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Chinese legal firms 'reforming at the top'

Posted by: Laurence Simons 02/10/14

Management reform has been a key feature of the legal firm landscape in China in the last year, the Lawyer has found in its first Lawyer China Elite report.

The study found that attitudes towards the need to sharpen up on all areas of management have become increasingly focused in the past year. This includes succession planning, remuneration, risk control, performance reviews and more investment in areas like IT and marketing.

It is now understood by all that such measures are needed for firms to stay competitive in the market, with the catalyst for this being a couple of major events in 2013 that shook the sector. One was the negligence lawsuit in Canada against two Chinese capital market firms - albeit one that was settled - while the second was the decision of the China Securities Regulatory Commission to impose a number of penalties on firms for their roles in initial public offering accounting fraud cases, which included poor due diligence and misrepresentation of information.

DeHeng chief executive partner Gavin Sun explained to the Lawyer what these cases taught the sector, stating: "In its 30-year history the Chinese legal profession has, for the first time, faced challenges that could bring an established firm down overnight.

"The thought is spine-chilling. The new management has decided that reform and improving our internal controls is essential. We don’t want to pursue short-term revenue growth and put our future at risk."

Revenue growth is an area in which the performance of different firms has varied greatly. While lawyer and partner headcounts have grown, particularly among red circle firms, income has been affected by the high level of volatility in the China and Hong Kong capital markets over the past two years, as well as the general slowdown in economic growth.

As a result, a number of firms have struggled to grow the bottom line, but not all; Fangda was the best performer with a 50 per cent rise in revenues in 2013. With only 48 partners on the staff, its income of RM480 million (£47 million) demonstrated the best income per partner in the red circle.

Having put various management reforms in place, other firms will hope to enjoy similar success soon.