How Green Was My Valley? an Examination of Tournament Theory as a Governance Mechanism in Silicon Valley Law Firms

Article excerpt

The tournament model is a widely used mechanism to control opportunistic behavior by associates in law firms. However, this mechanism can only operate in certain economic (and social) circumstances. When those circumstances do not exist, the model breaks down, and with it the ability to control opportunism in the absence of some alternative mechanism. Prior research has not investigated whether the utilization of a tournament model prevents the opportunistic behaviors identified as grabbing, leaving, and shirking. In order to test the limits of the tournament model, it is necessary to find particular historical moments when the economic environment radically challenges assumptions/premises of the model. The dot-com bubble in Silicon Valley provides precisely such a time and place. This article demonstrates limits to the applicability of tournament theory. Those limits are to be found in the economic environment in circumstances in which: (1) exogenous reward structures offer many multiples of internal rewards; (2) demonstrably high short-term rewards outside the firm starkly contrast with the delayed long-term rewards inside the firm; (3) the managerial strata reduce their emphasis on long-term recruiting of potential partners in favor of short-term productivity by young associates; and (4) firms develop departmental leverage ratios in excess of their capacity to monitor, mentor, and train recruits.

I. Introduction

In 1991, Galanter and Palay set forth a model for understanding the organizing principle that frames the relationships between partners and associates in elite law firms (Galanter & Palay 1991). Building from the economic tournament model developed by Malcomson (1984), whose work builds upon Carmichael's (1984) model of seniority systems, Galanter and Palay present a tournament model predicated on the exchange of surplus human capital for labor. They argue that the system of incentives established by the "up-or-out" tournament structure permits parties who operate in a system of imperfect information and distrust to enter into an economic arrangement that minimizes the long-term risk of either party cheating the other.

This article considers one aspect of this model: that the tournament works as a monitoring device to ensure that associates will not engage in opportunistic behavior by "shirking," or failing to exert maximum effort or develop professionally; "grabbing," by taking a partner's client; or "leaving," by going somewhere else and taking the firm's investment of training with them (Gilson & Mnookin 1985, 1989; Galanter & Palay 1991). I present qualitative data from a study of all Silicon Valley law firms that have taken equity from their emerging growth company clients (dot-coms) as an integral part of their fee for representing these companies.

The tournament model is a widely used mechanism to control opportunistic behavior. However, this mechanism can only operate in certain economic (and social) circumstances. In the absence of those circumstances, the model breaks down, and with it the ability to control opportunism in the absence of some alternative mechanism. Specifically, the tournament model only works if associates are willing to participate. To participate, they must want the deferred prize. If they do not value partnership positively, the tournament model breaks down.

Prior research has not investigated whether the utilization of a tournament model prevents the opportunistic behaviors identified as grabbing, leaving, and shirking. The study tests this hypothesis by examining whether these opportunistic behaviors have occurred when external economic forces stressed the tournament model. The study provides initial evidence that shirking and leaving, though not grabbing, have become far more prevalent as many of the characteristics of the tournament model are blurred. I situate the findings of the study within the literature, applying tournament theory to understand the social processes that structure and govern relationships between partners and associates in law firms. …