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Managing Underperforming Partners

In this issue:
  • Article: Sarah Chilton and Clare Murray consider how firms can manage the risks and processes relating to partner underperformance
  • Video: Clare Murray discusses handling partner underperformance
  • Little Book: Partner Exits and Team Moves
  • PPA archive: Dealing with Rogue Partners

Many professional partnerships have policies in place to manage the conduct and performance of their employees, but have no equivalent policies or procedures for partners.  In particular, few have formal performance management processes to deal with partner underperformance. Yet in our experience mishandling of underperforming partner exits are the single most significant source of unlawful discrimination complaints by partners.

It is the vacuum of evidence which often places the firm at greatest risk in relation to such partner claims. The lack of any formal or meaningful discussion with the individual partner prior to the request that they leave the firm, can lead to both confusion and anger on the part of the exiting partner. They may see themselves as being unfairly targeted for exit, in contrast to peers whom they consider to have the same or a lower level of performance. This information gap and lack of communication can, rightly or not, create resentment, a sense of unfair treatment and allegations against the firm and senior management of discrimination and of acting in bad faith.

Firms can however put themselves in a much stronger position to respond to such complaints – and also put individual partners in a better position to understand and address the performance issues (and if necessary to move on in good time to avoid a forced exit) – by:

  • adopting clear and consistent partner expectations and balanced scorecard performance assessment criteria for partners;
  • following open partner appraisal systems with honest and direct feedback and appropriate partner targets;
  • applying rigorous and consistent partner performance management processes where partners fall short of expectations;
  • considering whether there are individual partner circumstances which may affect their ability to achieve expectations (e.g. pregnancy, maternity leave or a recent return from maternity leave, long term health issues, and family caring responsibilities, amongst others); and
  • carefully documenting those assessment and performance management processes.
The importance of firms taking these steps to protect themselves was particularly highlighted over the summer by the EAT decision in Fennell v Foot Anstey LLP. Mr Fennell was a Limited Equity Partner (LEP) in the firm.  Having had an excellent first year with the firm, his performance was described in his next appraisal as having “gone off a cliff” and the firm did not have confidence that he could improve. Having initially determined to remove him from the partnership, the firm then decided instead that he should be put through a formal performance review process. During that process he failed to hit the major target set for him, though he achieved a lower soft target; the firm gave him direct feedback to that effect.

The firm then restructured its partnership to remove LEP status, moving instead to a structure of a new grade of equity partner and a new employed legal director status. It adopted a “multi-factorial approach” to determine which of the existing LEPs would be offered the new equity partner status and which the employed role. Each LEP was assessed individually based on financial performance, partnership criteria, practice area, personal circumstances and most importantly, potential for business development. As part of that process they looked at individual billing data for the previous 2 years, group leader comments, each partner’s last appraisal and 360 degree feedback information.Mr Fennell was not offered the new equity partner status, but rather the employed legal director role: he claimed the reason for that was that he was older, namely over 45.  He made other complaints about earlier treatment he had experienced at the firm, including in relation to the previous decision to remove him on performance grounds, and the performance process applied to him. He claimed he was being treated less favourably than younger LEPs on grounds of age, and he put forward statistical evidence which tended to show that the prospect of becoming an equity member in the firm diminished with age.

Both the Employment Tribunal and the Employment Appeal Tribunal rejected Mr Fennell’s complaints.  They were satisfied that the reason he had not been offered the new equity partner status was because of his performance and not his age. The statistical evidence in itself was not considered to be enough to show a clear link between the firm’s treatment of Mr Fennell and his age.

Further, the younger LEPs who were given the new equity role, to whom Mr Fennell had compared himself were not appropriate comparators. The firm has assessed each LEP individually using the key assessment criteria, and that process had shown that there were material differences between those partners and Mr Fennell (such as lack of positive feedback from his group leader and low personal billings compared to others). The tribunal was entitled to find, on the basis of the firm’s evidence, that its decision was based not on Mr Fennel’s age but on its concerns regarding his ability to generate business and its loss of confidence in his ability to take the business forward – a key criterion in the formal assessment process.

Foot Anstey’s use and documentation of a thorough appraisal process, a performance management process with set targets, and objective assessment criteria in the restructuring process, were therefore critical in their successful defence of Mr Fennell’s partner age discrimination claim.

It is of course not just age discrimination which could arise in a partnership situation.  In theory all types of discrimination can arise, but age, sex and disability discrimination are probably the most common forms of discrimination claims which we encounter when advising firms and partners who are asked to leave on the grounds of poor performance.

Allegations of sex discrimination are sometimes made when a firm raises performance concerns about the performance of a partner who has recently returned to work after a period of maternity leave.  Returning from maternity leave can sometimes be difficult for partners in professional practices. They may receive little help to reintegrate; often their clients may have been transferred to another partner who may be reluctant to return them; they may have had no appraisal on which to record their performance prior to maternity leave; and there may be misconceptions about the partner’s commitment, especially if she takes multiple maternity leaves and/or requests flexible/part-time working for childcare purposes. Those factors are likely to negatively and unfairly impact perceptions of the partner’s performance.  Taking action on the grounds of performance, or to otherwise treat the partner unfavourably or less favourably in such circumstances, with regard to e.g. profit allocation or promotion to full equity status, will expose the firm to potential claims of unlawful discrimination on grounds of pregnancy, maternity leave or sex.

But what of those partners whose performance was a concern before they became pregnant and took maternity leave?  Here there may be a genuine need for performance management, which is not based on the fact that person is pregnant, has been on maternity leave, or is a woman.  If the firm has no objective record of the performance concerns which existed before that partner informed them she was pregnant or commenced maternity leave, then taking any action to manage or potentially exit that partner, will again expose the firm to allegations of discrimination.  But having a properly documented and consistently applied partner appraisal and performance management process, with clear expectations, honest feedback and appropriate support, will go a long way to help firms defend related allegations of unlawful discrimination.

As a professional practice, what steps can you take to ensure that partner performance is managed properly and promptly both to minimise the risk and  – importantly – to align partner contribution to the strategic needs of the business?

  1. Have clear performance objectives for all partners and prospective partners so they all know what level of performance is expected of them, and the criteria against which they will be assessed for fixed share and equity promotion, profitshare allocation, and for exit as part of any restructuring or downsizing.
  2. Have regular appraisals for partners with honest feedback, including those who are on any form of family leave.  This means that performance concerns are raised promptly, and that those concerns can be dealt with, with appropriate support, in order to help improve performance.
  3. Have properly drafted, clear and unambiguous policies in place for dealing with under-performing partners, and make sure partners know which policies apply to them, and that those policies will be implemented consistently across the partnership.
  4. Manage expectations – where a partner is warned that there are performance concerns, it should reduce the likelihood of a dispute.  Often a dispute arises because the partner is shocked and distressed because they did not pick up (or were in denial) about the “subliminal messages” the firm may have been sending them about their performance.
  5. Know your LLP or partnership agreement – be on top of the provisions, grounds and processes for exiting a partner for performance and other reasons. Do not assume that silence in the agreement as to process or procedure gives the firm a free hand to exit a partner with impunity.    Following and documenting the grounds and process for an underperforming partner exit will not only reduce the risk of potential costly discrimination and (in respect of LLP members) whistleblowing claims, it will also help address any allegations that the firm or senior management have acted in bad faith or in breach of the partnership/LLP agreement terms.
CM Murray LLP can provide firms and partners with support with performance management processes, drafting and implementing partner management policies and procedures, and helping to manage risks and to achieve sensible commercial outcomes in partner exits. Please contact Sarah Chilton or Clare Murray if you would like more information.