January 7, 2019
IN OUR OPINION, PERSPECTIVE #74 — JANUARY 7, 2019
(A Continuing Series for Leading CPA Firms)
THE ROLE OF THE MANAGEMENT COMMITTEE AND THE EXECUTIVE COMMITTEE.
SHOULD AN INDIVIDUAL PARTNER SIMULTANEOUSLY SERVE ON BOTH?
| Generally speaking, the key dimensions of corporate governance are strategy oversight, policy making, accountability and monitoring”. “ — Pearl Zhu |
In addition to the CEO (or Managing Partner), we believe that CPA firms should have 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 senior management team (usually referred to as the Management or Operating Committee) 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. 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 can’t afford not having a supporting 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!
- An Executive Committee for oversight and corporate governance. Other than the CEO who is appointed to the Committee, members are usually elected by the partners at large for a three/four-year staggered term with the ability to re-up. 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.
In Our Opinion, there is considerable dysfunction in many smaller firms when it comes to management and corporate governance, principally 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 the Management Committee and for the Executive Committee. This lack of knowledge often results in bickering and infighting among senior partners. Senior management starts to look at the firm’s Executive Committee as an obstacle or hurdle that gets in 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.
To avoid a weakening of the firm, we suggest that these two committees have clearly defined roles and responsibilities as summarized below:
Major Responsibilities — Management Committee:
1. Developing/monitoring adherence to all firm operational policies and processes.
2. Ensure that the system of internal controls regarding financial and operational systems are adequate and enforced.
3. Approval of all major vendors and purchases exceeding an amount to be determined by the Executive Committee.
4. Recommending promotions, raises and bonuses for all non-partner staff.
5. Monitoring annual partner goal setting to ensure that it is effectively completed in accordance with all agreed upon timetables and parameters.
6. Monthly review of firm’s financial results and management reports, analysis of each office financial results, variance analysis to budgets and other reviews as it deems necessary.
7. Monitoring and enforcing the firm culture reflecting an appropriate balance between financial/performance results and respect, responsibility, behavior, community service, teamwork, client service and loyalty.
8. Annual assessment of employee morale and implementing appropriate actions as
necessary.
9.Implementing appropriate actions based on the firm’s cash flow and borrowing.
Major Responsibilities — Executive Committee:
1.Overall performance of the firm.
2. Approval of annual strategic plan and budget.
3. Goals, performance reviews and compensation of CEO and Chairperson of the Executive Committee.
4. Partner issues including final approval of partner compensation and profit allocation.
5. Admission/termination of partners (equity and non-equity) in adherence with operating agreement.
6. Approval of overall risk management process and enforcement including negotiation of and setting limits for professional liability insurance.
7. Approval of all mergers into the firm.
8. Approval of major decisions relating to significant legal issues.
9. Approval of capital structure of the firm including members’ capital and debt.
10. Oversight of firm’s cash flow and borrowing.
11. Meeting obligations defined within the Operating Agreement.
12. Establishing, promoting and enforcing the firm culture reflecting an appropriate
balance between financial/performance results and respect, responsibility, behavior,
community service, teamwork, client service and loyalty.
Should an Individual Partner Simultaneously Serve on Both the Management Committee and the Executive Committee?
While we are aware that policies at many firms, including some in the Next Six, allow for an individual partner (other than the CEO) to simultaneously serve on both the Management Committee and the Executive Committee, we strongly discourage firms from adopting this policy as we see it as an inherent conflict. The Executive Committee serves in an oversight function and that oversight can’t be very effective if you are overseeing your own performance. We much rather prefer a separation of duties. Best practices find that if a partner is on the Executive Committee but
subsequently is asked to serve on the Management Committee, that partner should step down from the Executive Committee.
IN CONCLUSION
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 senior management team and corporate governance resting with the Executive Committee.
Finally, don’t allow an individual partner (other than the CEO) to sit on both the Management Committee and the Executive Committee. This environment could easily be viewed that the fox is in the chicken coop and it has the potential of creating poor partner morale.
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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 desposito@espositoceo2ceo.com or 203.292.3277.
