Why do so many smaller CPA firms eventually merge up?

While there are many reasons, one reason for sure is that many smaller firms can’t capitalize on the opportunities that may be in front of them because their leadership and corporate governance aren’t properly aligned.

To illustrate the problem, many CEOs and managing partners at smaller firms become their firms’ leaders because they were either the biggest biller, the partner with the most billable hours, or the firm’s best business development partner. Further, the executive committee or partner board at these firms usually wears many hats in addition to their client service responsibilities (operating subcommittee, finance subcommittee and compensation subcommittee, etc.). The executive committee generally doesn’t function properly as the participating partners have plenty of firm responsibility but little, if any, authority and, as a result, feel powerless and unfulfilled. And finally, at many of these firms, the CEO and the chairperson of the executive committee are usually one and the same. That can be overbearing for both the partner and the firm.

A thriving, growing firm requires that leadership and corporate governance take on roles and responsibilities that are very different than those at smaller, slumbering firms.

For sure, the CEO at a growing, thriving firm more than likely isn’t the biggest biller or the best business developer, the executive committee is not involved in day-to-day operations, and for sound corporate governance the executive committee chairperson might very well not be the firm’s CEO.

For a firm that wants to “run with the big dogs,” the key objectives and responsibilities of each of these constituents usually looks like the following:

Key Objectives and Responsibilities of the CEO

• Create a one-firm, firm-first culture (that requires partners thinking “our clients” not “my clients”), implement firm procedures and policies, and instill best practices in areas such as communication, business growth, cost controls, etc.

• Drive revenue and profitability; oversee short and long-term financial condition.

• Protect the firm from significant risk. This requires the CEO to make sure that staff and partners are appropriately trained, evaluated, adhering to firm policies, and appropriately analyzing risk from a perspective of client acceptance, as well as client continuation.

• Be actively involved in the community by attending events, joining boards of directors and becoming active leaders of nonprofit entities.

• Mentor future leaders. This requires continual communication with partners and staff and assisting partners in setting their goals and how they can improve themselves as well as the firm. It also requires that partners be held accountable, partners be evaluated against goals that were agreed to in the year-end evaluation and goal setting meetings.

• Commit to growth through industry specialization by building expertise, effectively going after target clients and providing value to existing clients.

• Assure that partners and staff are providing world class client service while not sacrificing quality by taking the pulse of key clients and the services being provided. This includes taking an active role in client service and communication plans.

• Communicate within the community, partners, staff and clients by maintaining a positive and enthusiastic outlook while dealing with both good and bad news effectively and in a timely manner.

• Design and develop a strategic plan, incorporating the firm’s strategic goals, and direct its development and implementation.

• Assure that the firm has an effective HR personnel plan for meeting current and future client needs.

• Resolve major client disputes with legal counsel assistance as required.

• Ensure that all partners and managers understand the firm’s financial goals and that day-to-day decisions are made consistent with these goals.

• Lead all partner meetings (I strongly encourage a meeting a month).

• Assure compliance with firm policies regarding capital expenditures and operating expenses, and oversee, monitor and control operating expenses consistent with firm policy.

• Assure proper utilization of firm administrative management and information systems.

• Function as the major spokesperson with major business organizations and publications.

• Maintain relationships with leadership at other CPA firms (potential combination targets) and focus on providing services they cannot provide.

• Implement and maintain effective client billing and collection policies and procedures consistent with firm policy.

• Seek laterals who can beef up bench strength and diversification.

• Monitor individual partner and manager fee realization versus plan and recommend actions to address negative variances.

• Oversee client transition and succession planning for retiring partners.

• Foster partner involvement in firm social functions and support personnel recognized for outstanding service in the community.

• Make sure that client services are handled in the most effective and efficient manner with the appropriate client service team.

• Continue to service a small number of clients to remain credible with partners and clients and to stay technically current.

Key Objectives and Responsibilities of the Executive Committee

Most firms do not need 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 an effective Executive Committee led by a Chairperson --- 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, the Chairperson and the supporting leadership/senior management team.

Key Objectives and Role of the Executive Committee Chairperson

The chairperson (if for no other reason than for sound corporate governance, the chairperson should be someone other than the firm’s CEO) is responsible for the oversight and effective performance of the executive committee and provides leadership to all aspects of the committee’s work. The chairperson acts as the communicator when appropriate for the executive committee’s decisions and acts in an advisory capacity for the CEO on matters concerning the interests of the firm. Other responsibilities include:

• Developing meeting agendas with input from the CEO and other executive committee members, and sends out the agenda and supporting documentation in advance of the meetings.

• Serving as moderator and chairs the meetings.

• Calling special committee meetings when necessary.

• Forming and making committee assignments as necessary.

• Recommending an annual schedule of the date, time and location of meetings.

• Determining, in collaboration with the CEO, the date, time and location of the annual partner meeting and developing the agenda for the meeting.

• Conducting feedback sessions for the CEO at the end of each meeting.

• Serving as a sounding board for the CEO related to personnel, strategy, or operational matters as needed.

• Serving as chair of the compensation subcommittee.

• Serving as a sounding board for all committee members as needed.

• Arranging orientation and on-boarding for new committee members.

• Leading a self-assessment process and solicit feedback annually on committee member performance from other constituencies within the firm.

• Evaluating CEO performance with input from the committee and make compensation recommendations.

• Annually assessing and making recommendations regarding the effectiveness of the executive committee as a whole, any subcommittees, and the individual members.

Today, more than in 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. To that end, firms should properly align their leadership and corporate governance so as to enable them to remain independent, achieve quality growth and enhance partner earnings.

Dom Esposito

Dom Esposito

Dom Esposito, CPA, is the CEO of Esposito CEO2CEO LLC, a boutique advisory firm consulting with small and midsized CPA firms on strategy, practice management, mergers and acquisitions.