Is Yo-Chi our next Decacorn, AI Comes for the Lawyers and should CEOs also take Board Seats

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1:05We're back, episode 239. This is our Super Saturday edition where we just go hard into business topics now. Our audience seems to love it. So we chatted on the pod last Tuesday about when should you become a director. We had very different views and this almost came to blows on our different views here. We're too far away, my reach doesn't extend across the table. Those biceps do travel far. But so what is your view on – because this came from Bridget Loudon, who obviously famously was director of Telstra while running Expert 360. And my view is no executive should be on the board of a for-profit business while running that.

1:41Be it founder, be it CEO or CFO, I just don't think it should happen. Well, let's start with this question to start. Why do you think a not-for-profit is different? Well, A, the time commitment is significantly less in almost all cases. like certainly not-for-profit boards I'm on A it's a bi-monthly board meeting B it's a pretty quick board meeting the board papers are 20 pages it's much smaller so basically time is significantly less Are you the chair of that thing? No Are you a formal director of it? Just a director, yeah Okay So but maybe we would say the reason that the not-for-profit is different is because you do the not-for-profit What do you mean?

2:17That's why it's carved out Oh no Because you do it so it's carved out I do it because I think I wouldn't do it if I thought it was impactful. So then we can say the following. There are different levels of commitment for different organisations. And I can get into the nitty-gritty of boring conversation, which is what about a board advisor versus a director versus whatever. But I want to make an overarching statement of why I support the concept of people in the C-suite, including the CEO, being able to do one director role that's not their primary business. And this could be an ASX? Well, I'm not sure if I would want an ASX 50 one to be.

2:59In this form, I'm about to say, I think Telstra was the wrong one, by the way. And Telstra's one of the high, like Telstra and the banks are probably the highest governance boards. I don't think anyone should be on the board of a bank. Like that is so stressful. Yeah. So stressful. So we're all on this constant learning journey. and the reason I joined the board of High Pages other than my positive... But you're not an executive. I know, but I just want to tell you the reason I joined other than, because it wasn't for the money, other than my positive predisposition towards the founder, Robbie, and Ines, the chair, and the board in general.

3:30Like, I like that business but the reason I joined is I wanted to learn the way that other people run public company boards. That's why I did it really and to learn from other people and it's been... I think as directors... It's been good, right? Most directors have multiple directorships which I'm not sure with it. And so I think a CEO or a C-suite person, being exposed to other ways of thinking at other businesses that helps them more clearly formulate their own ways of thinking, gives them ideas, keeps them on that learning journey. And I think that you do need to find a balance between how much time and commitment that takes and getting that benefit.

4:08But I don't think it's all or nothing. I don't think it's Telstra. I don't think that's the answer. And I don't think it's a business that's in trouble because that's even more work than Telstra. CTM had 27 boards. Yeah, like you don't want that. And it's definitely not a bank. Yeah. But I think it might be an ASX 300 tech business. Technology One would be a good example. So you're saying the CEO of a bank. Yeah, well, Technology One's an incredible business. That's ASX 100, I think. Yeah, that's a great business. But the CEO of a bank or the CEO of Telstra, for example, or BHP should go on the board of a high-tech startup, for example.

4:41Well, I don't think they'd want them on the board, and I care less about what that CEO does of an ASX 50 business, and I care more about what the – I'll give you an example. What about the CFO? I know you were talking about CEOs, but I just want to highlight the point. The CFO of a rapidly growing private business, 100 mil of revenue, sitting as a director on an ASX 300 tech company, I think that will help that CFO be a better CFO and report better to their own board. I'm not saying the CFO in that case wouldn't get any benefit from it, but the question is, can they get similar benefit elsewhere that doesn't take up so much of our time.

5:28So what would be another way they could say that? Oh, you can work with, we work with, obviously we have a chairman here, but our former chairman, Pat O'Sullivan, who is himself a great CFO and COO, mentors, me and my CFO, so I think there's ways to get exposed to great people without taking directorships, is the point. The thing is, and they certainly shouldn't be getting paid, I think that money should go back to the business, by the way. Well, that's a separate issue, unless, Well, it's kind of interlinked, like, I don't think that happens much, and I don't think, absolutely, they should not be getting that money.

5:51I feel less strongly about that because you're not... You're getting a wage from business one and you're getting business two as well. You're not... Unfortunately, when you hire a CEO, I do say unfortunately, you're not buying 24-7 of that person's time. I know, but the CEO has a degree of working time. Let's say they have 70 hours of working time a week. You're giving a fifth of that working time. They're going to be doing the board meetings overnight. What if they don't have any hobbies or occupations outside work and not much family life and they've actually got 100 hours a week available to...

6:19Like, I think it's up to them to decide because if they're not working efficiently as a CEO, you can fire them. That's fine. Or discipline them and say stop. We could have a good CEO performing well or CFO performing well. Why are we giving 20 % of our time to some other random business that gets very minimal benefit to the company? Because I don't think you own their time. That's why. I think you own their working time. Okay, fine. I'm going to reduce your pay by 20 % then. That's the case. But I can't imagine any CEO is going to take that deal. But why, like if they're delivering a great outcome for you, maybe one of them.

6:48But I'm paying them for all your time. I'm not paying you 80 % of the time. I'm not sure you're paying them for all of it. You're paying them for their full-time job and to be thinking about this after hours. That's my view. And to have their sense of self-worth ideally linked to the success of the business. But I don't think you're paying them for all of their time. I don't agree with that. Plus you're also ignoring the liability. What happens if you're on the board of a company that goes under and then... Yeah, definitely it's not simple. But when you're a CFO and a CEO, you're presenting to the board a lot.

7:18and it is to me a very educational experience that helps them to see what it's like on the other side of that table being reported to by a cfo or ceo and that really helps them with their engagement with the board and helps them understand the nature of what they should be reporting to the board to make the board as efficient as possible so i think neither one of us is going to persuade the other but I think the argument comes down to you think when you employ a CEO all of their working time commitment should be to the company that employs them I don't mind if they're on not for profit boards, I don't mind if they're doing some other stuff but I don't want them doing a directorship of a even an ASX 200 business is a significant business, that's a multi billion dollar business.

8:04Yeah I think ASX 300 but ASX 300 to me like you know what, this is why I'm not making a blanket rule but I do think there are circumstances where it's helpful to the business because it's helpful to the individual and they get better and like you know different not-for-profits have got different levels of time and demands as well right i just i'm generally against blanket rules yeah you know i always quote this amosos comment which is um all borders are blurry but borders are important so yeah i think there should be a line and you can make some lines but the truth is sometimes i think it's really beneficial to a cfo or c or c-suite person are you are you more relaxed about it with like a head of product or you feel the same way?

8:45No, same. Absolutely. All the time. Maybe if it's a small tech business when the commitment's relatively low, obviously the smaller the business, the less the direct commitment. That becomes almost like a not-for-profit level commitment. I'm less bothered by that. It's the public company is a big, as you know, a big commitment. And I just don't see how you can possibly do both roles properly. But, you know, some commitments are bigger than others. And so, yeah. Okay. Well, that's interesting. You know what? I'm going to share, as these happen, I'll share them with you probably offline, private examples, and you can tell me if you think this was a good thing or if it's still a bad thing.

9:19Let's move on. And there was an interesting story in the Financial Times last week which reported that Wall Street banks are pushing large law firms to cut fees, arguing that the business model has enriched top lawyers for decades is not sustainable in the era of AI. The article claimed that pressure from some of big law's most valued clients could help overturn the financial model at the heart of the legal industry. Under the so-called leverage model, firms maximise profits for equity partners by billing hourly work done by large numbers of more junior lawyers, often working late into the night at rates that outstrip the cost of their salaries.

9:49Much of that work, such as research, document review, assessing contracts, and drawing through discovery, can now be done far more quickly and better using AI. Eric Grossman, Morgan Stanley's General Counsel, told the Financial Times that top lawyers have for a long time been compensated on the foundation of associates billing for long hours, but that compensation model is now extraordinarily unsustainable matt levine writing for bloomberg claimed that one possibility is that ai will give the top lawyers more leverage instead of working on 20 matters with 20 different associates and making 20 money a year they can work with 200 matters with 200 ai instances and make 200 money a year but probably there'll be some pricing pressure so yeah i think that last point's super weak yeah um because you know ai can't give you more time.

10:32Yeah. It can make you more efficient. But ultimately, mostly what the senior partners are doing is using their own brain power in their own time to advise on matters. They're not writing things up themselves, generally speaking. I mean, barristers are, KCs are writing stuff themselves. Oh, even KCs have juniors there. They do, but they do a lot of writing themselves as well because they're writing what they're presenting in court, right? But where do I think this is going? I think it's interesting. Number one, And we can, I think, say with comfort, and I'm not going to offend our lawyer friends, that the fees have gone crazy.

11:10Astronomical. They've become crazy. Do you remember, certainly when I was a lawyer, bankers earned 2, 3x what lawyers earned. I'm not saying this is right or wrong. Now lawyers earn significantly more than bankers. It's actually incredible that switch that's happened over the last 10 years. So the reason that bankers and fund managers earn so much money is their stock in trade is money. And the closer you get to money being your stock in trade, the more money you earn. For example, your job at Luxury Escapes is to provide this product and there's a whole lot of benefit and value you provide and then you earn money as a consequence of providing that benefit.

11:41A fund manager's benefit is they make money. That is the benefit that they provide, right? That's the job that they do and therefore they're going to earn more money. And so for lawyers who are service providers that are not directly connected to money to be out earning bankers, there's something perverse about that system. Yeah, absolutely. And then we can say, And so I think, I don't know if I'd say that's a moral judgment. I just think that's a capitalist judgment. Well, it's an agency. Lawyers are an agency cost. Yeah, it's an agency cost. Yeah, it's a capitalism judgment. Yeah. And then we say, what will be the effect of AI on this?

12:11Well, just before we move on to AI, which is inextricably linked, is it's bizarre how lawyers earn so much more. And it's really the private equity, private equitization of law. And that firms like Kirkland and Ellis, who are effectively private equity firms, the richest lawyers in the world. Kirkland and Ellis partners make$20 million a year. That is more than almost every CEO. It's astonishing how much these lawyers make. And so I'm going to make a moral judgment. It's undeserved. Oh, I think even the lawyers themselves would agree that that's the case. Because, and I'm not judging them as human beings, but in terms of the economic value they bring to society, it's undeserved from an economic point of view.

12:52A banker earning$20 million, that's a lot of money, but they've generally put together a transaction that's made someone a lot more money whereas the law firm is just literally taxing every transaction. Yeah, it's value accredited versus value destructive. And the reason why, and Kirkland has led the way because it's private equity clients and then every other law firm's been hitched up by the coattails is the agency cost of private equity firms is spending clients' money, all this stuff. So private equity firms raise a$3,$4,$5 billion fund. If they spend$100 million on legals versus$50, it doesn't really matter.

13:22Why doesn't it matter? Because the scale of the fees are so high. But why would they not just say, we're not going to use you, we're going to use the other one because you're interchangeable? Because I think there's a benefit to using a Kirkland. Okay, so then that's more of a good argument for charging more. Realistically, I think what really happens is it's this bracket quake and the lawyers go, well, I can charge 10 million or 12 million. Private equity clients, remember there's a barrier between the superannuation fund who's invested in private equity and the private equity people running it.

13:52there's too much there's agency on agency so it's the agency costs have allowed these more firms to creep up there's a lot of fees when I'm hiring a lawyer and we hire ex big firm lawyers who then basically go to a mid tier firm and they're as good if not better than most big tier lawyers for half the price and that's what any smart sort of person who's running their business will do these guys are the opposite of that they don't care it's not their money they'll spend whatever so the cause CEO let's pick a firm in Australia the cause Kevin McLaren who's earning$7 million a year so he's earning 7 mil which is outrageous so what do you think a senior equity partner at course would be earning a year?

14:24Well, there's a cabal of six or seven, I think, that earn similar and then it obviously drops away. I don't know how much they all earn. And that would be, do you think that's the pinnacle of earnings as a partner in Australia? There's a couple similar, roughly similar, but Garen's number one. And some other places, yeah. Okay, so you've got lawyers earning six or seven mil. Presumably, they're paying half of it away in tax. Yeah. You know, by the way, I'm sure you know this, but a lot of these firms are structured so that these are effectively dividends and payroll tax is not paid on this money as well.

14:53So that's painful for the state. But I totally support it for them because payroll tax sucks. And it's a terrible tax. And so why – I know what – I can tell you what lawyers cost because I had first-hand experience with a lot of them. So you can pay the top, top, top KCs. I'll start with that. So you can pay top KCs$2 ,500 an hour. And so let's call that... They're usually charged by the day as well. $25 ,000 per day. Yeah. Chuck the cash after tax mostly. So let's say you multiply that out and you say... And you've got a junior and you've got solicitors, so it's not just the KC, but yeah. Yeah, but like that KC is taking home$125 ,000 a week.

15:38Yep. And they could easily be billing for 45 weeks a year of their time. They tend not to be utilised at 100 % though. So discount a little bit. These ones will be utilised at 100%. Yeah, they'll be turning away work, these ones. No, but they just don't work 100 % of the time. Yeah. You're not 100 % efficient more. Okay. Give them 40 weeks, let's say. So that's five mil a year. Yep. And so that is less than these most senior solicitors. And that's their own risk. It's their own business. It's a much harder job being a KC than a partner. And so I think that KC salary is outrageous, but it's still lower than most senior partners.

16:14bothered by the KCCO because they're being paid for by the client versus there's less of that gap. There's less agency costs there. And so, and so I think this needs to change if, it's not good for capitalism, okay? But I do think lawyers, I've got no issue with lawyers making a few million dollars a year like just senior partners. And so, AI, let's just quickly touch on that. You want kind of lawyers, doctors, bankers, they're all kind of the pinnacle of their professions, probably earning roughly the same. You think a top doctor, top surgeon, a couple million bucks a year probably. I don't know you know more than me on this stuff.

16:48Probably, yeah, three. Yeah. It feels like law firms just got out of whack. Like suddenly these lawyers are earning too much and everybody else, all this stuff is incredibly large salaries, but law is just bizarre. And earnings for surgeons goes up more slowly because there's a combo of the Medicare fee which basically doesn't move very much and out-of-pocket stuff they charge which predominantly is private health insurance paying and then a bit of out-of-pocket. So they've got a more, The problem that surgeons have is they don't have a big customer to bill with lots of money. They've got the government and a private health system and a person.

17:23The person does not want to pay. The government doesn't want to pay. And private health doesn't really. So no one wants to pay, right? Unless it's elective surgery. It's better to be a lawyer, right? Because you've got someone to bill. And so I think AI is going to dramatically shift things. But I also don't think it's coming at the rate that people think it is. for example, I would not trust large language models doing discovery on one of my cases. Oh, but now I've got specialised. I know. Like Garo and Harvey are much more specialised. But you still need a lawyer there. And so it will be faster.

17:52But don't you just think that what's going to happen is what's happening with the whole software industry, where we're going to move from time-based billing to usage-based billing? Yeah, job-based. I think that's what's going to happen. I think, remember that Lennon quote, like history happens, nothing happens for 20 years and everything happens in a week. We're still in the 20 years, but something will happen at some point. was when I was a grad lawyer or article clerk, it was called back then, like part of my job was literally sit with another article clerk and we'd read a prospective IPO document and someone would read the PDF, someone would read the Word document, made sure that there was no mistake.

18:23There ever was. That's ridiculous. And we were in charge for like 400 bucks an hour. It was just basically criminal. And this is what these law firms, ironically, the law firms do. That can be done way better by AI. Like there's no, you don't need people to do that. So a lot of the, and this is what this, the Financial Times talked about is that so much, the reason why lawyers, the partners are able to earn so much they have this leverage they get all these junior lawyers that i was once who do effectively administerial who are worth 50 an hour and they're being charged out for 500 or maybe 150 but yeah it's there's a massive leverage there and they just make all this money from just ripping off clients and essentially what they're doing and i was part of that industrial complex for 18 months it was shocking like that part of the law was the worst because a it's incredibly boring and being so unnecessary so but people do it at the bottom in the hope of getting to the top end, like all of these machines, right?

19:09So I think there is, a lot of that leverage will go because basically I think what you'll get is really strong partners. And you sort of had this with this drift of like the lawyers I use, great lawyers from like an up-and-coming senior associate, for example, who's earning 500 grand a year, can potentially start their own firm or a junior partner and can probably make one and a half, two million providing a better service than this big law firm's doing. Maybe, but then, so I think what it's going to come down to is which is how you would do things now anyway. What it's going to come down to is the partner that you want to use and what you're prepared to pay them for their time essentially.

19:46And a lot more – so the question is whether partners' fees are going to go up by the hour as their earning capacity in the pyramid goes down. Because at the moment a lot of these – Less juniors, more seniors. Yeah, so the partners are earning money based on not just what they're charging out but their clip of the machine below them. Most of their money is made on the machine. Yeah, you basically lose money off your own time and make money off everybody else's time. It's the razor and the blade model, essentially. And so the question is, does AI, and what people will say is, but AI will make mistakes.

20:15And what you would say is, yeah, like self-driving cars will make some mistakes, but a lot less than people. Like I made a mistake, I was a lawyer. Yeah, that's right. They'll make fewer mistakes than people and you can have someone overseeing it, right? Yeah. And so the question is, can you start a law firm with two senior partners and two junior partners and have it behave like it's two senior partners and 20 junior partners in the current system with AI. Or anti-asserties. Yeah, and I suspect the answer's yes to that, but not today. But soon, I suspect the answer's yes. There are a few professions more perfect for disruption than law because AI is perfect for law and people are a bit frustrated by the fees.

20:57Another reason why the fees are so high is we've had these 20 years of economic boom since GFC, really, and law just sort of clips the ticket and we haven't enough, during a recession, you're looking for how do you cut every cost and one cost you look to cut is, I'm just going to go to a less expensive law firm because like they're basically the same, yet these guys have a better, inverted commas, brands are going to pay double for Kirkland or double for Allens and Overy or whoever the incredible international firm is. But realistically, having been a lawyer, there isn't that much difference and often the smaller firms are better.

21:25Like an ABL, for example, has the best lawyers despite being a smaller firm than some of the bulge bracket firms. So there's this weird branding situation where instead of like, you argue Hermes produces the best bag and charges the most, you've got the Hermes of law firms not producing the best bags, which is a real problem. Yeah, plus, you know, the truth is, we've discussed this, like court and casino, they start with the same letter. That might not be the only thing they have in common. And so, yeah, I think there's going to be a lot of change in this space. I agree with you. We'll be back after a quick break with a very delicious story.

21:56Hold on.

22:01The Contrarians is brought to you by Acquire Intelligence. And our dear, it's a problem we see all the time, especially as your businesses get bigger, they just become more bloated. And often, these huge enterprises may be successful on paper, but I think below the surface, they're really struggling under the weight of their own complexity. Have you found that with your investee businesses? I completely agree with you. As the size of the business grows, the complexity increases in a non-linear way and definitely adding staff at some point is a massive step up in the level of complexity in a business.