The long read: Has strict lockstep and turf war sabotaged Linklaters’ China ambition?

Stringently managed lockstep and political infighting have contributed to Linklaters’ fast shrinking partnership in Greater China, indicating testing times for the magic circle firm’s China ambition.

In the space of just one year, the number of partners in Linklaters’ China and Hong Kong offices has plummeted by 12 (see tables for detailed list of partner exits). It is a staggering rate of reduction, as the number accounts for one fifth of Linklaters’ entire Asia partner headcount, and one third of its Greater China partnership ranks.

These exits can be categorised into three main groups: natural retirement, performance-related cases of partners being managed out, and voluntary moves. While a few of the partners who moved voluntarily did so for family and personal reasons, the majority left to join either a US or magic circle rival.

Linklaters’ corporate department in Hong Kong, particularly its private equity practice, has been hit the hardest by the raft of partner departures and retirements.

With global corporate head Matthew Middleditch due to return to London later this year following a four-year tenure in Hong Kong, Linklaters will only have two corporate partners in the major financial hub: Asia practice head Robert Cleaver and Craig Dally, who was made up in 2012.

Spate of exits

Hong Kong private equity partner Betty Yap and Beijing corporate partner Judie Ng Shortell are the two latest partners to leave the firm, both moving to Paul Weiss’s Hong Kong office. Their departure is expected to have the most disruptive impact on the firm’s Asia private equity practice and China practice.

“Betty is a big loss. Her move with Judie to Paul Weiss does change the dynamics,” says a source close to Linklaters.

The sensitivity around Yap’s departure was not just because she is a highly regarded private equity partner but also because she is a key member of the firm’s China practice. She first joined Linklaters in 1998 in Hong Kong and was make up in 2004 before her appointment as head of China practice in 2011.

Prior to that, Yap practised at legacy Australian firm Mallesons Stephen Jaques, prior to it becoming King & Wood Mallesons. She and Shortell are both fluent in Mandarin, Cantonese and English.

A highlight of the pair’s deal list was China Mengniu Dairy’s $1.7bn (£1.1bn) acquisition of Yashili International in 2013 as part of China’s milk production industry consolidation. The pair acted for Hong Kong-listed Yashili, as well as its main shareholder Zhang International Investments and the Carlyle Group, which also sold its 24 per cent stake in the listed company in the deal.

“When it comes to China-related clients and private equity deals, Yap is a formidable force,” comments a source at a rival US firm.

Sources familiar with the situation claim Linklaters had prioritised investment to its China team and focused on the career and business development of local talent such as Yap, but this focus had allegedly upset a number of good expatriate lawyers.

“Linklaters gave its China team a lot of attention and prioritisation in the region, but the favoured individuals didn’t repay with loyalty,” says a source. “This strategy seems to have backfired and caused collegial damage.” The source also pointed to the fact that there is now no Chinese partner left in the firm’s Hong Kong corporate team.

Linklaters’ focus on building up its China team is evident in its promotion rounds in the past four years. Of the 11 partners promoted in Beijing, Shanghai and Hong Kong between 2012 and 2015, seven are native Chinese speakers, including Judie Ng Shortell who was made up in 2012.

‘A right pickle’

“Linklaters is in a right pickle. The reality for me is that the office has been dysfunctional for a while,” says an insider, who adds that the “dysfunctionality” is down to some fundamental issues.

The first is described as a lack of real centre of gravity and leadership. “The office is neither an expatriate office nor a local outlet. It’s more of a personality issue than anything,” he says. “The Hong Kong management doesn’t have a clear strategy and is more about managing the process and day-to-day running of the business.”

The second main issue lies in the alleged imparity between the investment given to and the output from the firm’s China team, which created discord between certain Chinese and non-Chinese partners.

“The China team in China has a big voice in the firm for a relatively small practice that doesn’t deliver great results. This has caused much concern adding to the rows,” the source adds.

Some say the problems have been present in the firm’s China corporate practice since 2010, when Shanghai-based Asia head Zili Shao left the firm to take up a role as the chairman and CEO of JP Morgan’s China business.

In the following year, Linklaters parachuted a string of London-based partners to Hong Kong in a bid to strengthen its capability in Greater China. For example, Cleaver was transferred to Hong Kong in 2010, followed by energy and infrastructure partner James Douglass’s relocation to Beijing and Middleditch’s move to Hong Kong in 2012.

However, the effort in bulking up its Hong Kong base with senior-level relocations has achieved limited success and growth.

The firm lost its co-Greater China managing partner Celia Lam to Simpson Thacher & Bartlett in 2011. In May 2015, James Douglass returned to London as he jumped ship to King & Wood Mallesons, as part of the partners exiting en masse in the past 12 months.

Inflexible lockstep

Apart from the intricate politics of the firm’s China practice, Linklaters’ tightly managed, inflexible lockstep structure is a much more pronounced problem that has driven several partners to defect to rival firms.

Linklaters operates a 10-year lockstep, with partners joining on 10 points and adding 1.5 points per year to a plateau of 25.

In the 2014/15 financial year, the firm’s equity spread ranged from £711,000 to £1.778m, signalling a 1 per cent increase at both ends of the equity.

The firm is understood to have discussed for a number of years plans to introduce gates to its equity, bringing a merit-based element to its lockstep structure. However, there hasn’t been any real progress yet.

“If you ask most people, the firm is not as much a fun place to work as it used to be,” says a former partner. “It has become an increasingly tightly managed firm. Its culture and collegiality isn’t what it used to be. The good things a lockstep system aims to promote are under growing strain.”

Another former Linklaters partner claims the cultural change was first driven by the old global management led by managing partner Simon Davies, who left the firm at the start of the year.

“The management focuses heavily on individual performance and numbers. But its inflexible lockstep means partners can’t be moved up or down the ladder. The only tool management has is to encourage people to leave,” he says.

“It has driven some unhappy behaviours as individual partners try to maximise their individual performances. People started to be very protective of their own business and less willing to share clients or work with other partners.”

Political infighting over clients and business origination has been mentioned by a number of former Linklaters partners as a key pressure point, criticising the experience as “demoralising” and “draining”.

“The firm’s lockstep system doesn’t reward good lawyers or hard working partners contributing strongly to the bottom line. Instead people who are politically savvy will be better rewarded. There were too much politics. I just wanted to be a good lawyer and eager to build the business, but it is very difficult to do in Linklaters,” says a former partner.

Future uncertainty

Responding to the series of departures, Linklaters’ Asia managing partner Marc Harvey insists that the reasons for each departure are different and that departures open opportunities for new talent. The firm also indicates that the new partner promotions in April 2016 will include “robust additions to our dynamic Asia team”.

In the four years between 2012 and 2015, the firm’s promotions showed a strong focus on Greater China. Its offices in Beijing, Shanghai and Hong Kong had a total of 11 new partners elected, compared to 15 across the whole Asia. Greater China promotions accounted for 12 per cent of the global total, which stood at 91 in the past four years.

But last year Linklaters only elected one Beijing corporate lawyer to partner in Greater China, whereas in 2012, all five of the firm’s Asia promotions were from Greater China.

The firm’s rivals, however, expect a more trying time for Linklaters to rebuild its corporate and PE offerings in Hong Kong.

“Any law firm that has lost three to five star partners should be concerned. It needs to do some soul searching and rethink how to keep partners motivated,” says a partner of a US firm in Hong Kong.

“Linklaters lost some high-profile and high-quality people in the market place. It’s one thing to lose older partners who are reaching retirement age, but not the sort of partners they are losing, who are at their peak and really should be the engine of the firm’s growth in the next 10 years,” the partner adds.

Merger potential

Linklaters’ fate in Greater China and Asia in the short and medium term is also heavily dependent on the firm’s new China strategy following the newly elected firmwide management led by London banking partner Gideon Moore.

The firm has been looking for a Chinese ally since 2014, and at the end of last year Shanghai based boutique firms Capital Law & Partners and Kai Rong emerged as two of the likely candidates.

However, sources familiar with Linklaters say a merger is only one of several options the firm is currently weighing up.

“Linklaters has spent a lot of time thinking how to face China. The general feeling is that it missed the boat for the US market and now it is a good chance to crack the second largest market in the world, China,” says a source in Hong Kong.

“An awful lot of strategic planning and thinking are going into that,” the insider adds. “Any options will be looked at in close detail but views will be different from different practice groups and geographic locations.

“I don’t feel the firm’s strategy to focus on China is wrong, but the question is if we need to be big in China is merging with a PRC firm the right way?”

With many questions still to be answered and changes to be made, Linklaters surely has a lot of hard work to be done both globally and locally to regain its former glory in a much more competitive Greater China market.

Linklaters partner departures since January 2015 (Greater China)

Linklaters stalling growth in Asia

Source: The Lawyer Asia Pacific 150

Linklaters partner promotions in Asia