Are Your Governance And Operating Models Effective?

IN OUR OPINION, PERSPECTIVE #123 — A Continuing Series for Leading CPA Firms

ARE YOUR GOVERNANCE AND OPERATING MODELS EFFECTIVE?

"Status quo, you know, is Latin for the mess we are in".   
—Ronald Reagan President

For small and midsized CPA firms that are striving to stay independent, this Perspective addresses how to avoid a “sand trap” that can stump your growth and eventually threaten your independence.

Regardless of your firm’s size, it is absolutely essential that you avoid “sand traps” ( including ineffective governance and operating models) that will get in the way of achieving growth at an acceptable rate (6% to 8% per year --- oftentimes easier said than done organically) and staying independent. If you “land” into this “trap”, your firm will eventually stagnate and ultimately die or merge-up.

In Our Opinion, practical tips to avoid this “sand trap” are presented below:

Today more often than not, larger firms (and those that aspire to be larger firms) look to one partner group to govern (usually referred to as an Executive Board, Partner Board, or Executive Committee) and a second group of partners, the Senior Operating Leadership Team, to drive strategy and to oversee the day to day operations. To be most effective, these two groups need to complement each other. In fact, in many firms with highly regarded brands, these two groups are comprised of different partners to foster healthy checks and balances within the firm. Unfortunately, all too often, at many of the small and midsized firms, we find that these two groups and their responsibilities are vested with just a single governance and operating committee appointed by the CEO or Managing Partner. While we understand that it is easy to fall into this trap, we don’t believe that this is a very healthy way to run a firm. Sometimes it creates a mentality of us versus them. It also creates a good old boys club that becomes very inbred. This unhealthy environment often creates favoritism (which is terrible for morale), hampers revenue growth (which is terrible for partner wallets), and makes it very difficult to nurture future leaders (which threatens the viability of a firm).

So, let’s take a look at our view of effective governance and operations.

THE EXECUTIVE BOARD 

Effective governance at any sized firm can be achieved by an Executive Board that is comprised of both senior partners and more junior, high potential partners --- perhaps five to nine in total depending on the size and complexity of your firm. Generally, the CEO or Managing Partner is an appointed member and other members are elected by the partners at large to rotating three-year terms with a limit of two years. The Executive Board usually meets one day a month (twice when it gets close to compensation time). In the interim, between face to face meetings, the Executive Board holds a video conference or conference call to discuss matters that can’t wait for the next regularly scheduled meeting. Responsibilities of the Executive Board usually include: (a) approving the firm’s strategic plan and holding the CEO and other firm leaders accountable for the plan’s implementation, (b) approving mergers, acquisitions or a firm name change, and (c) overseeing the successful resolution of partner matters (compensation, lateral hires outplacements, and new internal admissions).

THE SENIOR OPERATING LEADERSHIP TEAM

Depending on the size of your firm, effective day to day operations are best accomplished through a Senior Operating Leadership Team comprising of the CEO, Chief Operating Officer, Regional Managing Partners, Office Managing Partners, Audit, Tax and Consulting Leaders, and a Go to Market Leader. Again, some of these positions may not be appropriate in your firm today because of its critical mass, number of service lines, and/or number of locations. Nevertheless, regardless of size, in addition to the CEO, we highly recommend that every firm, at a minimum, have an Office Managing Partner, three functional leaders (Audit, Tax, and Consulting/Advisory), and a Go to Market Leader (many firms do not have this position today). While all positions are important, we very much want to emphasize the importance of a Go to Market Leader who is typically responsible for driving industry and consulting strategies both at the operating office and individual partner levels. This partner, who generally has a small client load and a reduced number of billable hours when compared to other partners, is the partner shepherd who leverages his/her strategic skills into others. If you don’t currently have such a partner in your firm, we highly recommend that you consider one.

The Senior Leadership Operating Team usually meets one day a month. These meetings create subtle peer competition and promote the sharing of best practices. In between face to face meetings (typically held to handle an opportunity that requires quick collaboration), the operating team usually holds a video conference or a conference call. The operating team’s responsibilities usually include reviews of key management tools that enable a firm to execute success.

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IN CONCLUSION

Trying to grow and staying independent requires that a firm avoid the many “sand traps” of practice management. This Perspective focuses on best practices in corporate governance and operations. Effective management is a key to success but unfortunately, many small and midsized CPA firms do not follow them.