Accounting firms tend to embrace one of three types of governance systems - the benign dictator, the republic or the democracy. Many of my clients often ask me these questions:* Which one is the best?
* Which one helps the firm survive from generation to generation?
* Which one will help us achieve our strategic goals?
This is what I usually share with them.
The rule of one
The dictator (whether benevolent or heavy-handed) is usually the person who started the firm. They are great entrepreneurs and rule mainly by intimidation. They have great ideas but are usually horrible when in comes to implementation. The sheer power of their personality keeps the firm together.
Unfortunately, dictators eventually surround themselves with weak partners, since strong-minded partners can't flourish under this system. The dictator only trusts those partners that he can control. And as the firm grows, there is constant tension and frustration between the dictator, trying to control everything that happens in the firm, and those partners who want to have the authority and responsibility to do things.
These firms are usually able to survive and prosper for at least one generation.
The rule of many
First, let's define what we mean by this term. The following comes from Training Manual No. 2000-25, published by the War Department on Nov. 30, 1928. A democracy:
* Is a government of the masses.
* Derives its authority through mass meetings or any other form of "direct" expression.
* Results in mob-ocracy.
* Has an attitude toward property that is communistic - negating property rights.
* Has an attitude toward law that it is the will of the majority that shall regulate, whether it be based upon deliberation or governed by passion, prejudice and impulse, without restraint or regard to consequences.
* Results in demagoguism, license, agitation, discontent and anarchy.
Sounds like a lot of accounting firms I have met over the last 20 or so years. The chief characteristic and distinguishing feature of a democracy is that it is ruled by the omnipotent majority (perhaps the few partners that own the majority of the firm). In a democracy, the individual partners, and any group of individuals composing any minority, have no protection against the unlimited power of the majority. It is a case of majority over man.
In a firm that is run as a democracy, all of the partners assemble to debate and decide all governance and operational issues and questions, and all decisions are reached by a majority vote. It is something akin to a New England town meeting, where all of the people meet to discuss an issue. Some firms find this a successful way to run their practices. But with no protection for the minority partners, there can be a great deal of tension and frustration.
The rule of a few
As firms mature and grow, they tend to move toward a republican form of governance. The War Department Training Manual from Nov. 30, 1928, also defines a republic:
* Authority is derived through the election by the people of public officials best fitted to represent them.
* Its attitude toward law is that the administration of justice should be in accord with fixed principles and established evidence, with a strict regard to consequences.
* A greater number of citizens and extent of territory may be brought within its compass.
* It avoids the dangerous extreme of either tyranny or mob-ocracy.
* It results in statesmanship, liberty, reason, justice, contentment and progress.
A republic is representative government ruled by law. The United States is a republic. The Constitution is our law. In your firm, it's the partnership or shareholder agreement. A republic recognizes the inalienable rights of individuals, while democracies are only concerned with group wants or needs (the public good).
Our Founding Fathers understood that the only entity that can take away the people's freedom is their own government. The same is true for accounting firms. Dictators become too powerful and take over every aspect of the firm. A democracy may become too weak to protect the firm from external threats.
What checks and balances exist in your firm to keep it strong, but also to protect the minority interest? Maybe it's time for more firms to consider a republic instead of a so-called democracy.
The larger firms in the country are surely run more like republics than democracies. Smaller firms would be well advised to change their governance to mirror the larger firms.
August J. Aquila, Ph.D, is the director of practice management consulting for The Growth Partnership. He specializes in mergers and acquisitions and partnership issues. Reach him at aaquila@thegrowthpartnership.com or (952) 930-1295.
