The Ties That Bind: the Internal Structures of Law Firms and the Dynamics of Law Firm Dissolution by Alan James Kluegel a Disser
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The Ties That Bind: The Internal Structures Of Law Firms And The Dynamics Of Law Firm Dissolution by Alan James Kluegel A dissertation submitted in partial satisfaction of the requirements for the degree of Doctor of Philosophy in Jurisprudence and Social Policy in the Graduate Division of the University of California, Berkeley Committee in charge: Professor Calvin Morrill, Chair Professor Lauren Edelman Professor Heather Haveman Summer 2020 The Ties That Bind: The Internal Structures Of Law Firms And The Dynamics Of Law Firm Dissolution Copyright 2020 by Alan James Kluegel 1 Abstract The Ties That Bind: The Internal Structures Of Law Firms And The Dynamics Of Law Firm Dissolution by Alan James Kluegel Doctor of Philosophy in Jurisprudence and Social Policy University of California, Berkeley Professor Calvin Morrill, Chair Research on law firms as organizations has largely grown up in literatures that rarely, if it all, speak to one another in sustained ways. Whether drawing from economic, ecological, network, or neo-institutional frameworks, organizational scholars often use law firms as sites for research without necessarily considering the unique qualities of a professional firm (for example, their ethical responsibilities or the type of legal work they perform). Legal schol- ars, meanwhile, largely focus on the legal characteristics of law firms without examining how their organizational structures or broader environments influence their behavior. Dialogue between these approaches can add significant theoretical grist to the organizations literature by identifying how the rules of different fields influence organizational behavior, while at the same time deepening legal scholarship by situating study of the law firm in broader theoret- ical discourses. In this dissertation, I will review the theoretical treatment of law firms, discuss the in- ternal structures and external environments of law firms, test whether network theories of organization explain the observed network of a professional firm, and examine the longitu- dinal trajectory of law firm growth and survival. To do so, I will develop novel hypotheses that integrate professional and organizational theories. i to the pain ii Contents Contents ii List of Figures v List of Tables vi 1 The Professional Organization 1 1.1 Studying The Law Firm As A Unique Organizational Form . 2 1.1.1 The History of the Law Firm . 3 1.1.2 The Modern Law Firm . 4 1.2 Theoretical Frameworks for Understanding Legal Organizations . 7 1.2.1 Economic Theories of the Law Firm . 7 1.2.2 The Firm As A Product Of Its Environment . 10 1.2.3 The Firm As A Network . 11 1.2.4 The New Institutionalist Perspective on the Firm . 13 1.3 Organizational Theory Is Only The Beginning Of The Story . 18 2 The Law Firm On The Boundary 19 2.1 Theories of the Professions . 19 2.2 The Legal Profession According To Organizational Theory . 20 2.3 Bringing The \Profession" Into The Study Of Professional Organizations . 22 2.4 Theoretical Questions Raised By The Law Firm . 23 2.4.1 Brokerage and Client Relationships . 24 2.4.2 Specialized Knowledge . 24 2.4.3 Collegial Profession, Collegial Organization? . 25 2.4.4 Homophily, Social Capital, and Networks During Crisis . 25 2.4.5 Lateral Hiring and Firm Cohesion . 26 2.5 Networks, Actors, and Fields . 26 3 Networking Among The Human Capitalists: The Internal Network of a Large Corporate Law Firm 28 3.1 The Organizational Network . 28 iii 3.2 Testing The Law Firm Network . 29 3.2.1 Brokerage and Power . 29 3.2.2 The Effect of Specialization . 30 3.2.3 The Value of Strong Client Ties . 31 3.2.4 Homophily in Networks . 32 3.2.5 Closure or Brokerage in the Post-Crisis Network . 33 3.3 Data Collection . 33 3.3.1 Units of Analysis . 33 3.3.2 Missing Data Issues . 34 3.3.3 Advantages to Using Observable Network Ties . 35 3.4 Methods and Variables . 36 3.4.1 Exponential Random Graph Models . 37 3.4.2 Outcome Variables . 38 3.4.3 Actor Attributes . 39 3.4.4 Network Position . 39 3.4.5 Homophily . 40 3.4.6 Network Effects . 40 3.4.7 Cross-Network Measures . 41 3.4.8 Network Control Variables . 42 3.5 Modeling the Firm Network . 42 3.5.1 General Characteristics of the Pre- and Post- Crisis Networks . 44 3.5.2 Tie Generation Between The Networks . 48 3.5.3 Does Network Position Predict Attorney Success? . 50 3.6 Discussion . 51 4 Do The Collapse: Individual Dynamics In The Firm and Causes of Firm Instability 54 4.1 Formal Legal Structures of Law Firms . 54 4.2 The Regulatory Environment of Law Firms . 56 4.2.1 Prohibitions on Lawyer Mobility are Unenforceable . 56 4.2.2 The Client Owns the Firm's Work Product . 58 4.2.3 The Prohibition on Non-Lawyer Ownership Favors Powerful Partners 58 4.3 Internal Law Firm Dynamics . 59 4.3.1 The Firm as a Site for Human Capital Development . 59 4.3.2 The Firm Network as Mediating Force . 62 4.4 Network Position and Partner Leverage . 64 4.5 Professional Norms of Loyalty and Trust . 66 4.6 A Formal Model of the Law Firm as a Coordination Game . 68 4.7 Discussion . 71 5 The Harder They Fall: A Longitudinal Analysis of Growth and Mortality among Law Firms 72 iv 5.1 Background . 73 5.2 Law Firm Growth . 75 5.2.1 Structural Explanations of Firm Growth . 75 5.2.2 The Organizational Ecology of the Corporate Law Firm . 77 5.2.3 Types of Law Firm Growth . 80 5.2.4 Some Hypotheses About Firm Growth . 83 5.3 An Empirical Analysis of Growth and Mortality . 85 5.3.1 The Data . 85 5.3.2 Law Firm Profits and Law Firm Growth . 88 5.3.3 Law Firm Growth and Law Firm Survival . 93 5.4 Discussion . 97 6 Conclusion 100 Bibliography 103 A Dissolved NLJ 350 Law Firms 1984-2017 116 B Goodness of Fit Tests for Firm Network Analysis 118 C R Code 121 C.1 Creating the Dataset . 121 C.2 Creating The Network and Network Statistics . 124 C.3 Separable Temporal Exponential Random Graph Models . 133 C.4 Exponential Random Graph Models of Pre- and Post-Crisis Networks . 137 C.5 Survival Analysis . 141 C.6 Structural Equation Modeling . 143 v List of Figures 1.1 Distribution of First Year Lawyer Salaries . 6 3.1 The Firm Network 2006-2014 . 42 3.2 Partners Per Matter: Pre- and Post-Crisis . 45 3.3 Comparing Pre- and Post-Crisis Working Tie Distribution . 46 3.4 Comparing Pre- and Post-Crisis Firm Network . 47 3.5 Network Positions of Executive Committee Attorneys . 52 4.1 Mapping The Network Position Of A Defecting Partner . 65 4.2 Centrality of Partner Threat . 66 5.1 Golbe and White's Graph Of Pre-1985 Merger Trends . 78 5.2 IMAA Graph Of Post-1985 Merger Trends . 79 5.3 Non-Equity Partner Growth 2000-2010 . 82 5.4 The Law Firm Network, Once Again . 85 5.5 Relationship between Firm Growth and Firm Profits by Decade . 91 5.6 A Path Diagram of Profits, Lateral Hiring, and Growth . 93 5.7 Survival Curve For Firms Based On Growth Strategy . 94 B.1 Pre-Crisis Network Goodness of Fit: Simulated vs. Observed Networks . 119 B.2 Post-Crisis Network Goodness of Fit: Simulated vs. Observed Networks . 120 vi List of Tables 1.1 Organizational Theories Of Law Firms . 8 2.1 Organizations and Professsions . 21 3.1 Popularity and Centrality By Attorney Specialization, 2006-2014 . 43 3.2 Network Statistics: Actual vs. Simulated . 44 3.3 Changes In The Pre- and Post-Crisis Deal Networks . 44 3.4 Separable Temporal ERGMs Of Pre- and Post-Crisis Network Ties . 49 3.5 Centrality & Executive Position . 50 3.6 Number of Ties & Executive Position . 50 3.7 Centrality & External Award Recognition . 51 3.8 Number of Ties & External Award Recognition . 51 4.1 Human Capital Development in the Firm . 62 4.2 The Law Firm Investment Game . 69 5.1 Distribution of Discrete Law Firm Outcomes . 87 5.2 Mortality Outcomes (With Merged Firms) . 87 5.3 Hierarchical Model of Growth and Profits . 90 5.4 Structural Equation Model of Firm Growth . 92 5.5 Cox Proportional Hazards Model (Log Odds Ratio) . 95 5.6 GLM Estimation of Firm Failure Based On Lateral Hiring Strategy . 97 vii Acknowledgments To the most patient dissertation committee anyone could ever have: Calvin Morrill, Laurie Edelman, Catherine Albiston, and Heather Haveman. To the faculty who valiantly attempted to teach me statistics: Sophia Rabe-Hesketh, Maya Peterson, Alan Hubbard, Anders Skrondal, and Kevin Quinn. To the colleagues who put up with me: Nicholas Sim, Johann Koehler, Hannah Laqueur, Vasanthi Venkatesh, Tobias Smith, Aaron Smyth, Joy Milligan, the 2016-17 Berke- ley Empirical Legal Studies Fellows, and the UC Berkeley Multi-Level Modeling Working Group. And to my family: James Kluegel, Kathleen Kluegel, Leah Rivers, Daniel Rivers, Asa Rivers, and Ezra Rivers. 1 Chapter 1 The Professional Organization A law firm is an organization staffed, owned, and managed by professionals; as such, law firms sit at the nexus of two distinct strands of academic inquiry: work on the professions and work on organizations. However, there has been relatively little work examining the pro- fessional firm as a unique entity; the professions literature tends to examine professionals as members of a broad category, while organizations literature generally considers professional firms as being like any other knowledge-intensive organization. But instead of being either a collection of autonomous professionals or an organization like any other organization, pro- fessional organizations face distinct challenges, are governed by separate rules, and perform specialized work and as a result, professional organizations often grow and develop.