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Big Four firms rethink governance

Big Four firms rethink governance

The current governance of the Big Four encompasses the worst aspects of partnership governance and the worst aspects of corporate governance.

In an article in the Financial Times, I explain how the partnership model eliminates the principal-agent problem, in that owners, managers, and major producers are one and the same. For smaller partnerships that can work very effectively. But, as partnerships grow, the leadership becomes more and more divorced from the partners.

Publicly quoted firms benefit from the oversight of external shareholders and non-executives. By contrast, the largest partnerships (which are as large as many large global corporations) are stuck in an awkward in-between place.

The leaders of these firms are no longer effectively subject to the traditional checks and balances of a well-run partnership – i.e. peer pressure and “helpful” scrutiny from well-informed and highly involved partners. Instead, they rely increasingly on bureaucratic systems and structures, which serve to disenfranchise partners and disengage them from the governance of the firms that they own.

In the accounting sector, the regulators’ response to the persistent waves of scandals emanating from large global accounting firms is to force them to adopt assorted fragments of corporate-style governance. But these corporate-style governance codes have evolved over decades, in response to multiple rounds of corporate scandals. They are not designed to accommodate the delicious peculiarities of partnership governance.

And these governance challenges are not limited to the Big Four, or the accounting sector. As partnerships grow, they need to adapt their governance, to ensure that adequate formal checks and balances supplement the informal powers of peer pressure and partner engagement. Otherwise, they may find that “solutions” are imposed on them from outside.

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