GOVERNANCE & MANAGEMENT In Andersen’s Wake – How PWC governs its partnership

Since the high profile corporate scandals like WorldCom and Enron re-set the demarcation lines between board and management functions, it’s no longer de rigueur for professional services firms to advocate good corporate governance without walking their own talk. The days of preaching and not practising are fading fast.
But the tardiness with which professional services firms have moved to separate the role of chair and CEO is both perplexing and amusing, particularly given the ignominious downfall of auditor-come-consulting firm Arthur Andersen. Ironically, the firms responsible for independently auditing most of our big (and many of our smaller) businesses operate on structures that, in today’s world of best practice corporate governance, look decidedly risky.
In reality, argues PricewaterhouseCoopers (PWC) tax expert and practice chair, John Shewan, little has changed in the way professional services firms operate since the global gravitation toward better corporate governance. But partners of professional services firms are, he says, starting to realise that it’s no longer good enough to be squeaky clean without showing greater transparency into how and why.
To do just this, PWC split out the chief executive and chair roles late in 2003. “There was initial scepticism as to how role splitting would work and we examined several different models, including the appointment of external directors,” says Shewan, who’s been with the firm for 28 years. “But we concluded that an adaptation of the traditional corporate model, involving internal candidates with clearly defined lines of responsibility and accountability was both workable and appropriate.”
By today’s standards, the old adage common within most professional services firms: “president, CEO, and chair – and for life” flies in the face of contemporary governance wisdom. Admittedly, there was nothing fundamentally wrong with the way former executive/chair Robin Hill ran PWC pre-November 2003. Both Shewan and current chief executive Warwick Hunt believe much of the firm’s former success was attributable to the unique strengths of their predecessor. But that said, the new structure eliminates the potential for exposing the firm to undue risk.
That’s why splitting the CEO and chair roles – still the exception rather than the rule in New Zealand-based accounting firms – coincided with halving the number of directors down to six. tighter and smaller board – comprised solely of partners all engaged in client activities – produces efficiencies while better serving partners’ interests, says Shewan.

Dividing lines
There are no established protocols as to how the chair and board members conduct themselves, but it’s important to have dividing lines between management and governance. “If partner bails me up over beer complaining about an operational issue, I’d ask them to discuss it with Warwick Hunt as CEO,” says Shewan. “But this sort of protocol doesn’t get in the way of the highly valuable feedback exchanged between partners every day within the firm.”
What makes these dividing lines doubly important, says Hunt, is the fundamental distinction between professional services firms and their mainstream counterparts. The most important role of any board is the job of hiring or firing the CEO. Not so, or at least not typical, in professional services firms.
In PWC’s case both the CEO and chair are elected by the 84 partners who collectively own and operate the business. And because of their innately co-dependent relationship, Shewan says the CEO and chair are usually running-mates who are voted in or out as an ensemble. While CEO and chair can stand for three consecutive three-year terms, they must receive 75 percent majority in their final term.
So how do their disparate backgrounds complement the roles Shewan and Hunt play? Originally from Durban via stints in the United States, London and Hong Kong, Hunt has been rubbing shoulders with long-serving partner Shewan since he joined the firm 10 years ago. Before taking up the mantle in their current positions, Shewan and Hunt headed-up the firm’s tax and auditing divisions respectively.
During that time neither of them got close enough to know what made the other tick outside work. Hunt prefers leisure pursuits on the water, like trout fishing. Shewan, on the other hand, indulges in “bad golf” and jogging. They are united by mutual interest in education; both through furthering the interests of their private school taught kids, and active involvement in the tertiary education sector.
Hunt recently invited Shewan and partner to celebrate his 10-year milestone with PWC, while Hunt and his partner helped Shewan celebrate his 50th birthday this year. With Shewan domiciled in Wellington and Hunt Auckland-based this sort of socialising is rare. But at the business end of the relationship, they’re in contact either via the phone or in person every two to three days.
Their relationship, according to Hunt, is based more on mutual respect for professional values than friendship. But he thinks that if the CEO/chair partnership is underpinned by common values then friendship follows naturally. And if these values are aligned to shareholder interests there is, he says, little danger of these relationships becoming too cosy. When implementing the PWC structure, Shewan and Hunt admit to being heavily influenced by the seemingly successful working relationships between Fonterra’s CEO Andrew Ferrier and chair Henry van der Heyden and that which existed between Air NZ’s CEO/chair duo of Ralph Norris and John Palmer.

Symbiotic relationship
So what are the key personal and job-specific ingredients of their successful partnership? According to Shewan it’s their joint ability to constructively support and guide fellow partners. But rather than being directly answerable to the chair, Hunt sees his relationship with Shewan as more symbiotic than might be appropriate in mainstream business.
Shewan believes the way he and Hunt behave and represent themselves to shareholders sets the tone for the board and the organisation. And because the board members also have management roles there is naturally close working relationship.
But formality around internal communications ensures all board members receive the same information through full board papers.
The symbiotic relationship between the chair and chief executive and other partners also recognises that the most important attribute they have as professional services company is their reputation. And it’s on this reputation that they sink or swim. “It’s equally important that all key issues are comprehensively communicated to the board as group,” says Shewan.
As CEO, Hunt is PWC’s boss of day-to-day activities. She-wan has responsibility for the oversight of the company’s New Zealand activities. Hunt is delegated by the power of the board to manage the firm on an executive basis, determine its strategy and lead it within the PWC international network.
On the flipside, Shewan says the chair is charged by the partners with the oversight of the firm’s activities, conducting governance, protecting partners’ interests, and advancing PWC’s reputation. “The essence of good governance from the chair’s perspective is delicate balance of oversight, support, and counselling, without undermining management or second-guessing contradictory views,” says Shewan.

Not compliance-driven
Contrary to the experience of many, especially listed, boards Shewan doesn’t believe compliance dominates PWC’s board meetings. It’s important to ensure there’s no time wasting, but “PWC is less preoccupied with compliance, but as major player in the assurance market is rigorous on process and independence issues”, he adds.
According to Hunt, 60 percent of the board’s time is spent on oversight, with the remainder divided between strategy and trends, performance issues, business development, risk management and human capital.
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