New law firm culture ratings set new standards by measuring human value and risk

Many organizations are seeking better measures of success. Financial results are backward-looking and unable to accurately reflect underlying corporate health. We know, for example, from a constant stream of audit failures, that financial analysis alone is unable to spot human failures. Clients, investors, suppliers, and regulators are demanding new metrics too. Where objective and independent verification of a responsible business requires human governance and sustainability as prerequisites.

The newly created Law Firm Maturity Index (LFMI) aims to provide a more nuanced and accurate picture than financial analysis alone. As of the 30^th October 2024, it provides a live dataset of law firm health measured through a comprehensive human systems framework.

The LFMI aims to help law firms face complex leadership challenges; firms are under pressure to authentically integrate responsibility and sustainability into business models; well-being and workforce mental health are increasingly becoming part of performance; legal regulators now firmly have toxic culture on their radar; and assessing and managing culture risk is now a board issue.

LFMI measures the extent to which a firm is authentically purpose-driven, has coherent management systems, and a corporate culture that creates Total Stakeholder Value. “TSV” is a measure of true, total value, which is one that reconciles financial performance with responsible business. Having been research tested by leading universities, we are confident that the new LFMI is a measure that matters.

The LFMI uses OMINDEX®, a research-tested diagnostic approved by the not-for-profit Maturity Institute. The diagnostic provides an in-depth, external assessment of organizational health across 32 maturity factors or human value drivers. These factors are listed in the table below. Each factor score is aggregated into a rating, which uses an “AAA” financial type scale. OMINDEX® provides a rating and assessment that sits alongside conventional financial analysis. The ratings scale is shown in Figure 1 above.

OMINDEX® assesses a firm’s ability to create value for every stakeholder. Maturity measures organizational health by capturing how human intangibles (e.g. leadership, purpose, learning, and innovation) create value and risk for any firm. OMINDEX® data shows how improving human value creates a stronger corporate culture and drives firm performance.

In-depth OMINDEX® ratings use publicly available information, and AI is utilised to help collate, interrogate, and interpret available evidence. Qualified Maturity Institute analysts review and sign off each rating.

The table above shows average scores for the first 30 law firms in LFMI, measured across each of the 32 OMINDEX diagnostic factors. Each factor asks an in-depth question and applies detailed guidance for analysis and measurement.

For example, question 22 considers learning and knowledge. It asks, “to what extent is this a learning organization that continuously and expeditiously aims to acquire and apply knowledge, expertise, and experience, to continuously create more value and reduce risk?”

A short extract from the diagnostic guidance states:

“The idea here is to look beyond simply the number of training days that a company may hold. Instead, analysts should understand how pervasive the engagement process with learning is within a company; and how they then apply and share learning outcomes, both internally and externally. Mature firms will be learning systematically from all stakeholders.”

With one exception, firms can make improvements across all elements that will help to enhance value and mitigate risk.

Overall, some of the key findings from the inaugural LFMI include the following:

•  Law Firm Maturity Index (LFMI) data shows that firms have a significant value opportunity from more mature management of their whole, human systems. Even the most mature law firms can yield almost 40% more value for stakeholders.
•  The average LFMI rating for the largest UK firms is BBB. Mature exemplars rate at A- and above. The three firms with the highest LFMI ratings are Linklaters, Herbert Smith Freehills, and Clifford Chance.
•  Many firms carry material human risk. Capabilities to assess, manage, and mitigate people and culture risk are rudimentary. The fundamentals of whole system, human governance remain missing.
•  The absence of coherent human governance means solving complex challenges, such as integrating ESG, embedding inclusion, and managing workforce well-being, will continue to be challenging, and often elusive.

The largest law firms in the UK are relatively tightly grouped. A small number of firms have differentiated themselves but not significantly.

Consequently, as with maturity exemplars in other industry sectors, there is material opportunity for those with the appetite to build more mature leadership and management. Mature firms differentiate themselves from peers and can do so over the very long term.

How can firms improve?

Based on the overall findings across the 30 law firms, the indicative areas that are likely to yield the greatest benefits include the following:

1. Purpose, values, and principles: mature firms embed a clear purpose that aligns with the Maturity Institute standard of “Best quality product/services at the best cost with the best external impact”. This galvanises human capital via meaningful values and principles that inform decisions, actions, and behaviours[1]. If stakeholders, including clients, suppliers, etc., do not share a common purpose, firms carry potentially material risk through strategic misalignment, dysfunction, and incoherence.
2. Value management: most firms define performance through a narrow lens of productivity and output (e.g. chargeable hours). Realising human potential and avoiding significant culture risk arises from managing people according to their contribution to total value. This starts with clearly defining and managing business value as an interrelated set of five factors – Output, Revenue, Cost, Quality, and External impact[2].
3. Authenticity and cooperation: authenticity is a fundamental building block for staff engagement, collaboration, and learning. It is a foundation for autonomy and empowerment, where performance and improvement will flourish. It is also crucial to develop cultures within which material business risks can be better understood and managed.[3]
4. Whole system, strategic cohesion, and adaptability: mature firms recognize that a whole organisational system includes every stakeholder relationship. Such a firm will manage each system as part of a mutually reinforcing whole system. Mature firms embed a learning system as a key foundation upon which they strategically cohere, where all effective systems also include feedback loops.
5. Accountability: A mature firm will have explicit links to ensure accountability at leadership arises for total value outcomes that integrate Output, Revenue, Cost, Quality and External impact. Failure to achieve agreed value outcomes will require full accountability in terms of reward impact, retrogression or ability to continue in-role.
6. Culture, human governance and people risk: every organisation is a whole, human system including workforce, clients, suppliers and communities. Understanding and managing the value and risk arising from this whole system is called ‘human governance’. Mature firms understand and manage this at board and C-suite level through well designed frameworks and measures.[4]
7. Decision making: One key characteristic of a mature organisation is the nature of decision-making. Mature firms are collegiate in how they make decisions. Importantly, they ensure that anyone who can add value to a decision [should be] is involved in the process. This may make it slower, [but] however it usually creates two critical outcomes: decision-making is right more times than it is wrong, and once a decision is made, it can be acted upon swiftly.

The LFMI summary report is available to download free here.