PERSPECTIVE #17— IN OUR OPINION, SEPTEMBER 19, 2016
(A Continuing Series for Leading CPA Firms)
THE ROLES OF SENIOR MANAGEMENT TEAM AND EXECUTIVE COMMITTEE
WHEN “RUNNING WITH THE BIG DOGS”
“Generally speaking, the key dimensions of
corporate governance are strategy oversight,
policy making, accountability and monitoring”.
— Pearl Zhu
Leadership/senior management, including the CEO, and the Executive Committee or Partnership Board (corporate governance) are two critical components of every CPA firm. Optimally, they function as effective teams with a shared view of the firm’s most important strategic priorities. These two groups need to be on the same page, hand and glove if you will, when it comes to what’s in the best interests of the firm. This is a truism but, in reality, it is easier said than done.
We have found considerable dysfunction in many, many smaller firms when they strive to “run with the big dogs” (i.e., mid-market sustainable brands including the Next Six — currently RSM, Grant Thornton, BDO, Crowe Horwath, CliftonLarsonAllen and CBIZ) in their quest to attract larger more complex clients and better quality talent and remain independent to perpetuate to the next generation.
In Our Opinion, this dysfunction principally occurs because many leaders and senior partners at smaller firms “grew up” in small firm environments with little, if any, exposure or understanding of what right looks like when it comes to clearly defined roles, responsibilities and authorities for both leadership/senior management and the Executive Committee. This lack of knowledge often results in bickering and infighting among senior partners. Leadership/senior management starts to look at the firm’s Executive Committee as an obstacle or hurdle that getsin the way of progress. The Executive Committee, in turn, begins to see their role as “shop stewards” representing partners who are not happy with the firm’s performance.
When this occurs, almost everybody becomes unhappy and disenchanted with the firm’s prospects for success (and by the way this discontent trickles down to the staff — a potentially cancerous situation). Worst yet, the firm begins to move backwards instead of forward and client relationships, new business development, talent management and profitability begin to suffer. Eventually these firms either merge-up out of weakness or break-up. Either way, it is not the preferred path.
In our previous perspective newsletter, we addressed the role of the CEO in a larger firm environment — emphasizing that the CEO isn’t the biggest biller or the best business developer but rather is the quarterback with the responsibility of moving the firm forward. In this perspective newsletter, we address the roles of both the CEO’s supporting leadership/senior management team and the Executive Committee.
To begin with, we believe that many smaller firms have too many part-time standing committees that get little, if anything, accomplished. Sometimes that creates chaos because these committees send mixed messages to the partners. Here are some examples. Some smaller firms have a Compensation Committee (that focuses only on the allocation of the discretionary partner bonus pool — working hours on a relatively small portion of partner compensation). Other firms have a Finance Committee (that focuses on the firm’s capitalization) but are unable to agree on the proper amount and mix of bank debt vs. partner equity and still other firms have an Executive Committee that functions as CEO.
CPA firms can’t run by committees. Too many committees are like cholesterol — they clog up the arteries and make it very difficult to make decisions on a timely and effective basis. Partners have to realize that as their firm gets larger, more of a corporate structure is required — with most of the day-to-day decisions sitting with the CEO, the supporting leadership/senior management team and the Executive Committee.
In addition to the CEO, we believe that CPA firms should have only two standing groups that are very important to success. Other part-time committees aren’t necessary if your CEO and these two groups are functioning as one cohesive team with different roles, responsibilities and authorities:
- A supporting leadership/senior management team that serves at the pleasure of the CEO. Depending on the size of the firm, a senior management team usually consists of the CEO, the COO or Chief Administrative partner, and office managing partners, and
- An Executive Committee for oversight and corporate governance; usually elected by the partners at large for a three/four-year staggered term with the ability to re-up.
Interestingly enough, we have found that many CEOs at many smaller firms don’t have a dedicated supporting senior management team. Big mistake. The populous partner view is that “our firm can’t afford too many non-billable or low billable partners. These partners become overhead and we already have too much overhead to begin with”. In our view, just the opposite is true. Firms cannot afford not to have a supporting leadership/senior management team as experience and history have proven that the most successful firms, indeed most if not all of the Top 100 firms, are those with strong senior management teams!
The CEO’s supporting senior management team at the most successful firms are usually responsible for:
- Making sure the strategic plan and its key initiatives and tactics are being implemented.
- Making sure that the firm’s budget is realistic (with a little stretch) and that actual results are being achieved so that the firm will either meet or exceed anticipated partner earnings.
- Managing risk and assuring that the firm isn’t making any “ranch bets” that have the potential for significant deterioration of firm reputation and partner earnings.
- Developing talent and ensuring that the firm has an adequate pipeline of future partners to perpetuate the firm.
And while most firms do have an Executive Committee, at many smaller firms this committee does not function properly. The partners on many Executive Committees at smaller firms feel powerless with corporate governance responsibility but little, if any, authority. We have found that the Executive Committee at smaller firms wears many hats. Members also belong to an Operating Committee, or a Finance Committee or a Compensation Committee. We believe firms do not need all these part time committees, sucking up, in some cases, about 200 hours of a partner’s year, if they have an effective CEO, supporting leadership/senior management team and Executive Committee — all functioning on the same page.
The Executive Committee at the most successful firms usually has a very small but very important charter as summarized below:
- Overseeing the soundness of the firm’s strategic plan and execution of the annual budget.
- Addressing all partner matters including mergers/acquisitions, new partner admissions, terminations, compensation and discipline.
- Making sure that the partnership agreement is up to date and reflective of the firm’s governance needs.
- Evaluating the effectiveness of the CEO and the supporting leadership/senior management team.
Today, more than recent times as margins continue to get squeezed and organic growth continues to be evasive, CPA firms are laser focused on strategy, growth (both organic and through mergers and acquisitions), and partner earnings. Many firms are doing numerous mergers or acquisitions in relative short periods of time and they are trying to integrate these silos into one cohesive firm that can compete with the “big dogs”. We find many firms are struggling to digest and integrate these mergers and are finding it difficult to make things happen. We urge these firms to slow down the merger frenzy until leadership/senior management, corporate governance and infrastructure catch-up, digest them and begin to have a visible impact on the future success of the firm — including accretion to partner earnings.
Dom Esposito, CPA, is the CEO of ESPOSITO CEO2CEO, LLC — a boutique advisory firm consulting to leading CPA and other professional services firms on strategy, succession planning and mergers, acquisitions and integration. Dom, voted as one of the most influential people in the profession for two consecutive years by Accounting Today, authored a book, published by www.CPATrendlines.com., entitled “8 Steps to Great” which is a primer for CEOs, managing partners and other senior partners. In Our Opinion, is a continuing series of perspectives for leading CPA firms where Dom shares insights, experiences and wisdom with firm leaders who want to “run with the big dogs” and develop their firms into sustainable brands. Dom welcomes questions and can be contacted at either email@example.com or 203.292.3277.