Shall We Lockstep, or Not? -An Initial Empirical Research on Shanghai Law Firms Distribution System And Their Lawyers' Educational Background

Qi Adam Li, Zhengming Pan, Aaron Hovan

Perspectives, Vol. 3, No. 7

The number of practicing Chinese lawyers[1] and their revenues have grown dramatically over the past twenty three years since China's economic and political rebirth. The number of fulltime lawyers in China[2] has grown from zero in 1979 to approximately 120,000 in 2002.[3] Shanghai lawyers, situated in the most economically sophisticated city in China, have experienced similar growth, whose number grew from sixteen in 1979 to 4,643 in 2000.[4] Gross revenue generated by Shanghai lawyers doubled every two to three years since 1985 to RMB 990,000,000 (approximately U.S.$ 120,000,000).[5] Revenue per head for Shanghai lawyers has also increased, from RMB 5,365 in 1985 to RMB 213,235 in 2000, a 4000% increase, adjusted for inflation.[6] In striking contrast to American law firms, not a single Shanghai firm adopts the so-called a pure "lockstep" system, where partners share the profits strictly according to their seniority rather than their performance.[7] Less than a handful firms include seniority in their distribution.[8]

Ronald J. Gilson and Robert H. Mnookin concluded that lockstep could often be more efficient than productivity-based system (or performance-based system or "eat-what-you-kill").[9] They also noticed that lockstep systems of compensation would work only when "shirking", "grabbing" and "leaving" can be constrained.[10] Here, "grabbing" means a lawyer's taking away of the know-how, including the client from the firm for which she has worked; "Shirking" refers to the lack of work ethic resulting from a lack of direct incentive to work hard. "Leaving" means without direct incentive of loyal dedication, lawyers would leave the lockstep firms for a firm where such incentives exist. Lockstep firms are successful, according to Gilson and Mnookin, for two main reasons. First, "grabbing" and "leaving" are minimized in firms with high levels of firm specific capital because by definition "firm specific capital can neither be easily removed from the firm nor easily duplicated outside the firm", and successful lockstep firms tend to have a high amount of firm specific capital.[11] Second, shirking is minimized "through some combination of socialization and selection." In other words, particular personal traits are sought and found within lockstep firms, so that "in a firm that successfully operates a sharing model, we would expect to find Jiminy Cricket in a three-piece suit perched on each lawyer's shoulder." In other words, such firms could operate because most of their lawyers have top level of self-disciplines and self-esteem.[12]

In this article, we seek to apply Gilson and Mnookins's theory to Chinese law firms, specifically to Shanghai. Shanghai is chosen because it represents the fast growing legal market in China. In our research among Shanghai law offices, we have found that neither the firm specific capital nor the "combination of socialization and selection" exists in Shanghai to the same degree that they do in the U.S.[13] Nonetheless, our research has shown that in the limited instances where "a combination of socialization and selection" and some firm specific capital exist, firms are willing to adopt some sort of a lock-step compensation system. Although based on an admittedly small sample size, our research showed that there was a significant correlation between uniformity of educational background and lockstep compensation system in Shanghai law firms.

Firm specific capital-to prevent "grabbing and leaving"-and a combination of socialization and selection-to prevent "shirking"-are in short supply in China for two reasons:

First, the Chinese had no legal education system for thirty years prior to China's ongoing transition from the old planned economy, where lawyers were in no demand. The relatively poor educational background of Chinese lawyers made it difficult to use education as a proxy for social characteristics, i.e., designating a law degree from certain schools as a screening agent for both academic performances and personalities, in the way Gilson and Mnookin suggest. Second, China's economy, law and society have dramatically reorganized themselves over the last twenty years. The dramatic social changes of the last twenty years depletes almost all the firm specific capital of old law firms and old lawyers by limiting the usefulness of lawyer's past experience.[14] These two forces provide strong disincentives to enter into a lockstep compensation system.

Part I of this article will discuss the general historical background of the development of lawyers and firms in Shanghai. Part II will discuss the Shanghai legal education market. Part III will focus on market changes faced by Shanghai lawyers, and the consequence of these changes to firm structures. Part IV reaches the conclusion that lockstep is yet part of the Shanghai legal market, and predicts that as Gilson and Mnookin's conditions for lockstep compensation systems (accumulations of firm specific capital, surplus of human capital, and advances in Chinese legal education system) become more and more prevalent, lockstep compensation systems will develop.

I. General Historical Background of Shanghai Lawyers

Shanghai was among the first cities to have law firms in China.[15] Until 1988, all the Shanghai law firms were state-owned[16] and all Shanghai lawyers were state-employed workers.[17] They received the same salaries and benefits as their colleagues with governmental agencies. Each lawyer received her salary based on her seniority as determined by a municipal committee, regardless of her earnings or productivity.[18]

With the expansion of the Chinese legal market and growth of law firms' revenues,[19] many Shanghai lawyers became less and less content with their salaries under the state-guided compensation scheme. And as Gilson and Mnookin would predict, lawyers' displeasure over low salaries was intensified by their inability to make more than less productive colleagues.[20] This discontent pressed Shanghai Municipal Board of Justice (SMBJ) to announce several reforms. State-owned law firms moved from a "lockstep" compensation system to a system where lawyers were allowed to keep around 30% of their revenues as bonus.[21] Almost without exception, all the firms decided to distribute the bonus strictly according to what each lawyer has actually brought to the firm, as opposed to a "lockstep" compensation system. However, SMBJ worried that the disregard of other forms of contribution to the firm would destroy institutional coherence within the then predominant state-owned law firms.[22] This worry turned out to be well founded. On one hand, 1994's total revenue generated by Shanghai lawyers increased by 100% from 1993, and continued to grow by around 50% each year thereafter.[23] The global increase in revenue in Shanghai legal community combined with the new revenue sharing arrangement has led to a dramatic increase in lawyer's income.[24] On the other hand, as SMBJ foresaw, the increase of Shanghai lawyers' income has had a substantial institutional impact. First, old firms split into newer and smaller firms.[25] A consequence of shrinking firms is that numbers of employment of newly admitted fulltime lawyers per firm shrunk from 5.67 in 1993 to 2.06 in 1994 and hit the bottom of the surprising 0.27 in 1997.[26] Firms were no longer able to retain lawyers. Second, new firms were often started by younger lawyers, some are just fresh graduate from college. Apprentice lawyers in new specialties could make much more money than their former masters whose expertise were either limited to the primitive knowledge of law or had been deprived in the years of ban of legal profession.[27] The senior partners were in no better places than the newcomers in terms of education, client base, or expertise in an abruptly changed market. The transition from state-controlled lockstep to a productivity based compensation system revealed their inadequacies in legal abilities. The wild performance variation of the lawyers in the same firm made it impossible to adopt a sensible office revenue sharing policy based on seniority. Lawyers started to flee. New firms, usually comprised of "young Turks" with more resources and expertise in the newer and more lucrative markets, took even more aggressive performance-based approaches, partly because they had hated the old and "inequitable" seniority-based system so much, and partly because they had thought that shirking, grabbing and leaving could never be cured on an institutional level.[28] These firms were not much more than cost sharing arrangements among individual lawyers.[29]

After 1993, the numbers of the law firms being formed increased dramatically. Most of the new firms were formed as collective-ownership,[30] and recently converted into partnership.[31] Almost all of these adopted eat-what-you-kill style compensation systems. Even within the firms that adopt a modified lockstep system, individual performance still dominates the revenue sharing.[32] Nonetheless, new firms have gradually established internal markets (where partners can find, or even shop for associates to work for them)[33] for their surplus human capital by hiring salaried associates with some elements of step-forward compensation system, though the practice varies widely from firm to firm.[34]

II. Addressing the Unsystematic Risk-Using Legal Education as a proxy for personality characteristics such as likelihood of shirking.

(1) The Theory

According to Gilson and Mnookin', lawyers choose lockstep because it provides a means to both avoid systematic and unsystematic risk. Under this theory, investors are exposed to two kinds of risks: systematic risk and unsystematic risk. Hence, for lawyers to invest in a sustainable and thriving business, they must reduce both systematic risk and unsystematic risk.

The systematic risk, like the market fluctuation, can be effectively minimized by diversification. The simple example in the law firm context is a bankruptcy lawyer's decision to join hands with a securities lawyer, because they would presumably have work regardless of the performance of the economy.[35] That settles the reason why many law firms today provide comprehensive services. It is normally a risk management strategy.

The unsystematic risk, on the other hand, is more difficult to avoid, since it involves estimating the future behavior of people. In lawyers' case, unsystematic risk involves "the variation in earnings from law practice resulting from the individual characteristics of a particular lawyer," [36] including health, academic abilities and personal traits. It follows that firms will try their best to reduce unsystematic risk by identifying characteristics that produce the least unsystematic risk, and hiring based on those characteristics. That is accomplished in America primarily by relying on a sound legal education system. Gilson and Mnookin predict and our research has shown that when a partners choose to lockstep their distribution, they are likely to have received an excellent legal education and would demand their associates to be equally qualified. The notion is, only people with the similar educational background tend to trust their counterparts in a largely self-disciplinary lockstep system in terms of their professional qualities and dedication. The real world examples are, the classic lockstep law firm of Cravath, Swaine & Moore recruited law students with superior education and outstanding academic performance directly from the campus and did little lateral recruiting. Its preference to law review editors and Harvard, Yale and Columbia was apparent historically.[37] Currently, both Cravath and Cleary, Gottlieb, Steen & Hamilton have lockstep compensation systems and a majority of firm members who graduated from Harvard, Yale, Columbia, or NYU.[38] This data contrasts nicely with the eat-what-you kill compensation system of Coudert Brothers, which corresponds with that firm's willingness to hire outside of the top 10 law schools.[39] That is exactly what we found in Shanghai's emerging lockstep firms.

(2) General Background of Shanghai Lawyers' Legal Education

Shanghai is one of the best-educated cities in China. Even so, barely half of Shanghai's lawyers (53%) possessed a complete formal legal education as of 2000.[40] When China reformed its legal system in 1979, there were no law schools and therefore no law school graduates. Out of necessity, many people without a formal legal education were licensed to practice law.[41] Initially, the lack of formal legal education among Chinese lawyers caused no significant problems. Clients did not demand too much.[42] The practice of law was little more than simple research and cooperation with government.[43] However, the rapid growth of legislation combined with the rapid economic and social growth of China have made Chinese society and Chinese legal practice more dynamic and complex.[44] As a result of this increasing complexity, the market has demanded more skilled lawyers. In order to ensure their lawyers' ability to handle complex work, clients try to select lawyers with a formal legal education that gives the skills required by the recently established businesses.[45] Shanghai has been the center of China's emerging legal market for business transactions, in addition, if not parallel to Beijing.[46] This article will now look at four Shanghai law firms compensation schemes to see how they have responded to all of these pressures.

(3) The Sample Firms

A survey of the following four law firms demonstrates that firms in China contemplating lockstep have at least tried to avoid unsystematic risk by using the educational level of their lawyers as an indicator of individual riskiness. In the following examples, we will analyze four Shanghai law firm's compensation systems and educational background. We conclude that the higher and more uniform the quality of a firm's legal education is, the more likely that firm is to adopt a lockstep compensation system. A picture of all four firm's educational background can be seen by looking at Chart 9, which shows the educational background of each firm's lawyers. As Chart 9 makes clear, both Firms A and C have both a higher quality of education and a higher level of uniformity of educational background.[47]

(i) Firm A- quasi-lockstep

Firm A's compensation system works as follows: partners collect all fees. All the fees are then put in a pool. A majority of the total dividends are distributed among partners according to their seniority, and the residuals are distributed on the basis of performance.[49]

Firm A has established a formal hierarchy among associates, primarily based on their years of graduation, with more than half directly recruited from campus, and less than half as laterals. Compensation to associates is evaluated year by year, based on seniority, hours billed, and the quality of their work, with wide discretion retained by partners. However, since even the best first year associate will rarely earn as much compensation as a second year associate, the lockstep system dominates both partner and associate compensation.

(ii) Firm B- performance based

The compensation system is typical in Shanghai. There is no strict line between partners and associates. Lawyers can opt to be a partner or an associate. If one chooses to be a partner, she would receive her fees under the name of the firm, and then after deduction of the costs they agree to share (potentially a large amount), all the remainder goes into the lawyer's pocket. If one chooses to be an associate, however, she would receive some fixed income from the firm, and work for a particular lawyer as assigned. Her compensation is part salary and part performance based.

The compensation system, than, is two tiered, with partners compensated strictly based on revenue, and associates compensation being made up of both a percentage of revenue generated and salary.

(iii) Firm C- performance based

Firm C specializes in arbitration, litigation and general corporate matters for foreign clients. This firm has elements of a lockstep compensation system in that the managing partner is authorized to assign cases to everyone, and everyone's earnings are determined by a combination of salary based on seniority and a percentage of individual revenues, all of which is reviewed and can be altered by the managing partner.

(iv) Firm D- eat-what-you-kill

Firm D is a purely eat what you kill firm. Partners receive their fees under the name of the firm, and then after deduction of the costs, residuals go back to the earner. It is a strict cost sharing arrangement.

(4) Analysis

This relationship between compensation system and educational background as seen in American firms is also seen in Shanghai firms. For firms A and C, over 80% of the partners graduated from two national leading law schools, and all but one lawyer had completed a formal legal education.[50] Both firms A and C adopted elements of lockstep in their compensation systems. The two firms with lawyers from less premium schools and less uniformity in education, B and D, had under 60% of their lawyers who went to national leading law schools, and between 25% and 30% of the lawyers at B and D had no formal legal education.[51] As Gilson and Mnookin would predict, these two firms are almost entirely eat what you kill.

We chose these four firms not only because they were among the leading law firms in Shanghai, but also because they were founded around the same time, except Firm D. Therefore, presumably, the time element should not play that important role.

But do good law school graduates or good law schools themselves warrant good law firms? Recall Cravath's reasoning for excellence is that, law school performance is the best and most reliable indicator of both legal skill level and legal theory level.[52] On the other hand, Gilson and Mnookin's explanation of unsystematic risk (the risk of individuals grabbing, leaving, or shirking) would indicate the best education means more than great skills and theories of law. Education acts as a proxy for other human traits such as moral standing and the unsystematic risk of shirking. Graduating from the best law schools is used by law firms to indicate a low likelihood of shirking because of the hard work required to graduate from law school. The three-year reinforcing of certain patterns of behavior that inevitably occurs at law school helps to achieve a level of social predictability that firms also seem to value.[53]

That may explain why the lawyers in the two law firms applying quasi-lockstep system have not only the best alma maters, but also a striking concentration in law schools. For Firm A, almost 90% of the lawyers come from a top quality national school, and for Firm C, over 80% of the lawyers come from another top national school, even though the styles of these two schools are different.

I did not, however, address the uniformity issue. Could a concentration of less elite law school in a single firm produce the lockstep distribution? Because I did not find such a concentration among Shanghai leading firms, the question is unanswered. For the moment, we may have to assume both quality and uniformity is required. This echoes the fact that uniformity and high quality of education are present in Firms A and C, the lack of uniformity and lower quality of education found in Firm B and D are serious obstacles to developing a lockstep system of compensation. Firms B and D are characterized by having less than 60% of their members attend a top national lawschool, and by 25%-30% of their members having no formal legal education. Gilson and Mnookin's theory suggests that lower levels of education and lack of uniformity of education make lockstep systems of compensation much less likely, and our research have reflected this might be true.

III. Addressing the Systematic Risk-From Market Perspective

In a lockstep law firm, senior lawyers receive higher compensation than junior lawyers regardless of their performance in a specific year. The question is, if a less senior lawyer could earn more money on his own, why would he choose to lockstep with someone who earns less money over time? The reasons might lay in the following theories:

First, as indicated above, there are significant advantages to lockstep compensation schemes, i.e., diversification of capital and the granting of firm specific capital. Presumably, people accept lockstep compensation schemes because they can't get a better deal anywhere else.[54] Since it has taken the dominant position in a number of American top large law firms for more than half a century and these firms remain empirically more profitable,[55] the system should be a good reflection of the relationship between partners' contribution and compensation. At the very least, this remains the dominant practice.[56]

Second, Professors Marc Galanter and Thomas M. Palay explained lockstep system as a consequence of lawyers wanting to leverage their surplus human capital[57]. According to their theory, senior partners' contribution is commensurate with their compensation because their surplus human capital (SHC) can be combined with the labor of associates. This combination allows the attorney's to profit from their capital beyond what their individual capacity to do work, and it gives associates the chance to work. With effective internal mechanism to prevent shirking grabbing and leaving, it is further assumed that the partners' contribution in the form of SHC is generally, if it is not absolutely, in positive relation with their seniority in a particular firm.

The developing track of these lockstep firms led to a relationship of asset specificity. Large firms grew together with their clients. The specific partner's SHC accumulation is largely attributable to the steady growth of the clients. A good example is the co-development of JP Morgan and Cravath.[58] This growth of firm and lawyer and client relationship makes individual surplus human capital and firm specific capital hard to separate, which makes it difficult for lawyers to leave, because first, if the lawyer left, he could grab little because the assets he would take would mean much less without the firm. Likewise, leaving would mean much a riskier venture if the thought about the huge bonus he would receive upon promotion as a partner.

However, due to its special market conditions, this relationship between individual SHC and Client/Firm Specific capital is not prevalent in China: a partner's SHC is not necessarily correlated with her seniority or service to the clients and, in fact, it is not related at all in most cases. Therefore, the idea of lockstep based on seniority seemed to be not workable in China for the past.

1. SHC of first-generation lawyers was shrinking instead of increasing.

As suggested above, the history of the profession of lawyers is of around 20 years. When the first-generation lawyers came into practice in the early 80's, the state-owned enterprises dominated the national economy and were the major clients of these lawyers. However, as stated above, with the progress of China's economic reform, the status of the enterprises decreased dramatically. In Shanghai, the state-owned enterprises contributed 76.9% of GDP in 1998, down from 99%.[59] The number of state-owned enterprises has dropped from 12,494 in 1998 to 10,891 in 2000 in Shanghai[60], while nationally, the number shrunk from 75, 645 in 1991 to 43,468 in 1997.[61] Furthermore, the unemployed urban population is 4,760,000 in 1994 and 5,710,000 in 1998[62], among which more than half (56.6%)[63] are directly linked state-owned enterprises.[64] These numbers demonstrate that the state-owned enterprises are shrinking both in numbers and in percentage. With the shrinking of the state enterprises, the demand for lawyers to meet their needs has also shrunk. The opportunity to grow together with their clients available to Cravath has not been provided to China's first-generation lawyers. Their investment in the development of client relationship did not bring them a good remuneration: their SHC has been eroded in the past five to ten years. It follows they may have nothing to offer under the bankruptcy/securities scenario by Professor Gilson.[65]

2. First-generation lawyers had no seniority-based advantage in the competition to acquire new markets.

Chinese first generation lawyers lost their human capital because their traditional clients, state enterprises, were declining in their economic performance. A natural response for these lawyers was to seek the opportunity to acquire new markets. New industries such as real estate, securities, IT, etc. emerged in China, creating new markets for legal services. However, large number of new lawyers joined the competition to acquire the newly emerging market.[66] A tournament developed between the old lawyers and the newcomers.

According to Galanter and Palay, a lawyer's human capital has four main elements.[67] These elements provide a useful framework from which to evaluate the intergenerational competition among Shanghai's lawyers.

(i) "Pre-law-school endowment of intelligence, skills, general education and the like."[68]

Considered as a collective entity, we assume that the predecessor lawyers and the newcomers have the same quality in terms of intelligence. However, as mentioned in the above section, newcomers have received better educations.

(ii) "Legal education and experience-dependent skills"[69]

Since 1978, China had undertaken a continual educational reform keyed to the economic transtion in order to ensure that the graduates could adapt to the market economy instead of the planned one[70]. Ten to fifteen years ago, the major courses in China's law schools were the legal theories contained in classic Marxism works.[71] The situation has been greatly changed. More practical courses have taken the dominant position[72]. In this sense, newcomers received a "better education" than the old lawyers did. In addition, professional experience is highly area-specific. Lawyers can only develop these "experience-dependent skills" in the areas they practice. Since the new market is generally brand new to all the players, neither of them has any advantage.

(iii) "Professional reputation"[73]

Through her reputation, a lawyer "disseminates information to clients and other lawyers about her qualification, skills temperament, legal philosophy, honesty and integrity".[74] Again, the qualification and skills of a lawyer are "area-specific" and do not make much sense to old lawyers in a brand new area. For example: a good reputation of a lawyer in sales contracts will probably not bring in securities clients.

(iv) "Investment in developing relationship with the clients"[75]

The analysis of this aspect is almost identical to the one above. If those state-owned enterprises also step into the new industries, they may prefer continuing their co-operation with their long-term lawyers. But when they realize lawyers with industry-specific experience would provide higher quality services, they would shift their purchase to more expert lawyers when their "loyalty" became too expensive.

Besides these four factors, we believe that, under China's special market conditions, one more aspect - capability of continuing study after graduation - should be added. A lawyer who masters the practicing skill better in the new legal area will prevail and the achievement of this goal at least partially depends on one's capability of continuing study to keep abreast of China's rapidly evolving legal regime. The "capability" includes two as aspects: learning capacity and the resources, such as time, that could be allocated on the study. Younger people generally have better memory, faster reaction and are more ready to accept new knowledge than older people. In addition, senior lawyers have very limited time to be allocated to continuing education because they still have existing business to deal with. The newcomers therefore have an advantage against their predecessors. The advantage in the ability to adapt to new markets outpaced the benefit that old lawyers gained from their reputation.

3. New industries provide enough space for the development of newcomers.

So far, we have seen that the traditional business of the first-generation lawyers, such as contracts disputes, regular legal counsel to state-owned enterprises, etc., have shrunk and the newly emerged market has mostly been taken by younger lawyers. However, if the size of the traditional market were much larger than the new one, veteran lawyers with SHC could still "kill" much more than the youngsters, and chances are that some versions of lockstep would be adopted for the reason of systematic risk aversion. However, that isn't what has occurred. The new markets are growing much faster than the declining older enterprises. Business concentrates on the securities, financing, IP, investment & foreign-invested-enterprises, and real estate.[75] Younger lawyers may have accumulated more SHC than the first-generation lawyers, so there would be no reason for them to submit to a seniority based lockstep compensation system.

IV. Conclusion

According to the theory expounded by Gilson and Mnookin, superior and uniformity education and stable surplus human capital are two important pre-conditions for lockstep compensation systems. After studying the current state of China's legal profession, we find that, as a general matter, the average education level of the practitioners is relatively low and hardly uniformed. Surplus human capital is in a state of rapid evolution due to China's ongoing economic reform, which started in the early 80's. We believe that explains why pure lockstep has been very rare in China's law firm because these two pre-conditions of lockstep compensation are not satisfied.

China's system of legal education and market economy are both growing and maturing. This ongoing evolution of both the legal education system and the economy will change both the supply of SHC and the average level of education. We would predict two main consequences of this development: First, those few firms that have adopted the lockstep system will continue to recognize its benefits especially in maximizing the joint gain and diversifying risks. We notice Shanghai Bar Association recognizes openly the benefit of non-eat-what-you-kill system.[77] Secondly, newly organized firms are more likely to adopt this system because one, they will be able to ensure the superior education background that is facilitates the adoption of lock-step systems of compensation and, the amount of SHC that is available will continue to grow as lawyers become more and more expert at newly developing areas of law and establish stronger and stronger client relationships. It has been reported more firms have built up stronger reputation in a specialized area.[78] More top law school graduate are considering joining local firms, whether they come within China or are trained overseas. It could be expected more firms will adopt distribution systems more linked to lockstep system, to the extent it elevates the profitability of the firm.

(Mr. Li has an LL.B., LL.M. from Fudan University in China. He also has an LL.M. from Columbia Law School in the City of New York and is a J.D. candidate from the same school. Mr. Pan has a LL.B., LL.M. and is a J.D. candidate; Mr. Hovan is a J.D. candidate.)

Notes:
[1] China has four jurisdictions, with distinct laws and court systems: mainland China, Taiwan, Hong Kong Special Administration Region and Macau Special Administration Region. For purpose of this article, we refer China to jurisdiction of mainland China.
[2] While the Lawyer's Law of China does not elaborate it, the Ministry of Justice of China (MOJ) has adopted a part-time lawyer system to supplement lawyers who work fulltime, where teaching and research personnel at law schools or law research institutes are allowed to practice law if they meet certain conditions. In form, it resembles the situation where an adjunct law professor works with a law firm. See Jian Zhi Cong Shi Lu Shi Zhi Ye Ren Yuan Guan Li Ban Fa [Administrative Measures on Personnel Practicing Law on Part-time Basis] (November 25, 1996), (Shanghai Bar Association (SBA) Legal Search System CD-ROM, version 2000).
[3] During the whole period of 1950 to 1979, there was not a single lawyer in China. See Hongming Xiao, the Internationalization of China's Legal Services Market, 1, No. 6, Perspectives, 3.d, (June 30, 2000), available at <http://www.oycf.org/Maganize_6_06302000/internationalization_of_china.htm> (last visited on May 23, 2001). See Jerome A. Cohen, Congressional Executive Commission On China Roundtable Discussion On Challenges for Criminal Justice in China, available at <http://www.cecc.gov/pages/roundtables/072602/cohen.php3#_ftn1> (last visited on September 15, 2002). Also see Douglas McCollam, Don't Mao-Mao The Lawyers, The American Lawyer, November 8, 2000.
[4] See Chart 1, Number of Shanghai Lawyers. The Charts used in this article were compiled based on the data provided by Shanghai Bar Association (SBA) unless otherwise indicated.
[5] See Chart 2, Growth of Revenue for Shanghai Lawyers. For reporting reasons, these numbers may represent just a portion of the actual revenue of Shanghai firms. However, supposing the underreport pattern is prevalent, these numbers provide good indication as to growth.
[6] See Chart 2.
[7] It is know to the professional world that a couple of New York based firms adopt pure lockstep method. These firms include Cleary, Gottlieb, Steen & Hamilton, Cravath etc. Most firms, however, adopt a modified lockstep method, where seniority is still a considerable index for distribution.
[8] Ideally, this affirmative claim should be based on empirical data. However, there has been no endeavor to systematically research the pie-dividing methodology of Shanghai firms. To the best knowledge of the author, only a handful firms like Llinks, Fangda Partners include seniority in its distribution index.
[9] See, Ronald J. Gilson and Robert H. Mnookin, Sharing among the Human Capitalists: An Economic Inquiry into the Corporate Law Firm and How Partners Split Profits, 37 Stan. L. Rev. 313, at 341.
[10] See Gilson et al, Supra, 321.
[11] See Gilson, Supra, at 354. Firm specific capital, a concept borrowed from Coase, means the firm has specific clients who demand specific knowledge, and therefore the clients are very reluctant to replace the current servicing firm with another.
[12] Supra, at 375.
[13] See generally, Qizhi Luo, Autonomy, Qualification and Professionalism of the PRC Bar, 12 Colum. J. Asian L. 1.
[14] See Section III.1, Infra.
[15] The first law office under Chinese Communist Party governance was established on August 25, 1980 in Shanghai, See SBA, Shanghai Lu Shi Shi [A History of Shanghai Lawyers], at p 57.
[16] See MOJ, Guan Yu Xia Fa He Ze Zhi Lu Shi Shi Wu Suo Shi Dian Fang An De Tong Zhi [the Notice On Release of the Scheme on Trial Basis for Collective-Owned Law Offices], (Shanghai Bar Association (SBA) Legal Search System CD-ROM, version 2000). The first collectively-owned law firm, namely Shanghai Jin Mao Law Offices, was established in 1988.
[17] See Zhong Hua Ren Min Gong He Guo Lu Shi Zan Xing Tiao Li [Interim Regulations of the P.R.C. on Lawyers], art. 1, (1980) (Shanghai Bar Association (SBA) Legal Search System CD-ROM, version 2000). Also see The Xinhua General Overseas News Service, June 6, 1983, Monday ("Lawyers of China are state legal workers, not privately employed professionals."); The Xinhua News Agency, October 23, 1995,"[A L]awyer is "a legal worker who has acquired a lawyer's certificate in accordance with the law and is engaged in providing legal services.")
[18] See Lu Shi Zhi Wu Zhi Xing Tiao Li [Lawyer's Post Implementation Rules], art. 2&7, (Oct. 10, 1987), (Shanghai Bar Association (SBA) Legal Search System CD-ROM, version 2000)
[19] See Chart 2, Growth of Revenue for Shanghai Lawyers
[20] For example, in 1992 at a leading Shanghai law firm that Mr. Li had worked with, a second-year lawyer billed some RMB 200,000 for the firm, while two forth-year lawyers billed only RMB 20,000 each. Needless to say, the fourth-year lawyers had a larger salary.
[21] Anonymous, Tan Suo Ju You Zhong Guo Te Se De Lu Shi Shi Wu Suo Guan Li Ji Zhi [Exploring Law Firms Management System With Chinese Features] <http://www.lawyers.com.cn>(last visited on May 24, 2001)
[22] Anonymous, Supra.
[23] See Chart 2, Growth of Revenue for Shanghai Lawyers
[24] The average before tax income for residents in Shanghai is RMB 18,035 in 2000, see Shanghai Statistical Y. B. 2001, <http://www.stats-sh.gov.cn/shtj.tjnj/2001/tables/3_2.htm> (last visit on October 13, 2001), while the average pre-tax income for Shanghai lawyers is RMB 84,330 for the year 2000.
[25] In 1993, the average number of lawyers per law firm was fifteen. In 1994, this number was twelve. In 1998, it was eight. See Chart 3, Number of Lawyers and New Graduate Hires Per Office.
[26] See Chart 3, Number of Lawyers and New Graduate Hires Per Office.
[27] See McCollam, Supra, Note 17 ("When [Professor Jerome Cohen] arrived in the city, Cohen says that he found very few fellow law professors, and those he did meet "had a pretty deep tan" from their days working the fields as part of the Cultural Revolution's "reeducation" programs.") Also see, Luo, Supra, 33.
[28] See Note 29, supra.
[29] Id.
[30] For difference between collectively owned firms and partnership firms, see Articles 16 and 17 of the Lawyers Law of P.R.C., (Shanghai Bar Association (SBA) Legal Search System CD-ROM, version 2000).
[31] See Chart 4, Growth of Private Firms and Decline of Public Firms
[32] For a list of all Shanghai law firms (foreign law firms excluded) in terms of revenue in 2001, see http://www.lawyer.org.cn/tongzhi/paiming.htm, (last visited September 16, 2002). Of top 25 of them, fifteen of them were formed in and after 1993. To my best knowledge, only three of them assign some profits to lockstep, i.e., Fangda Partners, Duan & Duan, Llinks and Yi Shi give credits to seniority. For the rest, there is no lockstep.
[33] For the idea of internal market, see Marc Galanter and Thomas M. Palay, Why Big Get Bigger: the Promotion-to-Partner Tournament And the Growth of Large Law Firms, 76 Va. L. Rev. 747, at 789.
[34] Among the top 10 law firms in Shanghai (foreign law firms and branch offices of Beijing law firms excluded), each has "laddered" salary associates, i.e., they have internal seniority among associates, primarily according to their years of graduation. The salaries of these associates increase year by year, with some connection to their performance (primarily the billable hours). Some other firms hire non-partners lawyers, with some fixed salaries, but usually these lawyers can join the profit sharing at anytime at their own option.
[35] See Gilson et al, Supra, 327-29.
[36] Supra, 324.
[37] See R.T. Swaine, The Cravath Firm, vol. 2, (New York: Ad Press, Ltd., 1948), at p 3.
[38] See Chart 8, American Firms Top School Concentration. The research was done by Mr. Aaron Hovan. The educational background for these firms was found by searching Lexis Nexis for all the lawyers who are currently employed at their firm, and recording where they went to law school. This methodology admittedly only collected data for those lawyers who reported to Lexis. Cleary's sample size was 313, Coudert Brothers' was 203, and Cravath's was 109. However, he sees no reason why the small sample size would skew the distribution of law school graduates, so he believes the percentage numbers are reasonably reliable.
[39] Id.
[40] See Chart 5, Growth of Formally Educated Lawyers and Decline of the Law Diploma: Traditionally, Chinese legal education runs in the following categories: (1) LL.B. (four years), the J.D. equivalent in civil law system, (2) LL.M. (three years) and (3) LL.D. (five years) the graduate degrees in law, which are designed to focus on special research fields of interest. There is recently a J.M. degree (3 years), which requires a pre-requisite bachelor degree in non-law major. There is also a traditional double (bachelor's) degree that admits non-law degree holders to finish a law degree within two years. There is also a college law diploma program, normally running from 2 years to 3 years, on-campus or part-time, which does not grant Bachelors' degree. When designing this chart, we categorize those with law degrees as having received a complete legal education, including LL.B., LL.M., LL.D., J.D. and J.M. Otherwise, we list them as Law Diploma
[41] China started national bar exam in 1986, after when bar exam is required to qualify a practioners. See Luo, Supra, 10 n37.
[42] See Luo, Supra, 34.
[43] Supra, 8 n28.
[44] See infra n-Note 82 below and its accompanying text.
[45] The increase in demand for skilled lawyers can be shown by the growth of business transactional work being done in China. In 1985, business transactions accounted for 40,000 cases in all of China, and these 40,000 cases were 20 of the total caseload. In 1997, the total business transactions representations numbered to 1,222, 239, enjoying 46% of the total cases in China. See Chart 6, Growth of Practice Areas in Mainland China, compare Business distribution 1985 and 1997.
[46] See Chart 7, Shanghai Lawyers Case Distribution.
[47] See Chart 9, Sample Shanghai Firms Lawyers Educational Background. This chart is intended to show that disparity in educational background between firms A and C and B and D.
[48] China universities can be roughly categorized as national leading universities, national universities, regional leading universities, and regional universities. The law schools of national leading university law schools and regional leading universities are called top-tier law school in the Charter 9, and the rest called the second-tier.
[49] China universities can be roughly categorized as national leading universities, national universities, regional leading universities, and regional universities. The law schools of national leading university law schools and regional leading universities are called top-tier law school in the Charter 9, and the rest called the second-tier.
[50] See Chart 9 for Firm C.
[51] See Chart 9.
[52] See Swaine, Supra, at p 2.
[53] See note 14, Supra and its accompanying text.
[54] Here, the newcomers do not refer to the new associates who may simply have no alternative and have to stay in a firm even if not satisfied with the compensation system. Instead, those new younger partners are in a much better situation to push forward a reform or to leave the firm with her whole practice group. If the client will stay with the old firms, the loyalty of customers should be more or less attributable to the old partner's investment in the customer relationship development, which is one of the most important portions of SHC.
[55] See, Gilson et al, Supra note 8 and its accompanying text.
[56] However, this position is beginning to erode with an increasing number of firms moving to incorporate an eat-what-you-kill profit sharing system, largely in response to the changing market conditions. See generally, Morris, Supra.
[57] See generally, Galanter, Supra note 10.
[58] See Swain, Supra, 2 n 20.
[59] See Shanghai Statistical Y. B. 2001, <http://www.stats-sh.gov.cn/hygs/tjfx/1999/HSBG017.txt> (last visited on May 2, 2001).
[60] Id.
[61] See China's Statistical Y. B. 1999, <http://www.stats.gov.cn/yearbook/> (last visited on May 2, 2001)
[62] Id. This figure may be lower than the actual one
[63] Id. Among the rest, 30.8% are those did not find jobs after graduation and the 12.5% without specified reasons.
[64] Id.
[65] See note 47, Supra and its accompanying text.
[66] See the Economist, Supra.
[67] See Galanter et al, Supra, at 769.
[68] Id.
[69] Id.
[70] In 1979, after the Great Culture Revolution, China almost had no law at all. Until 1984, all the Acts (including the new Constitution and other legislative interpretations) promulgate by the Nation People's Congress counted 60. See People's Daily, Sept.15, 1999.
[71] See Luo, Supra. In addition, according to a conversation between Mr. Li and Mr. Xiaolin Zhou, a partner at Jun He Law Offices, who received graduate legal studies in Beijing in 1970s, the professors admittedly knew just a little more than the students, so that their major studies focused studying the law and English together.
[72] When Mr. Zhengming Pan received his legal education from1995-1999, only two courses about the Marxism legal theory were required out of a total 60-70 courses. The real "legal" courses counts more than a half.
[73] See Galanter, Supra, at 769.
[74] Id.
[75] Id.
[76] For example, the Patent Law (revised) was promulgated in 1992, the Securities Law in 1998, Insurance Law in 1995, Corporate Law in 1993. They have been revised from time to time.
[77] See Shanghai Lawyers Delegate Visits Beijing, available at <http://www.lawyers.com.cn/lawyers/news/show_content.jsp?news_id=12820&news_type=1> (last visited September 16, 2002)
[78] E.g., Fangda Partners in capital market, Llinks in financing, Richard Wang & Co. in litigation, etc. See Asia Law & Practice, available at <http://www.lawyers.com.cn/lawyers/news/show_content.jsp?news_id=12820&news_type=1 >(last visited September 16, 2002)