CORPORATE GOVERNANCE : Governing Principals – When everyone is a professional

Some say there is nothing worse than cobbling together large group of independent autonomous experts and expecting them to work in coordinated, let alone strategic, manner. Yet professional service firms – engineers, accountants, lawyers, architects, doctors and consultants – have managed this for hundreds of years. What’s more, most of them have operated as partnerships.
Change is now afoot. The past two decades have seen gradual shift away from the traditional partnership model to corporate governance model. This is prompting firms to look at how they can reconcile the hitherto successful partnership approach with corporate governance and commercialism.
But can corporate style governance really work in professional service firms? And how to get it right?
Corporate governance is essential to the survival of today’s firms. Success hinges on clearly defined structure (through the partnership deed), sound communication through the chain of command and confidence in the leadership.
The concept of partnerships has been around for centuries – much longer than company incorporation – and they do seem to work. Indeed, there are examples of partnerships that have continuous line of ownership for hundreds of years. Is there corporate company that can lay such claim? Not only do partnerships survive generations, they are profitable. The returns to partners in successful professional services firms compare very favourably with company shareholder returns. The UK’s Legal Top 50 report for 2005/06 showed the percentage change in profits for the top 50 law firms ranged from disappointing -3.1 percent to stellar 70.9 percent with the mean being 16.8 percent. Whilst the range of profit increases in New Zealand and Australia might not extend to 70 percent, they are still substantial in both large and boutique law firms.
Partnerships are, and continue to be, successful entities. In fact, professional services firms account for 17 percent of all employment in the US and Europe and generate staggering US$1000 billion in revenues year. So if professional services firms are thriving, why are so many of them moving away from the traditional partnership governance model and introducing corporate style structures and systems instead?
According to Demos report on the future of the professions, the partnership governance model has been in steady decline. Its demise can be tracked to the ’80s when the stock exchange reforms in the city wiped out most of the stockbroking partnerships in London. The flotation of Goldman Sachs in 1998 also marked the end of investment banking partnerships.
The existence of reliable hierarchical structure is no panacea for company’s woes. But one of the major problems with the traditional partnership structure in the majority of professional services firms is that no one person is accountable, as in corporate setting. Partners want to make decisions by consensus but experience shows that where board is responsible for the day-to-day minutiae, those detailed tasks tend to dominate, leaving the important policy and strategic decisions neglected.
In the rush to embrace more corporate ideals there is danger, however, of throwing the baby out with the bath water. The partnership model has worked extremely well for centuries. The high level of participation and trust that exists between the partners leads to strong, sustainable business and makes partnership special.
So does incorporation change the success of professional services firms? Research by Harvard Business School shows that even where professional services firms have determined to incorporate – driven by size, complexity or need to raise finance – those that are successful have retained the “partnership” concept or spirit as an essential foundation to their organisation. They recognise that this is what makes them successful.
The ultimate “approval” body in professional firm is, of course, the partnership. In the successful firms, however, distinction has been made between the partnership’s “decision-making” and its “approval” role. The days have gone when partners could meet and reach consensus, or vote over every decision affecting the firm. Today’s business environment is too large, fast-paced and dynamic.
While consensus management is desirable, the reality is that it is impractical for full-service firms over certain size. For example, accountancy firms, which were the first to have over 1000 partners, realised it was no longer feasible to follow consensus management on firm-wide issues.
Nor is it just behemoths that need modern corporate governance. Small firms with growth plans need to prepare for the time when their partner numbers increase and every fee earner can no longer take part in the decision-making process.
Without sound governance structure professional services firms will suffer from poor communication, meddling behaviour by one or more strong-minded partners and the leadership will risk losing its credibility and fail to take partners with them. The two key issues are putting in place the appropriate leadership structure and ensuring the partnership culture is retained.

Leadership structure
A firm’s partnership deed must set out process for appointing leaders, and provide clear lines of authority. Having clear, shared sense of who is responsible for what will help eliminate the chances of gridlock or overlap.
Most large professional services firms elect board of partners.
This board of practising partners corresponds closely to the corporate model of board of directors representing the interests of the “shareholders” (in this case partners). The responsibility for the overall governance of the professional services firms is vested in the board which is authorised to exercise all the powers of the partnership (except for important equity issues, such as admissions to partnership and other matters expressly reserved for partnership vote). Like corporate board, primary function of this body is to oversee and monitor the activities of the executive (the CEO or managing partner) to ensure that the partners’ interests are being served. The board should not be responsible for the day-to-day running of the firm.
Having the elected board appoint, or at least nominate, the executive (managing partner/CEO and office heads), maximises the chances that people with the right skills are placed in positions of authority and that they work together as team. Of course, the power to appoint is to be exercised carefully to ensure such decisions have the confidence of the partnership.
The CEO or full-time, non-practising managing partner is responsible for management and operations. The CEO appoints management team or executive. Some of these – such as practice heads and team leaders – will also be partners.
Adopting such “corporate” model ensures that governance and policy functions are effectively separated from executive functions. It also provides avenues for partners with different skills to make their respective contributions. Most firms recognise that the managerial tasks involved with the day-to-day running of the practice require distinctly different set of skills and abilities than those required at board level.
Effective managing partners hold regular meetings at which the managing partner can report latest developments, inform others on topics to be addressed at forthcoming board meetings and answer questions. When done well, this approach allows those outside the official power structure to participate.

There may be tendency on the part of some partners to feel that, as owners of the firm, they have the right to be involved in all aspects of the business. If allowed to happen, this will break down the good governance of the firm creating an environment where the person who is the most important or vocal is seen as the real leader or power-broker in the firm.
It is important that the culture of the partnership is one of clarity as

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