So, 2020 is behind us and many midsized and small CPA firms did better than expected. When you add in the forgiveness of the PPP money, 2020 turned out to be a financially pretty good year.
But unless CPA firms are successfully executing on their strategic plans (including leadership and corporate governance), they can’t presume that 2021 is going to be a financially successful year. They must avoid cruising because they may be headed for a bruising.
Leadership and senior management, including the CEO, executive committee and partnership board, are critical components of every CPA firm, regardless of its size. Optimally, they function as effective teams with a shared view of the firm’s most important strategic priorities. These groups need to be on the same page when it comes to what’s in the best interests of the firm. This is a truism but, in reality, it’s easier said than done.
I’ve found considerable dysfunction in many midsized and small CPA firms. It really becomes obvious to their partners and to the marketplace when these firms strive to “run with the big dogs.” Many of them begin to unravel.
This dysfunction principally occurs because many leaders and senior partners 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 leadership, senior management and 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 its 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. This discontent trickles down to the staff, a potentially cancerous situation. Worse yet, the firm begins to move backward instead of forward. 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’s not the preferred path.
In a larger firm environment, the CEO isn’t the biggest biller or the best business developer, but instead the quarterback with the responsibility of moving the firm forward. Many midsized and small 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. Other firms have a finance committee that focuses on the firm’s capitalization but they’re unable to agree on the proper amount and mix of bank debt vs. partner equity. Still other firms have an executive committee that functions as a CEO.
CPA firms can’t run by committees. Too many committees are like cholesterol — they clog up the arteries and make it 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 and senior management team, and the executive committee.
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 or senior management team 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- or four-year staggered term with the ability to re-up.
Many CEOs at many smaller firms don’t have a dedicated supporting senior management team. Big mistake. The popular 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.” Actually, just the opposite is true. Firms cannot afford not to have a supporting leadership or senior management team. 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 is usually responsible for:
- Making sure the strategic plan and its key initiatives and tactics are being implemented;
- Making sure the firm’s budget is realistic (with a little stretch) and that actual results are being achieved so the firm will either meet or exceed anticipated partner earnings;
- Managing risk and ensuring the firm isn’t making any “ranch bets” that have the potential for significant deterioration of firm reputation and partner earnings; and
- Developing talent and ensuring the firm has an adequate pipeline of future partners to perpetuate the firm.
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. They have corporate governance responsibility, but little, if any, authority. The executive committee at smaller firms wears many hats. Members often also belong to an operating committee, a finance committee or a compensation committee. Firms don’t need all these part-time committees. In some cases, they suck up about 200 hours of a partner’s year. If they have an effective CEO, supporting leadership and senior management team, and executive committee, they’re all functioning on the same page.
The executive committee at the most successful firms usually has a small, but important, charter:
- 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 the partnership agreement is up to date and reflective of the firm’s governance needs; and
- Evaluating the effectiveness of the CEO and the supporting leadership/senior management team.
Today, 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 and acquisitions in relatively short periods of time, trying to integrate these silos into one cohesive firm that can compete with the “big dogs.” Many firms are struggling to digest and integrate these mergers and are finding it difficult to make things happen. I urge these firms to slow down the merger frenzy until leadership, senior management, corporate governance and infrastructure can catch up, digest them and begin to have a visible impact on the future success of the firm, including accretion to partner earnings.
