Part II: How most law firms misapply the “Cravath system”
[Posted by Bill Henderson, cross-posted to ELS Blog]
In my last post, I discussed the linkage between the bimodal distribution and the emphasis on credentials under the “Cravath system.” I also stated that most law firms misunderstood the internal logic ofthe original Cravath model and promised to elaborate in a subsequentpost. This is the promised entry.
One note of context: this post is not a history lesson. TheCravath system reflects a profoundly powerful method of developinghuman assets. Cravath started with very good associates/inputs andturned them into truly exceptional lawyers who were in high demand byclients and other firms. Moreover, the Cravath system requiredlawyers to work together collaboratively to further the clients’interests. This resulted in efficient and highly effective legalservices that engendered the abiding loyalty of clients and more demandfor the firm’s services. See Results or Résumés at4 & n. 13 (discussing concept of firm-specific capital). In other words, underthe true Cravath system, everyone comes out ahead. Two caveats: (1)the first-mover–here, Cravath 108 years ago–garners the most benefit;(2) if a firm neglects a key element–e.g., investing inassociates–the model generates no competitive advantage.
[Sources: The Cravath system described below come primarily from Robert Swaine’s 1948 history of the firm and other contemporaneous sources from the 50s, 60s, and 70s, which I will cite as appropriate.]
Recruiting Elite Law School Graduates
One of the hallmarks of the Cravath system is the recruitment ofelite law school graduates. As of 1948, Cravath, Swaine & Mooreand its predecessor firm had employed a total of 454 law schoolgraduates as associates. Of this total, 67.7% attended Harvard (128),Columbia (124), or Yale (54). According to Swaine, “in recent yearsthere has been an increasing number from the law schools of theUniversities of Virginia and Michigan.” These two schools rounded outthe top five : (UVA 30, Michigan 26).
Cravath’s emphasis on credentials, however, had a clear economiclogic that was designed to compensate for the deficiencies of early20th century legal education. During this period, most law schoolsrequired little or no college education. In contrast, Harvard,Columbia, and Yale grads typically had a college degree before enteringlaw school. Swaine writes,
Cravath believed thatdisciplined minds are more likely to be found among college graduatesthan among men lacking in formal education … .
Cravath believed in seriousness of purpose–a man with a competentmind, adapting to practicing law according to Cravath standards, shouldhave made a good scholastic record at college. But he recognized,without full approval, the tradition of the early decades of thiscentury–that “gentleman” went to college primarily to have a good timeand make friends. Hence, while a good college record was always afactor in favor of an applicant, lack of such a record was notnecessarily an excluding factor. … [I]n the stern realities of thedepression of the ’30s, however, college records of applicants came tohave added importance.
Yet, “[f]or a poor law schoolrecord Cravath had no tolerance.” Candidates who “had not attained atleast the equivalent of a Harvard Law School ‘B’ either had a mind notadapted to the law or lacked purpose and ambition … .” Thus, the”first choice” was a “Phi Beta Kappa man from a good college who hadbecome a law review editor at Harvard, Columbia or Yale.”
Note, however, that Cravath’s emphasis on credentials had a clearbusiness purpose designed to compensate for the limitations of legaleducation. During the first half of the 20th century, going to an IvyLeague law school did not guaranteed legal aptitude. Prior to advent ofthe LSAT in 1948, college grades were the only predictors of success inlaw school. In 1955, The “LSAT Handbook” included cross-tab tables of LSAT scores versus law school performance for several individual lawschools. At Harvard Law, roughly 1/3 of the class scored below the 50th percentile. On the west coast, UC Berkeley had a similar wide range of LSAT scores. See The Law School Admission Test and Suggestions for Its Use(ETS 1955). The clear relationship between LSAT and gradessubsequently encouraged law schools to revamp their admissionscriterion. But that process took decades. See Lunneburg &Radford, The LSAT: A Survey of Actual Practice, 18 J. Legal Educ. 313 (1965).
In a talk at Harvard Law School, Cravath stated that a successful”lawyer of affairs” (aka corporate lawyer) assumed “the fundamentalqualities of good health, ordinary honesty, a sound education andnormal intelligence.” On top of these attributes, a candidate musthave “character, industry and intellectual thoroughness, qualities thatdo not make for charm but go far to make up that indefinable somethingthat we call efficiency. Brilliant intellectual powers are notessential.”
More after the jump …
Developing Human Assets
Under the Cravath system, the inputs themselves (i.e., qualifiedassociates) had little value to clients. Rather, they needed to betrained by the investment of intensive training. Over a period ofyears, that investment created the remarkable efficiencies and superbquality that bonded clients to the firm.
The Cravath system was build upon an incentive structure thatencouraged young lawyers to acquire skills at an optimal pace. Further, the firm was intent on inculcating its superior work habits. “Cravath believed that a staff trained within the office would bebetter adapted to its methods of work … and hence he insisted thatthe staff be recruited, so far as possible, from men just out of thelaw schools.” Cravath also ended the practice of associates havingtheir own clients and working on firm’s matters in exchange for a deskroom. “Cravath could not tolerate the inefficiency and divided loyaltyimplicit in such an arrangement. … [E]very associate, including theman fresh from law school, was put on a salary.”
Once in the firm, associates where placed on matters in a way thatrounded out their professional training. According to Swaine,
Cravathpreferred that men should not specialize in such branches of the law asreal estate or administration of estates or, later, taxation, untilthey had attained a general experience over several years. Thisobjective required that a man should not be confined to the work of oneclient or be assigned to one partner for any undue length of time.
At the outset of the practice Cravath men are not thrown into deepwater and told to swim; rather, they are taken into the shallow waterand carefully taught strokes. The Cravath office does not follow thepractice of many other offices of leaving small routine mattersentirely to young men fresh from law school without much supervision… . Under the “Cravath system” a young man watches his senior breaka large problem down into its component parts, is given one of thesmall parts and does thoroughly and exhaustively the part assigned tohim–a process impracticable in the handling of small routine matters. Cravath believed that a man who learns to analyze the componentparts of a large problem involving complicated facts, and to do eachdetailed part well, becomes a better lawyer faster than the man who isnot taught in such detail.
As the professionalcompetencies of associates grew, their level of responsibilityincreased. Ideally, these competencies included the ability toeffectively delegate, supervise, and train other lawyers. Swaineobserved, “The art of delegation in the practice of the law isdifficult, requiring the nicety of balance which many men with fineminds and excellent judgment are unable to attain. … The more nearlyhe attains the right compromise between [doing all the work himself orturning everything over to an assistant], the greater the amount ofeffective work a man can turn out, and hence the greater his value tothe firm.”
Obviously, the Cravath system as conceived by Paul Cravathenvisioned a process that spanned several years. Therefore, “[m]en whoare willing to stay only a year or two are not desired, for the’Cravath system’ cannot train a main in that short time. They areexpected to remain as long, but only as long, as they are growing inresponsibility.” In today’s high attrition environment, this temporalcomponent has been completely disrupted at most firms.
Another tenet of the Cravath system was up-or-out after six to tenyears, primarily because a “man who is not growing professionallycreates a barrier to the progress of younger men within theorganization … . It is much better for the man, for the office andfor the clients that he leave while he still has self-confidence anddetermination to advance. The frustrated man will not be happy, andthe unhappy man will not do a good job.”
Sustainability
The genius of the Cravath system was the interlocking incentivesthat made the model sustainable: every person involved in theprocess–associates, partners, clients-was made better off. In thecase of associates who were not destine for partnership, Swaine reported:
Thefirm constantly has requests from clients and other leading industrialand financial organizations to supply men for legal and executivepositions. Other high-ranking law firms of the City and elsewhere havetaken Cravath men as partners; many Cravath men have formed successfulfirms on their own [many of which are now Am Law 100 firms]; and quitea number have become members of law faculties. It is oftendifficult to keep the best men long enough to determine whether theyshall be made partners, for Cravath-trained men are always in demand,usually at premium salaries.
Almost without exception, the relations between the Cravath partnersand the men who have left the office to compete professionally haveremained friendly, and often intimate. Cravath partners take greatpride in the success of alumni. … [N]ew business if often referredto former associates.
One such Cravath alumni was Charles Reich, a Yale law professor who gained fame for the influential book, The Greening of America(1971). One of Reich’s close friends recently took at job at Cravath,Swaine & Moore, and Reich used the occasion to reminiscence on thisown experiences. It a letter to his friends daughter, which was subsequently published in The American Lawyer in December 2007, Reich’s relates impressions strikingly similar to Swaine’s account:
In the Cravath of 1952, I felt no pressure whatever concerning billablehours. … Theonly pressure was to complete an assignment on time. … We were all told that while few associates could expect toremain permanently at the firm itself, we could all count on well-paidfuture employment at one of the many corporate legal offices orregional law firms that had ongoing relationships with Cravath. Themessage was: Excellent work is expected, but the pressure is off. Associates were safely and comfortably on the inside for life. Inclusion was more important than competition.
In the terrific book Lions of the Street(1973), journalist Paul Hoffman quoted another former Cravathassociate, who observed, “The [Cravath] fraternity takes care of itsown. … Nobody starves.” Going to work for Cravath and following theprogram guaranteed a certain minimum level of professional success. And that minimum was, in the bigger picture, pretty darn high. Further, with some luck, you could become partner at Wall Street’s mostrenowned firm.
Interlocking Incentives for Partners
It is noteworthy that the Cravath system reflected a businessphilosophy that encompassed the entire firm, including thepartnership. According to Swaine, “Probably the most rigid feature ofthe ‘Cravath system’ has been insistence that for every man in theoffice, from the senior partner to the neophyte law clerk, the practiceof law much be the primary interest and that that practice shall besolely as a member of the Cravath team.” Associates and partners weretrained in the tradition that:
All the business inthe office much be firm business. … The problem of the firm is to doeffectively the business that comes to it; by so doing that business,more comes in. Hence, business-getting ability is not a factor in theadvancement of a man within the office at any level, except in so faras that ability arises out of competence in doing law work … .
Every partner is expected to cooperate with every other in thefirm’s business, through whichever partner originating, and tocontribute to all the work of the firm to the maximum of his ability. The formation among the partners of cliques practicing independently ofeach other, which developed under Gurthrie [a partner who left the firmin 1906], would not be allowed today.
To maintainthis interlocking system of incentives toward high quality workproduct, Cravath very rarely hired lateral partners or associates. Thus, “Young partners and young associates are seldom subjected to thediscouragement of seeing someone come in over them from the outside.” [A Cravath tenet broken by most law firms today.] Swaine also claimedthat the firm discouraged work habits that crushed interests outsidethe law. “Cravath wanted his partners and associates to have suchinterests, and believed that the few who allowed office work topre-empt all their energies where harming themselves and the firm.”
The Cravath firm history has a interesting passage on the the firmcompensation system. Today, Cravath Swaine & Moore is often citedas one of the few remaining examples of lockstep compensation, in whicha partner’s profit share is a function of years with the firm. See,e.g., Paul C. Saunders, When Compensation Creates Culture,19 Geo. J. Leg. Ethics 295, 296-97 (2006) (partner at Cravath Swaineand Moore discussing deleterious effects of eat-what-you-killcompensation system and noting “[m]y firm’s model for partnercompensation is, and has been for a very long time, completely based onthe lockstep approach.”). Yet, the passage excerpted below suggests,at best, a modified lockstep approach:
Attainmentof partnership does not mark either the limit of potential growth oraccession to any automatic hierarchy. The younger partner whoevidences capacity to win the confidence of clients with whom he or sheworks so that they continue with the firm, or impresses others who comeinto contact with his work so that other business comes to the firmthrough him, and who takes responsibility for a number of variedmatters, at the same time supervising the work of members of the staffand sometimes of other partners, may well raise, and indeed often hasrisen, with the firm more rapidly than his seniors. The partners arejudged inter se just as are the associates, and adjustments are made to reflect the evaluation of the young partners by their seniors.
My co-author, Marc Galanter,tells a story–possibly apocryphal–that the Cravath partnersapproached Paul Cravath about the possibility of moving to a pureseniority-based compensation system. Cravath stated that he had noobjection to the proposed plan, “as long as I get my half.” I have noidea if this story is true, but it is (a) amusing and (b) consistentwith idea that rules required to build a franchise may be verydifferent than those required to maintain it. Certainly, the lockstepsystem may be the best way to preserve a cooperative ethos at a firmthat has earned the top position in the market.
Conclusion
One objection of my above characterization of the Cravath system isthat I have been too willing to accept, at face value, the words ofRobert Swaine and Paul Cravath–that these lawyers are spinning thehistory to show themselves in their desired light. I understand thecriticism but I think it is premature and possibly misguided. The bestway to ascertain the reliability of Swaine’s historical account is toexamine the various pieces of the Cravath system and ask ourselves ifit holds together as a theoretically coherent model. I think itdoes. Occasionally an accurate historical account is going to be themost flattering.
In a future post, I will discuss how the logic of the Cravath systemmirrors the findings of the famous Bell Labs study, which documentedthat organizational productivity was a function of teachable workstrategies rather than the credentials or innate abilities ofindividual engineers. Further, under the Bell Labs system, women andminority engineers tended to post the largest gains–a finding thatshould give the legal profession pause. See Results or Résumés.