMG were paid £3.6m, £2.7m and the confidence of the public is £2.4m respectively, last year. not possible. The accountancy firms share However, their role has become and reinforce a mind-set that one of facilitating corporate strategy, emphasises corporate and rather than holding companies to individual financial gain. There account. The professional services is little or no apparent self-doubt firms also reinforce the culture attached to the receipt of high of high pay that is prevalent at rewards and they are hardly likely big companies and benefit from to restrain those that they advise it themselves. and assist in enjoying similarly substantial gains. Indeed, the ability Accountants of the Big-4 partners to sustain their income streams depends on their The ‘Big 4’ accountancy firms – ability to respond to the priorities PricewaterhouseCoopers, Deloitte, of the corporate executives who KPMG and EY – dominate the UK employ them. accountancy market. The revenues of their UK arms are similar to those Alumni of the Big-4– all imbued of publicly-listed companies in the with the culture and worldview of top half of the FTSE 350, although those organisations –are heavily the Big-4 are all structured as represented on FTSE 100 company ‘Limited Liability Partnerships’. boards – 331 out of 976 FTSE 100 executive and non-executive 5 High Pay Centre
directors have a background in Partnership, meaning it enjoys accountancy or finance. 58 FTSE complete secrecy and does not 100 Finance Directors are qualified have to produce audited accounts. Chartered Accountants, with 46 having previously worked for The profit margins for Freshfields the Big-4. and Linklaters were an astonishing 45% in 2011, while average Representatives of the Big-4 also profit-per-equity-partner (PEP) for dominate the Financial Reporting each firm was more than £1m in Council, responsible for regulating 2013. Though PEP has remained auditing and accounting practices, reasonably constant since 2008, as well as the development and it increased by 98% from 2000 to enforcement of the UK Corporate 2008, despite significant increases Governance Code, responsible, in the number of partners. amongst other things, for guidelines on pay for corporate executives. We estimate there are around 1,100 senior lawyers at the Magic Circle As of May 2014, five of the earning over £1m. The highest- fifteen FRC board members were paid partners at Allen and Overy, accountants (all former partners Freshfields and linklaters were of PwC, KPMG or EY). The Codes paid £1.6m, £2.5m and £2.3m and Standards Committee, which respectively in 2013. (Figures are has responsibility for Corporate not available for the other two Magic Governance, is composed of nine Circle firms) people including four accountants, two from PwC and two from EY. Taken with the 270 accountants, this means that the nine firms looked The close relationship enjoyed at as part of this study account for between the Big-4 firms, the FRC roughly13% of the 11,000 people and the executives of Britain’s in the UK with incomes of more largest companies can raise than £1m. questions about the influence of the elite accountancy firms over UK Studies have indicated that trainees corporate governance. at law firms are 13 times more likely than the average person to Lawyers have been privately educated. One third of trainees at Magic The dominance of the ‘Magic Circle firms attended Oxford or Circle’ of law firms – Allen and Cambridge University. Overy, Clifford Chance, Linklaters, Freshfields Bruckhaus Derringer The role of the Magic Circle firms and Slaughter and May - is arguably appears to go beyond ensuring even more striking. The first four are mere compliance with the law to all Limited Liability Partnerships, converting ‘the law’ into a resource generating revenues of over which can be employed by £1 billion each, while Slaughter corporate management to mould and May is a smaller General and deliver corporate strategy. 6 Cheques and the City
This is reflected in a number of respect accorded to English law, areas. For example in interpreting on the institutions of British justice, the law: On the basis of experience, and the whole infrastructure of expertise and depth of knowledge commercial law created and of industrial sectors, the lawyers safeguarded by the British state. can define what the law will permit, rather than what it forbids. Conclusion
Second, as formidable adversaries While big companies produce very in dispute resolution they can liaise, high levels of information on the pay negotiate and litigate against legal of their top executives, professional challengers, regulators and the services firms are more opaque. courts themselves, to minimise Yet we would argue that more constraints on corporate activity. transparency is justified in enabling us to understand a sector crucial to Third, they can assist companies the health of the British economy. in influencing legislation, designing Their services are, after all, regulation and, increasingly, in conducted on behalf of government creating platforms of self-regulation and the public. which facilitate corporate goals. This is a role which includes advising The professional firms represent and lobbying government through a substantial part of the British secondments or the outsourcing of corporate landscape and also legal advice. reinforce a culture of high pay across corporate Britain. When their All the Magic Circle firms stress own partners are so well rewarded, their commitment to innovation and it is not likely that they will provide a entrepreneurship. They search for counterweight to the prevailing pay new business opportunities. Much practices of top companies. of this involves the definition and even the creation of new markets. A recent example is provided by the rapid growth in the utilisation of ‘big data’ which raises tricky legal issues to do with ownership, privacy, storage and intellectual property.
The creation of huge transnational law firms has been another extraordinary British success story with UK and American firms dominating the international legal profession. However, although they behave as very private undertakings, the Magic Circle firms are reliant on the whole apparatus of English law. They draw on the 7 High Pay Centre The Big-4, the Magic Circle and the Corporate Elite
Professionals within the law. If they can be seen clearly corporate elite. to comply with these accounting and legal requirements, they are The debate about inequality in regarded as legitimate and are Britain can draw on some stark free to pursue their commercial contrasts. It can, for instance, strategies. Companies cannot contrast the 5.2 million workers operate without capable in Britain paid less than the living accountants and lawyers but the wage (of £7.65 per hour, see dependence is two-way and this Living Wage Commission, 2014: Report explores the reciprocal 13); with the average FTSE 100 relationship between a managerial CEO remuneration of £4.5 million elite and these professional elites. (High Pay Centre, 2013: 4). Such contrasts emphasise a growing It is striking that the large polarisation in income distribution companies upon which the which requires better understanding corporate elite is centred are at both ends of the scale to facilitate serviced by a small group of a more sophisticated debate. This accounting and law firms. The Report deals with the top end of the ‘Big-4’ and ‘The Magic Circle’ firms remuneration scale and extends the constitute the elite of their respective discussion beyond CEOs to look at professions and are so closely other elements of what has been involved with the corporate elite termed ‘the corporate elite’ (Wilks, that they appear as indispensible 2013, ch. 4). constituents of that wider elite. The partners of these large professional The corporate elite is conventionally firms have close commercial equated with the boards of relations with senior corporate quoted companies. In a way this management, they appear to share is a soft target, biased towards their norms, are engaged with easily available data. Quoted shared social networks, and they companies are required to publish share their access to exceptionally substantial details of remuneration generous remuneration. This Report packages in annual reports. But seeks to explore that relationship, the corporate elite is much wider initially with a factual review of covering, for instance, private the firms and their remuneration equity and the senior executives of patterns, and going on to present many non-quoted companies and some more speculative impressions service providers. of their modes of influence as members of the corporate elite. The The professional services provided Report seeks to increase the level by accountants and lawyers are of transparency, and hence debate, special because they guarantee about the financial performance compliance with two mandatory of the firms and their partners. requirements imposed by society The impetus for promoting debate on the operations of companies. springs from the High Pay Centre’s They must produce true and fair interest in inequality, as previously accounts, and they must obey the mentioned, but also by three 8 Cheques and the City
further areas of unease to which we return in the conclusion. In a word they are unease about: persistent dominance; the normalisation of very high levels of remuneration; and the implications for the proper exertion of countervailing power. We begin with a profile of the Big-4 accountants before turning to the Magic Circle.
9 High Pay Centre Partners in the ‘Big-4’ accounting firms: Notes: UK figures are for 2013 from annual organisation, remuneration and influence reports; EY figures from Accountancy Age 13/1/14; global turnover is from www.Big4.com, There is a very clear elite of (PwC); Deloitte; KPMG; and EY Performance Analysis, 2012; global employees accounting firms in the UK. The ‘Big- (formerly known as Ernst & Young). (and EY UK employees) 4’ dominate the major accounting Until 2002 the “Big-4’ had been the from CC (2013): 22 and services of audit, tax planning and ‘Big-5’ but, in the wake of Enron, relate to 2011. Note also that, despite much management consulting. In fact Arthur Anderson melted down and discussion of diversity, they dominate the global markets its audit business was absorbed by and an average female employee proportion of for these services and are each the others. The current profile of the over 50%, only about part of huge global networks. The Big-4 is as follows: 15% of partners are women. The highest Big-4 are: PricewaterhouseCoopers level is in EY with 18%.
table 1 Profile of the ‘Big-4’
UK GLOBAL
Partners Employees Turnover (£mn) Employees Turnover ($bn)
PwC 874 18,000 2,689 161,000 32.1 Deloitte 740 14,549 2,515 181,566 31.3 KPMG 583 10,500 1,814 145,000 23.0 EY 529 10,800 1,630 152,000 24.4 Total 2,726 53,849 8,648
It is important to emphasise the half of the FTSE 350 – Deloitte the sheer size of these firms. Their same size as ITV, PwC about the global networks are breath-taking same size as Tate & Lyle. The elite but the UK firms are huge in their accounting firms have become own right. On the basis of their big business. revenue figures, if they were listed
Sources: SCEA (2011): they would all be in the upper The extent of their market 162; CC (2013): 46. dominance is clearest in the audit of large publicly quoted companies. A House of Lords select committee table 2 Audit share of the ‘Big-4’, 2010 emphasised their monopoly of large audits noting that ‘the audit FTSE 100 FTSE 250 FTSE 350 of large firms, in the UK and (%) (%) (%) internationally, is dominated by an PwC 40 27.3 31 oligopoly’ (SCEA, 2011: 9) and the Report was influential in persuading KPMG 23 22.2 23 the OFT to refer the audit market Deloitte 20 26.6 25 to the Competition Commission EY 16 18.7 17 which reported in October 2013. The pattern of market dominance Total 99 94.8 96 is stark: 10 Cheques and the City
These firms also dominate the British success story. Perhaps partly markets for high-level tax advice for this reason the Competition and planning, and have a big share Commission did not move of the management consultancy aggressively to end their control and mergers and acquisitions of the audit market or to break markets. They may also advise them up. Indeed, there is regular big companies on executive concern expressed about the risk remuneration. that another Arthur Anderson could reduce the Big-4 to the Big-3, that The ‘Big-4’ firms are astonishingly would be regarded as a disaster and successful. Like the law firms, to that extent these four firms are, in they expanded rapidly from the a familiar cliché, ‘too big to fail’. late 1980s through organic growth and mergers which culminated The dominance of the Big-4 has, with the creation of PwC in 1998. if anything, been consolidated by Subsequently they have shadowed the modest remedies put in place the globalisation of their corporate by the competition authorities clients to become steadily (basically requiring companies larger global entities and have to re-tender their audit providers strengthened their hold on UK and every ten years). That dominance global accounting markets. From is seen in absolute size; in market 2004 to 2008 they grew their global share; in partner remuneration; in revenue at an annual compound prestige and in their professional rate of 14% and, although they self-confidence. Their confidence suffered setbacks in 2008-2011, the and ambition could be symbolised trajectory of growth is re-establishing by their mission statements which, itself. Clearly, their dominance of for KPMG, includes the rather their markets has raised suspicions disconcerting declaration that of collusion, are they operating a they have ‘one clear ambition – to cartel? The Competition Commission dominate professional services in did not find evidence of a cartel and the UK’ (KPMG, 2013: 12). Those did not find evidence to substantiate who have had regulatory dealings other possible areas of wrongdoing with the firms observe a level of such as ‘bundling’ advice and audit professionalism and commitment activity; engaging in predatory that is simply not found in the ‘low ball’ pricing to retain audits; medium sized firms. or exercising undue influence over regulators. Yet their dominance is Organisation and operations remarkable. Their great incumbent advantages appear to be their The firms have various reputational success and their configurations of national and global networks which make them global legal forms but in the UK indispensible for global companies. they are all established as ‘Limited The Big-4 all originated in the Liability Partnerships’ (LLPs) under UK and continue to be strongly the Limited Liability Partnership influenced by their UK components. Act, 2000. The Act provides for In that sense they are a spectacular the firms to be recognised and 11 High Pay Centre
act as a corporate body. Unlike a of capital partners are required to traditional partnership the liability of pay into the firm to ‘prove’ that they the members is limited to the capital are not ‘employees’. they have subscribed and otherwise they bear no liability for the debts of Ironies of Cooperatives and the partnership or for the actions of Cobbler’s Shoes any of the other partners. There is no limit on the number of partners. This organisational model deserves The disclosure requirements include a moment’s consideration. Basically, the deposit of annual accounts at as far as partners are concerned, Companies House but the level they are running a cooperative. of detail is modest and the only Formally every partner is equal remuneration requirements are and the firms religiously maintain to show the overall total profit, this myth (see Empson et al, 2013). the names of the partners, and There is a degree of democracy the amount paid to the highest since the Senior Partner (effectively paid partner. This is a decidedly the CEO) of each firm is formally advantageous form of organisation elected and there are various and was introduced specifically to accountability mechanisms – help large law and accounting firms. certainly more democracy than a standard plc. In fact since partners LLPs pay no corporation tax, contribute capital (which is repaid but since the entire profit is when they retire) they are effectively Source: Accountancy Age, 50+50 Survey, attributable to the partners, they employee shareholders. So, the first 13/1/2014 pay income tax on their share of irony is that these acolytes of the Evidently, the firms do specialise to some the firm’s profits. There is a tax corporate form, whose audits and extent. PwC is biased advantage inasmuch as, since advice underpin the reputations and to audit whilst KPMG is more reliant on partners are not employees, the brands of large companies, follow a consulting. Within the firms do not pay employer’s NI far more participative organisational audit market there is on partner’s remuneration. The model than their clients. The second also specialisation by industry, thus Deloitte Revenue is currently challenging irony is that the accountants are do no real estate audits this arrangement and firms are the designers and custodians with the FTSE 350 and, more importantly, EY do considering increasing the amount of the British model of corporate not audit any banks. governance, yet they themselves avoid the whole corporate table 3 Big-4 revenue from main activities, 2013, governance framework, including (£mn) disclosure of board composition and remuneration. This is ‘the cobblers children’ irony – in the fairy tale the audit tax consulting total cobbler’s children have no shoes; in this case the auditors do not PwC 963 659 438 2,060 disclose. Deloitte 663 529 524 1,716 In operational terms these firms KPMG 469 380 925 1,774 are something of a professional EY 478 431 416 1,325 conglomerate. Their pattern of income is shown in table 3. 12 Cheques and the City
Profitability and remuneration by its member firms. In any case EY does not appear to submit The Big-4 are all highly profitable. UK accounts. Deloitte and KPMG Profits fell from 2009 but have now declare profit on each of their main recovered to pre-crash levels. activities but beyond that matters Three of the firms declare their UK are opaque. The Competition profits in their annual accounts but Commission found the lack of data provide relatively little detail. EY has frustrating. It tried and failed to work adopted a European structure and out profits per audit engagement Source: annual reports. in an odd incestuous relationship, or profits per partner. The overall EY do not disclose UK the UK partnership is owned by figures are: profitability and KPMG stopped producing EY Europe which is, in turn, owned UK reports in some of these years.
table 4 Profitability of the Big-4, (£mn)
2013 2012 2011 2010 2009 2008
PwC 765 740 727 665 668 675 Deloitte 642 560 542 593 581 621 KPMG 455 358 n/a n/a n/a n/a EY n/a
These profits are all attributable Three of the firms declare to the partners. They tend to be information on ‘average profit per distributed in full with deductions partner’, plus the legal requirement for annuities and benefits to retired to disclose the remuneration of the Sources: annual partners and in some cases a senior partner. This is what they reports; transparency small proportion is held back for tell us: reports; financial statements (and new projects. some specialist press coverage).
table 5 Average profit per partner of the Big-4 (£’000)
2013 2012 2011 2010 2009 2008 2007 2006
PwC 705 679 763 759 777 797 778 716 Deloitte 772 789 756 873 883 970 877 765 KPMG 712 580 683 763 671 685 685 806 EY n/a
13 High Pay Centre
There are some inconsistent figures about these levels of partner floating around which may derive remuneration. They are widely from a contrast between ‘average reported in the technical press and profit per partner’ and the profit included in annual league tables. actually distributed, ie. ‘distributed Firms seem comfortable with these profit per partner’. These figures numbers as evidence of the talents indicate a broad comparability and marketability of the firms and between the remuneration of their partners. Also, of course, they partners across the firms. The provide very attractive incentives Competition Commission found for recruitment and retention of that remuneration of partners highly talented graduates and across the Big-4 was very similar newly qualified accountants. In so that we can safely assume that contrast there have been occasional the rewards going to partners in rumblings about the remuneration EY will be similar to, but perhaps of Senior Partners. In 2005 a poll slightly lower than, those in their found that ‘84% of the 261 finance sister firms. There is a huge gulf directors polled believed that Big between partner remuneration in Four senior partners were paid the Big-4 and that in medium sized too much. Julian Groves, FD of firms. Big-4 partners receive at least Herts College, said partners were twice as much as partners in their earning ‘silly money’ and questioned nearest rivals and Deloitte partners whether they were ‘really earning it’ do particularly well. At an average of (Accountancy Age, 11/8/05). This over £700,000 in 2013 remuneration outburst was provoked by the £3.6 is substantial but has not (unlike the m pay package of Deloitte Senior lawyers) breached the £1 million Partner, John Connolly. This storm in barrier, although it should be noted a teacup does not appear to have that the averages are sensitive to affected Connolly’s remorselessly the number of partners. rising pay but it is interesting, as Note * Deloitte paid an old and a new senior seen in the figures below, that his partner in 2011. It is There is very limited criticism in successor, David Sproul, has been very difficult to find a Deloitte number the popular or the technical press taking more modest remuneration. for 2009.
table 6 Profit distributed to the Senior Partners of the Big-4 (£mn)
2013 2012 2011 2010 2009 2008 2007 2006
PwC 3.6 3.3 3.7 3.6 3.3 2.9 2.8 716 Deloitte 2.7 2.8 2.6/4.4 5.1 n/a 5.7 4.6 765 KPMG 2.4 n/a 2.6 2.7 n/a n/a n/a 806 EY n/a
14 Cheques and the City
The Senior Partners are powerful but The Big-4 and their influence not as dominant as CEOs (Empson in the corporate elite et al, 2013). Although they are elected by all the partners, they Why does it matter that this small personally choose their executive group of huge firms dominates the groups and are effectively managing market for accountancy services, large corporations. They are paid at and pays its senior people so slightly lower levels than FTSE CEOs lavishly? There are many different and two of the firms have begun to answers but here we concentrate disclose the total remuneration of on the role of the Big-4 in defining their Executive Groups (equivalent and disseminating a set of ideas to the Board of a company but about the operation and priorities of without non-executives) which large companies and how to define helps to give some sense of success in terms of financial and remuneration at the upper levels personal gain. This could be set in of the partner hierarchy. Thus the a larger picture about the role of 12 members of the PwC Executive financiers, finance and accounting Group (excluding the senior criteria in British stock market partner) received an average profit capitalism. It is regularly remarked distribution of £1.49 m in 2013, how British boardrooms and CEOs down from £1.54 m in 2012 see are disproportionately selected from table 7. the world of finance and accounting (as opposed, say, to scientists in This information on remuneration German boardrooms). For the time is thin and patchy. The firms are being, however, we will concentrate extremely sensitive about releasing on the mechanics of influence. more detailed remuneration data and exploit the legal requirements The partners of the Big-4 are closely and accounting recommended integrated into the operations practices to remain highly secretive. of large corporations, into the They released remuneration data to workings of the City and the key the Competition Commission inquiry issues of raising finance, and into but insisted that it be treated as the regulatory frameworks within commercially confidential and it was which large companies conduct fully redacted from the published their business. They authenticate Note: the Executive Group includes the report. None of the recruitment and and establish trust through audit Senior Partner survey agencies publish information and professional standards. They Source: Annual Reports on partner’s remuneration. The firms do not participate in Income Data table 7 Profit distributed to the executive group Services surveys. Towers Watson of PwC and KPMG (£mn) undertake a survey of partner and senior executive compensation but the results are confidential to the 2013 2012 2011 participating firms PwC 21.5 18.7 n/a KPMG 22 15.1 17.1 15 High Pay Centre
advise on strategy, on presentation, individual financial gain. At the on minimising tax, and on key corporate level, this stresses the decisions such as mergers and need to achieve success defined acquisitions. And they are part in standard criteria of maximising of an invisible but ubiquitous and revenues, cutting costs, increasing indispensible network of accounting profits. At the individual level, they personnel. As they engage with enjoy exceptional personal financial corporate executives (through rewards and the expectation that consultancy rather than audit) they those rewards will continue to grow share and reinforce a mind-set over their careers. There is little or that emphasises corporate and no apparent self-doubt attached
Box 1: The Heirarchy
It is evident that there is an elaborate hierarchy of status, influence and remuneration within the firms, reinforced by rigorous evaluation processes. There appears to be a gradation of rankings based on performance, ability and internal managerial roles rather than the type of work undertaken. The CC found that ‘there was no systematic difference in remuneration per partner for audit and non-audit partners’ (CC, 2013: 62). There are well-defined executive positions including the CEO and the equivalent of Chief Operating Officer, Chief Financial Officer and leaders of the main components of the matrix of services and products. It is wholly speculative but we might envisage a hierarchy composed of say:
Team leaders 40 % of total, average salary perhaps 467,000
High performance 30 % of total, average salary perhaps 697,000 leaders
Sector/area managers 20 % of total, average salary perhaps 943,000
Top-level managers 10 % of total, average salary perhaps 1,190,000
Note: wholly speculative assumptions but based on PwC 2013 numbers and the projection that each ‘group’ gets 150/ 200/ 250% more than basic partner remuneration.
So, given the total partner population of the Big-4 at 2,726 we might speculate that there are 270 top-level partners, all of whom have an income of well over £1 million. These are the people who are members of a more broadly defined corporate elite.
16 Cheques and the City
to the receipt of such rewards and and to lobby for favourable they are hardly likely to restrain regulation. As non-executives as those that they advise and assist well as finance directors many in enjoying similarly substantial retired Big-4 accountants join the gains. Indeed, the ability of the boards of large companies. Big-4 partners to sustain their income streams depends on their A second mode of influence ability to respond to the priorities is through regulation and the of the corporate executives who involvement of Big-4 accountants employ them. In helping to deliver in the design and even the corporate and individual financial implementation of financial success they are securing their own regulation. One example is the financial security. This is a powerful extent to which Big-4 tax advisers combination of legitimating ideology have influenced government tax and personal reward, nurtured in a policy through advice, consultancy rather closed and introverted world and the secondment of staff to work but celebrated by the City and on tax regulation. After a direct the financial press and consistent investigation of the Big-4 the Public with the dominant expectations of Accounts Committee presented shareholder capitalism. some of the most direct criticism to be found in an official report To put a morsel of flesh on this observing that ‘the close relationship argument that the Big-4 have that the four firms enjoy with influence which they employ to government creates a perception benefit the corporate elite let’s look that they wield undue influence on at a couple of avenues of influence, the tax system which they use to starting with the alumni network. their advantage’ (PAC, 2013: 4). Former employees and partners of the Big-4 are ubiquitous in the Who regulates the regulators? leadership of large corporations and financial regulation. A 2013 Then we come to the regulation of study of the 976 executive and non- the profession itself, and the design executive directors of the FTSE 100 and enforcement of corporate found that 331 of them were either governance, both of which fall accountants or had senior finance within the remit of the Financial experience. Of the 100 finance Reporting Council (FRC). The FRC directors on these boards 58 were began life as a purely voluntary qualified chartered accountants of exercise in self-regulation but whom 46 had previously worked it has steadily gained in stature for one of the Big-4 (Accountancy and importance and now is one Age, 2/11/13). These directors have of the central bodies in financial considerable political influence. regulation. It regulates audit For instance, Finance Directors of standards, the conduct of the audit the FTSE 100 organise themselves firms and, since 2012, accounting in ‘The 100 Group’ to define and standards, using delegated powers defend their commercial interests originating in the 2006 Companies
17 High Pay Centre
Act. It is also responsible for the of accountants and actuaries. There development and enforcement is scope for the levy to be made of corporate governance through compulsory by government but the the ‘UK Corporate Governance suspicion is that the FRC is anxious Code’ and the ‘Stewardship Code’. to maintain financial independence This second aspect of its work (it’s CEO, a former civil servant, remains essentially voluntary. is paid £447,000). This arguably Hence the FRC ‘audits the auditors’, makes it less independent and more but who controls the FRC? Why, deferential to its clientele, especially the accountants of course. The the Big-4. accounting profession has captured the whole apparatus of corporate Conclusion on accountants governance and the regulation of professional standards, or Partners in the large accounting rather, the Big-4 have. This can be firms are hardworking, highly illustrated by the FRC Board which professional, rarely corrupt, well- is composed of 15 people. In May respected members of society. 2014 five of those members were And this is the danger. It might accountants (all former partners be thought that professional of PwC, KPMG or EY). One of the accounting (and law) firms would accountants was an executive act as a countervailing force to limit director and two of them chaired corporate power. Their professions the Audit and Assurance Council grow out of a deep-seated societal (which oversees audit standards) distrust of commerce and business. and the Accounting Council (which Can we trust business accounts to sets standards for the preparation give a true and fair view? Can we of accounts). The Codes and trust business people to act within Standards Committee, which the law? Can we, as a society, call has responsibility for Corporate them to account? But this aspect of Governance, is composed of nine the professional activities of the Big- people including four accountants, 4, especially outside audit services, two from PwC and two from EY appears to have been subordinated (details from FRC website www.frc. to efforts to facilitate corporate org, accessed 2/5/14). strategy led by partners fully integrated into a wider corporate This colonisation of the FRC by the elite. Rather than engaging in accountants is aided by two further sceptical semi-adversarial review factors. First the FRC remains a self- of corporate activities the Big-4 regulatory body. It has no statutory have become what Gourevitch and basis and no requirement to Shinn (2005: 33) call ‘reputational pursue the public interest, although intermediaries’. Their priority is from 2013 its annual report was to protect their own reputations submitted to Parliament. Second, (which suffered in the wake of the the FRC receives only trivial funding financial crisis, and ‘building trust’ from government. Its activities are is prominently addressed in their financed by a ‘voluntary levy’ on public statements); and to protect companies and professional firms the reputations of their clients. 18 Cheques and the City
Individual partners may have financial security, influence and misgivings about the companies money. They are ludicrously well they audit and advise. They may paid. The top-level of partners object to blatant offshoring to will be earning around £100,000 sweat shops, to casualisation of per month, receiving roughly the the workforce, or to transfer pricing average annual wage every week. to reduce tax, but collectively they In turn they defend a system that are locked into a system which emphasises short-term gains, facilitates and even encourages financial opportunism, and a such commercial behaviour. This is share price obsession. They work not mere speculation, the disgrace in the interests of the corporate and collapse of the respected firm managerial elite who control the of Arthur Anderson is as recent contracts and the revenues upon as 2002. The profession and which they depend and they can their firms buy the loyalty of their themselves be regarded as a vital partners with professional standing, component of the corporate elite.
19 High Pay Centre Partners in the ‘Magic Circle’ law firms: organisation, remuneration and influence
The elite of London commercial law The four largest firms are very firms has come to be known as the similar in size whilst the fifth, ‘Magic Circle’. This small group of Slaughter and May, follows a rather large, immensely profitable and different model. It is smaller, more highly influential firms dominates the specialised, and has not developed London and global markets for high- a global network of offices. It has level commercial transactions and been described as a ‘boutique’ acts for the vast majority of large firm and is sometimes omitted from corporations operating in the UK. discussions of the Magic Circle, The term Magic Circle has become but it is hugely profitable, very high standard usage, it is employed status (described as ‘the definitive without irony as a straightforward City blueblood’) and clearly an description and can be seen as a elite firm. As with the accountants brand or, in more academic usage, it is necessary to emphasise the as an institution (Fairclough, 2005). sheer scale of these firms. The The Magic Circle firms have grown top four all have turnover of over up since the early 1990s and have £1 billion and in total have 2,113 consolidated their dominance with partners. The creation of these huge astonishing invulnerability. transnational firms has been another extraordinary British success The Magic Circle firms are: Allen & story following the liberalisation of Notes: Figures for 2012 Overy; Clifford Chance; Freshfields financial markets in the mid-1980s. taken from The Lawyer Bruckhaus Deringer; Linklaters; Clifford Chance, for instance, was UK 200, undated supplement; profit and Slaughter and May. Their profile can created by a merger in 1987 when employee figures are be seen in table 8. the combined firm employed only for 2011 and taken from The Lawyer, UK 200 Preview, 15/8/11
table 8 Profile of the Magic Circle Firms
Profit Global Rank by Turnover Employees Firm (2011) Partners Lawyers offices turnover £mn (2011) £mn (countries)
Clifford 2 1,303 381 568 2,518 5,997 23 Chance Linklaters 3 1,206 515 466 2,150 4,659 29 Allen & Overy 4 1,183 420 512 2,253 4,776 29 Freshfields 5 1,139 544 445 2,010 4,561 28 Bruckhaus Deringer Slaughter and 10 426 235 122 553 1,308 2 May Total 5,257 2,095 2,113 9,484 21,301
20 Cheques and the City
640 lawyers, it has grown fourfold club of elite firms is average partner over the last 25 years. In 1985 the remuneration of over £1 million Magic Circle firms had 281 partners, and this elite can be defined by by 1990 this had risen to 512 and reference to its most salient indicator the era of the giant international law which is PEP ‘Profit per Equity firm was beginning (Galanter and Partner’. What is most remarkable Roberts, 2008: 157). The global about this group of firms is the legal industry is monopolised by way in which they have sustained British and American law firms. their dominance for decades. In The Americans have weathered this respect they exactly replicate the recession better than their the Big-4 accountants. Their British cousins but in 2012 the reputations are such that they are four largest Magic Circle firm the ‘must have’ legal advisers for were all in the top ten of global large corporate transactions and law firms ranked by turnover (at they have succeeded in creating a 5, 6, 7, 8 with Slaughter and May Magic Circle ‘brand’ that appears at 48, see Legal Week, Global to insulate them from serious 100, 19/10/2012). The first non- challenge or market volatility. Anglo-American firm appeared at Their practices embrace tax, real number 58, and that was Australian. estate and litigation but the big So, again, like the accountants, money spinners are in what can be the London law firms have been termed ‘corporate transaction law’ extraordinarily successful, servicing covering commercial contracts, global corporations from London mergers, finance, private equity, and forming a vital component capital markets, competition and of City capability, income and restructuring. ‘invisible exports’. The durability of the Magic Circle The Magic Circle firms are not quite provides an interesting example as distinctively dominant as the of reputational consolidation. Big-4 accountants. Firms such as Originally, from the 1980s, the the Anglo-American DLA Piper have Magic Circle appears to have been similar turnover and Norton Rose a secretive group of London law has more partners. Indeed, The firms who agreed not to poach one Lawyer has suggested that there is another’s partners and agreed on a ‘silver circle’ of firms challenging rates to pay trainees and junior the dominance of the Magic Circle. lawyers. As these arrangements But the Magic Circle is distinguished evaporated in the early 1990s the by size, reputation, profitability, term began to be used by the legal client base and partner earnings. press and in particular was taken They are the largest firms in London; up by The Legal 500, one of the they have outstanding reputations key client guides to choosing law for high quality legal work; they have firms. The company and commercial high profit margins; they advise law section of The Legal 500 was the largest corporations; and their regarded as the key criteria for elite partners are very well paid. It has firms and by 2000 the five Magic been remarked that access to the Circle firms were established at 21 High Pay Centre
the top of the list of recommended become more corporatised, but the firms. Subsequently the Magic beliefs and behaviours associated Circle firms have exploited the with the traditional professional legitimacy encapsulated within this partnership persist’ (Empson at labelling. As Fairclough (2005: 36) al, 2013: 817). Certainly they have remarks, ‘by choosing one of its been remarkably entrepreneurial five members, clients, employees ‘concerned to develop law that and the like will be associated facilitated the bridging of gaps with a large firm with an excellent between what seemed commercially reputation”. Fairclough (2005: 38) possible and what was legally also points out that ‘no longer a allowable’ with the result, as noted secret society – like its magicians above, that London, came to namesake – the tag became dominate the global law firm model a badge of honour, a phrase (Morgan and Quack, 2005: 9 and denoting prestige, yet its original 19). But despite the attention given connotations remained: that of a to these firms the evidence base closed, impenetrable group, with remains sketchy with firms reluctant special powers or skills above the to publish material about their norm. These firms were ‘magicians’ finances and often self-reporting in respect of their abilities to in their release of information. So attract blue chip clients and star let’s start with their formal legal and employees, turn in enormous accounting position. profit, and produce work of an exceptional quality’. The four largest Magic Circle firms are, like the accountants, all Organisation and operations established as Limited Liability Partnerships (LLPs). In contrast In contrast to the accountants, Slaughter and May remains as a there is a substantial literature General Partnership which does devoted to the study of law firms not therefore enjoy the privileges including their growth, influence, of limited liability for individual organisation and decision-making. members. On the other hand, There is also a range of specialist it does enjoy the privilege of legal journals such as The Lawyer complete secrecy and does not and journals specialising in law firm publish a report or submit audited management such as Managing accounts. Unlike the accountants, Partner. The literature recounts the and with the exception of Allen emergence of large international law and Overy, the other law firms do firms which have come‘to look and not publish their accounts, and behave much more like international review of the accounts deposited businesses’ (Galanter and Roberts, at Companies House shows that 2008: 168). Such firms could be they reveal the minimum necessary said to have been ‘corporatised’ for legal compliance. For instance, although Empson et al argue that segmented analysis of turnover they have become ‘sedimented’ or profit by area of activity is not inasmuch as ‘the structures and revealed, with the firms using the systems in these firms may have formula that ‘the Members believe 22 Cheques and the City
it would be prejudicial to the firm’. The glowing exception to this The Magic Circle firms all publish generalisation is Allen and Overy. a variant of an annual review The A&O Annual Review gives a full which may say something about survey of the firm’s activities and it is governance but concentrates on genuinely interesting and engaging. corporate responsibility and main Moreover, they give extensive detail commercial activities. These tend of management arrangements, they to be classic glossy publications explain the remuneration system full of happy pictures and with for partners, they give key statistics cherry-picked numbers relating (including profit and remuneration) to charitable engagement or pro over a five year period, and bono work, although, to their credit, they publish their accounts on Linklaters and Freshfields recount their website. The accounts close involvement with the UN review community affairs with the Global Compact. A key source of heartening observation that ‘we information is the annual survey, The work hard to find solutions to some UK 200, conducted by The Lawyer of society’s most pressing issues’ magazine. It provides comparable for instance, ‘developing the rule of data on size, partners, profits law in Rwanda and other emerging and remuneration but from 2013 economies’ (Allen & Overy, 2013: 3). the full data-set is only available It may be impressionistic, but Allen on payment of a substantial & Overy appear in a different league subscription. A drawback to this and of transparency, at the other end similar surveys is that much of the of the spectrum from the opaque data is self-reported. This carries a Slaughter and May. risk of manipulation since the survey and league tables are very widely The organisation of the firms reported within the sector and have as partnerships means, as a substantial effect on reputation. noted above, that they are ‘co- The direction of variance is itself operatives’ as far as the partners interesting, thus both Freshfields are concerned. Their governance and Clifford Chance give PEP arrangements typically involve the numbers in their annual reviews that election of a senior partner and the are substantially below the numbers election of a partnership council or included in The UK 200. This sort of board (16 people in Freshfields, 8 divergence has been picked up in in Clifford Chance). The firm will be US debates where many firms are run by a managing partner and the felt to exaggerate their PEP numbers organisational divisions will include in order to bolster their reputations. ‘practice areas’, for instance, Linklaters’ website lists 25 practice Overall the amount of information areas ranging from capital markets available about the management, to litigation and arbitration. The firms financial performance and are both more and less ‘democratic’ remuneration patterns of the than the accountants. On the Magic Circle firms is limited democratic side, remuneration is and inadequate for an informed only marginally driven by individual assessment of their performance. performance. Instead, as examined 23 High Pay Centre
below, these firms treat partners term strategic thinking. Whether very equally in a seniority system. these benefits are fully shared by On a less democratic note, there are female employees is less certain. A divisions of partners into salaried very small proportion of partners are (non-equity) partners and full equity women, around 15%. Freshfields’ partners who share profits. The proportion is 12% and they concede balance between equity and non- that ‘gender diversity is one of equity partners is quite variable. the biggest challenges we face’ Thus the huge DLA Piper had (Freshfields, 2013: 13). only 31% of its partners as equity partners in 2011 and the average for Another challenge is potentially the Top 100 UK firms was 55%. The posed by the 2007 Legal Services Magic Circle has far higher levels of Act which formalised regulation of equity. One source puts the total of the professions through a new Legal equity partners in Magic Circle firms Services Board, and permitted a at 81% in 2005-06 rising to 85% in range of legal services to be offered 2012-13 (Big Law, 11/9/2013), the by an ABS (alternative business detailed numbers in 2011 can been structure). The ABS could be a seen in table 9. company (the so-called ‘Tesco law’) or it could be a partnership. As we see below, these proportions By Spring 2014 over 240 ABSs have an effect on the figures for had been licensed and a spate of PEP but the policies on which they mergers between law firms had got are based also have an effect on underway. This innovation mainly the strategies and effectiveness concerns basic legal services and is of the firms. The full equity model unlikely to affect Magic Circle firms which the Magic Circle tends to but it is interesting that some of the endorse is said to have substantial Big-4 accountants are moving more
Source: The Lawyer, advantages in motivation, deliberately into legal services. Thus 15/8/2011 collegiality, coordination and longer- PwC is using the Act to organise its team of over 2,000 lawyers and table 9 Equity Partners in Magic Circle firms, in June 2014 EY announced that 2011 it had poached a senior partner from Freshfields to lead its global transaction law practice.
Total full equity % equity Profitability and Remuneration
All the Magic Circle firms are highly Allen & Overy 487 398 82 profitable, and substantially more Clifford Chance 552 379 69 profitable than the accountants. As an example, in 2011 PwC and Linklaters 473 441 93 Deloitte made collective profits of Freshfields BD 445 416 93 £1.3 bn on a turnover of £4.6 bn; Slaughter and May 125 122 98 whilst Freshfields and Linklaters made profits of £1.1 bn on a Total 2,082 1,756 84 turnover of £2.3 bn. This gives a 24 Cheques and the City
substantial profit margin for the larger reduction in the number accountants of 28% against a of non-partner lawyers. On the remarkable profit margin for these whole, however, they weathered two Magic Circle law firms of 45%. the recession relatively well and It must be noted, however, that the expansion is again the order of full equity policies of the Magic the day. Circle (and the accountants) inflate their profit figures and margins We can first review the pattern of because no costs are charged for profit per equity partner in table 10 the value of the equity partner’s before exploring various aspects of services. But, even taking this into the pattern. account, the high profitability of the Magic Circle sets them apart. These are average profits and Other large law firms typically have conceal considerable variation profit margins of 20 to 30 % and between individuals. Several in 2011 the next most profitable points emerge from the Table. First, firm was Hogan Lovells with net profits have grown substantially profits of £185m. There is very little since the turn of the century. The information available about which top 30 law firms saw PEP rise by activities are most profitable and 93% between 2000 and 2008 (The how the law firms cost their work. Lawyer, 14/7/2010: 16). The Magic Despite a broader picture of ‘brutal Circle did slightly better with an trading conditions’ (Byrne, 2012: average PEP rise of 98%, and bear 18) the Magic Circle have sustained in mind that this was despite a their high profitability although sizeable increase in the number of Source: The Lawyer, UK200, various issues: it has dipped below the peak equity partners. Second, PEP has 2013, The Lawyer, year of 2008. Some of the firms remained very stable and above 21/10/13. 2012, undated introduced restructuring measures £1 million since 2008 (with the sole supplement, 2012. which included a reduction in the exception of Clifford Chance in 2011, 15/08/11. 2010, 13/09/10. number of partners and often a 2010). This is a startling trend, the 2008, 14/07/08. 2000, Ibid.
table 10 Average Profit per Equity Partner: Magic Circle Firms
2013 2012 2011 2010 2008 2000 Firm (£ ‘000) (£ ‘000) (£ ‘000) (£ ‘000) (£ ‘000) (£ ‘000)
Slaughter and May 1,887 1,780 1,930 1,840 2,250 960 Clifford Chance 1,271 1,078 1,005 933 1,170 685 Freshfields 1,221 1,299 1,308 1,406 1,484 675 Linklaters 1,195 1,243 1,225 1,214 1,440 710 Allen & Overy 1,189 1,100 1,100 1,100 1,120 744
25 High Pay Centre
consistency of earnings indicates operate a ‘lockstep’ system which significant market power and an is based on seniority. Each firm effective oligopoly. Third, the sheer has slightly different arrangements size of earnings is remarkable, and only Allen & Overy give full these are over 2,000 immensely details so we can consider their well paid professionals who earn on model. When a new partner is average over £1 million a year, year appointed they are put on a fixed in, year out. share of profit for two years. Then the partner is allocated 20 profit As with the accountants the profits sharing points which are increased are all attributable to the equity by two points each year until they partners and are similarly distributed reach the maximum of 50 profit in full. Income tax is levied on sharing points (often referred to partner remuneration so the partners as ‘the plateau’). Linklaters use a pay tax at something approaching scale of 25 ‘parts’ but arrangements the higher rate of 45% rather than in the other firms are unclear. In a lower rate of corporation tax. The 2013 the 20 points in Allen and pattern on pensions is also much Overy were worth £627,000 and the same as the accountants with the 50 points worth £1,566,000 defined benefits schemes for staff (Allen & Overy, 2013: 18). At 2013 closed in the late 1990s and defined levels an Allen and Overy partner contribution schemes operated for could therefore expect to get a partners and staff. pay rise of about £62,000 a year and it would take 17 years to reach When it comes to partner the plateau following promotion to remuneration the picture is partnership. The partners would somewhat different to the be required to subscribe additional accountants. Instead of the rigorous capital in proportion to their profit and complex set of performance sharing points. criteria which drive accounting
Source, The Lawyer, remuneration, the magic circle firms The spread of remuneration 15/8/2011 between equity partners is thus substantial. For 2011 The Lawyer gave figures for top and bottom of table 11 Range of Equity Remuneration equity for the Magic Circle as seen in table 11.
bottom of top of average Comparison with the average equity equity (£’000) indicates that Freshfields and Slaughter and May have a large proportion of their partners at or Allen & Overy 642 1,604 1,100 near the plateau. Clifford Chance 495 1,240 1,005 Freshfields 590 1,475 1,308 For the casual observer one might Linklaters 624 1,559 1,225 expect a hint of apology from the firms and their partners about the Slaughter and May 1,005 2,100 1,930 sheer scale of remuneration. It 26 Cheques and the City
is, after all, at a level which has The hierarchy raised criticism of banking pay packages and it is substantially Returning to the theme of greater than the partners in the partnerships as co-operatives Big-4 accountants. Indeed, the (as far as the partners are accountants cited high pay in concerned) there does seem to law firms to the Competition be a greater degree of collegiality Commission in mitigation of their and democracy in the law own high partner remuneration. firms. We know quite a lot about Thus, ‘PwC and Deloitte considered the intensification of internal that their profit per partner ranked management from recent research lower than Magic Circle law firms’ (see Empson et al, 2013) but (CC, 2013, A7(3): 31). In fact there the treatment of partners retains is little hint of apology from the firms traditional courtesies. Leadership and very little explicit criticism in the has become more managerial general or the specialist press. This with a senior partner, a managing dimension of high pay has passed partner and finance and personnel beneath the radar, a point we come partners (who may be non-lawyers) back to in the conclusion. And the but the hierarchy remains rule Magic Circle firms are not alone. bound and flatter. The ‘lockstep’ In 2011 18 law firms paid their top seniority system is intrinsically more partners over £1m but some of inclusive and the Magic Circle these were small boutique practices firms have resisted performance and all of them were flattered by a based criteria or US-style ‘eat what lower proportion of equity partners. you kill’ remuneration. Curiously, Rather than an air of hesitancy PEP lockstep firms appear less tolerant exhibits the reverse syndrome, of poor performance and tend to celebration instead of apology. be more profitable. The equality High PEP appears to be considered of remuneration extends to some as a badge of honour, as proof of extent to the leadership. LLPs are excellence and as a vital element in obliged to reveal the payment to the continued membership of the Magic highest paid partner and the recent figures are as follows in table 12. Source: 2013 annual Circle. In the US serious falls in PEP accounts put firms under threat with potential loss of clients and staff along with the fall in status and reputation. In table 12 Total remuneration for highest paid London changes in PEP also attract partner, £’000 extensive comment with heated debates about rivalries and pecking 2013 2012 order between the big firms, and much of the debate is conducted Allen & Overy 1,566 1,604 with an air of restrained admiration. Clifford Chance n/a n/a There is what might be described as a sense of entitlement. Freshfields 2,500 2,900 Linklaters 2,300 2,500 Slaughter and May n/a n/a
27 High Pay Centre
There is no figure for Slaughter and that the elite professional service May, who do not publish accounts, firms are themselves members and Clifford Chance give a global of, and foundations of, a wider figure (of £18m) for the sixteen corporate elite. people on their Management Committee. How they escape the The Magic Circle firms are, above regulatory requirement to report on all, ‘client facing’. Their reputations, the highest paid partner is unclear. their stability and their fees depend Overall, however, despite higher on winning work commissioned average earnings, the highest paid by large corporate clients and partners (who may or may not be their success is publicised in the the senior partners) are paid slightly quoted company ‘Adviser-Rankings’ less than their equivalents amongst (formerly the Hemscott Rankings). the Big-4 accountants. Allen and Their overriding preoccupation is to Overy again stand out. They pay enable profitable activity by large their highest paid partner at exactly corporations and they facilitate, the same rate as all the other innovate and reassure corporate ‘plateau’ partners. executives. They deal with, and are commissioned by, senior managers The total partner population of the and there is much attention paid Magic Circle in 2013 was 2,113. to face-time and relationship Of these about 84% are full equity management. Magic Circle partners partners and of those a reasonable are accomplished members of the estimate would be that over half, inner circles of senior management perhaps 60%, receive remuneration and they inevitably share those of over £1 million, around 1,100 norms, observe the conventions partners. The equivalent number of and follow the unwritten rules. £1 million-plus earners for the Big-4 Indeed, recruitment is biased accountants was estimated above towards individuals who are at 270. For the lawyers the top- likely to fit seamlessly into these level partners, the managers and circles (see below). Like the practice leaders, could be regarded accountants, the lawyers are there as members of the corporate elite. to help corporations cut costs, increase sales, grow profits and The Magic Circle and reap rewards. This seems almost their influence within the too obvious to rehearse but it is corporate elite worth re-emphasising that these are law firms and that the law is This discussion is necessarily more conventionally felt to emphasise speculative. A thorough review of access to justice, equality before the influence would involve extensive law, legal compliance and restraints research applying theories from of the exercise of power. However, sociology, anthropology and it might be felt that the Magic Circle organisational studies. Instead firms reinforce rather than restrain this section raises some areas corporate power and help to tilt the for debate drawing on the major legal and regulatory playing field premise of this paper, namely towards corporate interests. 28 Cheques and the City
The elite standing of the Magic up-market image and are better at Circle has several dimensions. The convincing clients of their claim to discussion above has emphasised expertise, hence ‘in the short term, performance but they also perceive discrimination on the basis of social themselves as an elite, the term is class can be seen as an entirely used in the specialist legal press rational commercial strategy’. This and in interviews and reports from re-emphasises the client-facing the firms themselves. Clearly there imperative within the firms. We is an element of meritocracy at could speculate at length on the work. These are clever people, effects of a class bias in Magic well-educated, well-trained and Circle firms but at the very least it very hard working. But there is also could be expected to consolidate a a thread of old-fashioned social rather narrow, privileged, uncritical elitism which seems to be more body of people insulated from pronounced in the Magic Circle than the realities of societal problems; in the Big-4. To put it bluntly, ‘law either paternalistic or, in a more firms continue to discriminate on the strident interpretation, ‘embracing basis of social class when recruiting’ particularly aggressive forms of (Ashley and Empson, 2011). Thus elitism and masculinity’ (Cook et al, Cook et al (2012: 1747) found that 2012: 1746). ‘privately educated candidates are thirteen times more likely to Turning from the social background enter an elite City law firm than are to their influence on corporate their state-educated peers’ and strategy and the regulatory Legal Week found that ‘more than environment we can consider one third of magic circle trainees the Magic Circle involvement … have studied at either Oxford in enhancing corporate power. or Cambridge’ adding that ‘at Large business corporations are Slaughter and May, the figure rose embedded in a dense environment to almost half (48%), with Freshfields of national and international legal Bruckhaus Deringer not far off at and regulatory systems. They need 44%’ (Legal Week, 24/3/2010). to be compliant with the law in every Thus, despite increased emphasis jurisdiction in which they operate on diversity, ‘there continues and their in-house lawyers will seek to be a strong link between to ensure compliance. But the role attendance at particular educational of the Magic Circle firms appears establishments (private education to go beyond mere compliance followed by the ‘right’ university) and by converting ‘the law’ into a recruitment into City law firms’ and resource which can be employed this naturally leads into the cadre by corporate management to mould of partners so that Cook et al also and deliver corporate strategy. This found that 42% of partners from the may be regarded as a radical claim, top 10 firms held Oxbridge degrees or it may be regarded as absolutely (see Cook et al, 2012: 1755). Ashley obvious, but the high fees charged and Empson (2011) argue that by Magic Circle firms have to be these upper middle class lawyers justified by offering value to the are able to project the desired company. There are many areas 29 High Pay Centre
where law as a resource appears to this section with some reflections on be deployed but let’s take four. First, the Magic Circle and the corporate in the area of legal interpretation law elite. The lawyers are less important firms will construct interpretations ‘reputational intermediaries’ than that favour the profitable interests the accountants inasmuch as they of the company and the senior do not report to shareholders on management. On the basis of true and fair accounts. On the experience, expertise and depth other hand, they do trade on their of knowledge of industrial sectors, own reputations and also protect they can define what the law will the reputations of their clients. permit, rather than what it forbids. Those clients are the core of the Second, as formidable adversaries corporate elite. They include the in dispute resolution they can big quoted companies, the large liaise, negotiate and litigate against unquoted multinationals operating legal challengers, regulators and in Britain, and the more diverse the courts themselves to minimise range of financial companies. By constraints on corporate activity. ensuring that these corporations Third, they can assist companies operate within the law, and to in influencing legislation, designing some extent ensuring that the regulation and, increasingly, in law is both sympathetic and creating platforms of self-regulation sympathetically enforced, so they which facilitate corporate goals. This legitimise corporate activity and the is a role which includes advising integrity of the City. It is perhaps and lobbying government through worth emphasising that, although secondments or the outsourcing of they behave as very private legal advice. Here we see law firms undertakings, they are reliant on innovating to create new products the whole apparatus of English law. and new markets, which brings us to They draw on the respect accorded the fourth use of law as a resource. to English law, on the institutions All the Magic Circle firms stress of British justice, and the whole their commitment to innovation and infrastructure of commercial law entrepreneurship. They search created and safeguarded by the for business opportunities and British state. That might require an engage in self-conscious intellectual enhanced level of accountability to creativity which in Linklaters, a British public, a point we come for instance is termed ‘thought back to in the conclusion. leadership’. Much of this involves the definition and even the creation For the large corporations operating of new markets. A recent example in the UK and globally, the Magic is provided by the rapid growth in Circle therefore provides a legal the utilisation of ‘big data’ which shield. For the members of the raises tricky legal issues to do with British corporate elite they provide ownership, privacy, storage and reassurance and confidence intellectual property. through expert advice and legal protections. They appear to be Bringing together some of these integrated into the corporate elite speculative threads we can end through commercial activities, social 30 Cheques and the City
ties and multiple networks ranging from schools to sporting interests and charitable activities. They help the corporate elite to acquire and retain substantial remuneration in which they share. It would, in conclusion, be hard to maintain the security of the corporate elite without the authoritative legal certainty provided by the Magic Circle.
31 High Pay Centre Conclusion: transparency, incumbency, remuneration and countervailing power
The main and most robust to validate the self-reporting of component of this Report is to professional firms and the numbers do with transparency. It provides that are incorporated into technical a profile of the nine professional surveys. The accountants are firms that make up the Big-4 and significantly more transparent the Magic Circle and we should in publishing accounts and consider whether we know enough details of governance (especially about their activities to understand audit governance) through the the contribution they make and to transparency reports published call them to account. This question alongside their annual reports. should be considered in the context Even so, much of the detail of of the headline – the sound bite – management, decision-making, that dominates this Report. Between financial results and remuneration them the nine firms reviewed in this is restricted in practice to the Report have 4,500 equity partners specialist community who have (2,726 accountants, 1,774 lawyers). the time, money, expertise and Their average annual remuneration, motivation to access the technical based on 2013 figures, is over and expensive publications £700,000 for the accountants and prepared by the specialist over £1,100,000 for the lawyers. press. There is limited access to A reasonable estimate would information for journalists, policy suggest that about 1,400 of them commentators and the public at enjoy annual remuneration of over large. Should more information £1,000,000 (270 accountants, 1,130 be freely available? Material, for lawyers). The headline is therefore instance, on revenues, profits, that: decision-making, risk and remuneration? Before turning to >>‘1,400 partners in elite more detailed conclusions on accountancy and law firms were remuneration we can note the paid over £1 million in 2013, following general features which continuing a pattern that has been seem to apply to all nine of these in place for at least ten years’. elite firms:
Whether this is defensible will >>the revenue streams which depend very much on where generate the income display a one stands in the larger debate remarkable consistency. about income inequality. Let’s for the moment continue the >>the firms are successful in discussion of whether we have generating consistent profit over a enough information to undertake substantial period, they undoubtedly that debate. have market power.
It appears that we have access >>partner posts are very secure, to a fair amount of headline there is some horizontal movement material. The LLP format provides between firms as they recruit for the mandatory publication of partners from other firms but on the just enough financial information whole these people progress within 32 Cheques and the City
one firm and have long, stable narrow perspective, derived from careers. the standard British corporate governance framework which is >>while there is little indication itself defective (see Wilks, 2013: of additional income earned from 250). In favour of more extensive outside the firm, there are extensive release of information there are opportunities for post-retirement three arguments. work, either lucrative, especially as non-executive directors, or often First, the services operated by public service or charitable. professional firms are, at their core, undertaken on behalf of >>there do not appear to be government. They audit companies extravagant ‘extras’ in the form of in accordance with the dictates of allowances, bonuses and pension company law, and they resolve legal rights or, of course, share options. disputes defined by, and sometimes resolved through, commercial law >>on retirement partners receive and the commercial courts. Further, back the amount they have paid they undertake these activities into the firm. There is no upward within a framework of professional adjustment to take account of the ethics policed by professional ‘present value’ of the investment bodies in a regulatory framework although it earns them additional mandated by government. These equity payment as part of their firms are to a significant extent annual profit share. undertaking a public interest role and should therefore be In pursuit of the question of accountable to the public. information about remuneration, the firms would probably argue that it is Second, in recognition of the not necessary to publish additional importance of their activities, information, similar to that published government has allowed them by quoted companies, because an advantageous mode of legal their ownership structure is different. organisation in the form of limited Plcs publish details of remuneration liability partnership. This was so that shareholders can reassure introduced as a major innovation in themselves that the managers are 2000 after lobbying by accounting taking reasonable and proportionate firms and involves a melding of rewards, the information allows company and partnership law. It principal-agent monitoring. For defines the firm as a corporate partnerships the owners are body and allows the partners themselves the partners and they all limited liability which has allowed have complete access to the details the rapid growth of ‘professional of their colleagues’ remuneration. corporations’. The LLPs have There is no principal-agent divide therefore been awarded by the and the wider public have no state a ‘license to operate’ parallel further legitimate interest in the to the license given to all limited operation of a private undertaking. companies. This is a point much But it can be argued that this is a debated within company law 33 High Pay Centre
but one position is certainly that and can briefly be summarised in recognition of this ‘license’ here. They concern the persistence an LLP should not be regarded of dominance; normalisation of simply as a collection of private high levels of remuneration; and individuals but as a body with public countervailing power. responsibilities which requires adequate sharing of information with The Big-4 and the Magic Circle the public. have maintained their dominant positions for perhaps 25 years. They The third argument in favour of clearly enjoy certain incumbency greater disclosure derives from advantages which appear to sheer size. As noted above, be related to their close and these are very large commercial sustained relationship with their organisations with a total collective large corporate clients. But how turnover of about £14 bn, (twice the do the big corporations benefit size, for instance, of BSkyB). Their from this relationship, do they too activities are surely of legitimate gain incumbency advantages? interest to their clients, who pay This is, after all, the whole point their large fees; to their employees, of elites, they seek to defend and who work notoriously hard; and perpetuate social and economic to consumers, who ultimately pay dominance. Almost by definition for their fees and salaries. Is it the corporate clients gain access acceptable for five of these entities to superior financial and legal to publish no financial information advice which should give them an at all, for three of those five simply advantage in resolving disputes to deposit 20 pages of minimalist with trading partners, competitors, accounts at Companies House, regulators and governments. and for the other two to observe This will apply across the whole complete financial secrecy? The field of mobilising financial data, question posed above was whether implementing corporate strategy, we have enough information to devising legal solutions and hold them to account? Clearly access to legal dispute resolution, we do not, and equally clearly it including litigation and arbitration. would be possible to increase the For the accountants the Big-4 level of disclosure, Allen & Overy’s audit advantage is more to do with exceptional levels of voluntary reputation than skill, but when it disclosure illustrates the potential. comes to tax planning many large firms appear to have been able to The discussion of transparency is tilt the system in their favour. For relatively straightforward, anchored the lawyers the argument that a in the availability of factual material. combination of deep pockets and There is, however, a range of other top calibre legal expertise is able areas of unease provoked by the to gain legal advantage is almost interpenetration of professional and too obvious to assert. The unease, corporate elites. Three of those have then, is that there is a self-serving been raised in a more speculative reciprocity between the partners fashion in the earlier discussion of elite professional service firms, 34 Cheques and the City
and the corporate elite, that demonstrates how exceptional is allows the professional firms to this level of remuneration. maintain their favourable position whilst at the same time enabling The firms would no doubt justify this corporations more fully to exploit level of remuneration as necessary accounting ingenuities and the to attract the best trainees and to law, and hence to protect their own prevent their partners from leaving. market positions. But more modest future rewards would surely still entice trainees, The second area of unease is the and there does not seem to be a degree to which remuneration very well developed labour market patterns in the elite professional in lateral partner movement, indeed, service firms normalise very high partners are often fiercely loyal levels of remuneration. Within the to their firms. Instead the rapid worlds of accountancy and the law, growth in PEP in the early 2000s the scale of remuneration is widely appears to have followed the rapid understood but not widely criticised. growth in executive compensation Clients will complain about the high (HPC, 2011: 28). It is hard not to fees charged by the top firms, and conclude that the professional there is occasionally comment that elite were building on the same partners may be earning more than permissive mood and increasing their clients, but there is nothing like their share of corporate wealth the tide of revulsion that has fuelled generation. The rising tide of criticism of hundreds of bankers remuneration raised all elite boats earning over £1 million. Perhaps with perhaps an understandable there is a recognition that partners tendency for the professional are risking their own money, and advisers to the corporate elite to that they have worked their way take a sympathetic, rather than a to the top of their professions, but critical stance, in reviewing rapidly should we regard £1 million plus escalating managerial remuneration. as normal remuneration? HMRC statistics reveal that in 2012-13 there The third area of unease is rather were 31 million income tax payers. broader and brings us back to the 8,000 of these reported income of opening view that accountants and over £1 million, and a further 3,000 lawyers are ‘special’ in the services income of over £2 million. If the that they provide. Accounting and estimates in this Report are correct, the law are basic constituents of then around 13% of ‘income tax a well regulated market system. millionaires’ are the partners of our Markets must have trust and nine elite firms. This is, of course, a confidence based on honest single comparison that excludes the accounts and binding contracts. many other types of tax, and it could Society supplies trust through even be regarded as a measure of professionals who are well trained, honesty, many other high-income licensed, governed by codes of earners will have concealed their ethics, independent, trustworthy income from tax. Nonetheless it and loyal to universal standards. They provide ‘countervailing 35 High Pay Centre
power’ intended to limit dishonesty, within large, quasi-corporate deception, and gross unfairness. commercial firms retain sufficient These commercial professionals independence and comply with provide one means by which society the best professional standards? limits the abuse of economic power. More particularly, how are those Clearly, however, professionals have judgements affected when firms to balance professional integrity impose tough requirements on against commercial opportunities, generating huge income, and when for them and for their clients. The the individuals concerned share concern is therefore self-evident that income? In their transparency and has prompted some regulatory reports the accountants confront intervention. We have in particular these issues head-on, but across seen the inquiry by the Competition the whole spectrum of financial and Commission into the Big-4 and legal services offered by the Big-4 the Public Accounts Committee and the Magic Circle there must be investigation of the Big-4 over tax unease that countervailing power is avoidance. It is perhaps surprising moderated in order to retain clients, that it is the accountants who have to sustain income, and to protect encountered investigation when a corporate elite of which the top they are more transparent, and less partners in these nine firms are a well paid, than the Magic Circle. major component. In any case, can partners working
36 Cheques and Notes and sources the City
The Author CC (2013) Statutory audit services for large companies market Stephen Wilks is Professor of investigation, London: Competition Politics Emeritus at the University of Commission. Exeter where he was Deputy Vice Chancellor, 1999-2005. He was a Empson, L., I. Cleaver and J. Member of the Economic and Social Allen (2013) ‘Managing Partners Research Council, 2001-05. He is a and Management Professionals: former Member of the Competition Institutional Work Dyads in Commission and is currently a Professional Partnerships’ Journal of Member of the Competition Appeal Management Studies, 50:5. Tribunal (CAT). The views expressed in this Report are entirely personal Fairclough, S. (2005) and should not be attributed to the Institutionalization and CAT. He qualified as a Chartered Interorganizational cognition: Two Accountant in 1971 but ceased Perspectives on the Development to be a Member of the Institute of and Persistence of the ‘Magic Chartered Accountants in England Circle’ of United Kingdom Law and Wales in 2011. Firms, Oxford: Clifford Chance Centre for the Management of Sources Professional Firms.
Allen & Overy (2013) Annual Report Freshfields Bruckhaus Deringer and Financial Statements for the (2013) An investigation not a year ended 30 April 2013, London: showcase: Responsible Business Allen & Overy. Report 2013, London: Freshfields Bruckhaus Deringer. Ashley L. and L. Empson (2011) Playing it safe: Why law firms Galanter M. and S. Roberts (2008) continue to discriminate on the ‘From kinship to magic circle: the basis of social class, Press Release, London commercial law firm in the Centre for Professional Service twentieth century’, International Firms, Cass Business School. Journal of the Legal Profession, 15:3. Byrne, M. (2012) ‘Do or die’ The Lawyer: UK 200 Annual Report Gourevitch, P. and J. Shinn (2005) 2012. Political Power and Corporate Control, Princeton: Princeton Cook, A., J. Faulconbridge and University Press. D. Muzio (2012) ‘London’s legal elite: recruitment through cultural HPC (2013) One law for them: capital and the reproduction of How big companies flout rules on social exclusivity in City professional executive pay, London, High Pay service fields’,Environment and Centre. Planning A, 44. HPC (2011) More for Less: what has happened to pay at the top and 37 High Pay Centre
does it matter? London: High Pay Commission.
KPMG (2013) UK Annual Report 2013, London: KPMG.
Living Wage Commission (2014) Working for Poverty: the scale of the problem of low pay and working poverty in the UK, London: Living Wage Commission.
Morgan G. and S. Quack (2005) Institutional Legacies and Firm Dynamics: The Internationalisation of British and German Law Firms, GSGR Working Paper, University of Warwick.
PAC (2013) Tax avoidance: the role of large accountancy firms, Public Accounts Committee, session 2012- 13, HC 870, London: TSO.
SCEA (2011) Auditors: Market concentration and their role, House of Lords, Select Committee on Economic Affairs, session 2010-11, HL 119-I, London: TSO.
Wilks, S. (2013) The Political Power of the Business Corporation, Cheltenham: Edward Elgar.
38 Design | Rachel Gannon