Is Stewardship Dead?
post # 336 — March 22, 2007 — a Strategy post
Over the years, I have had a lot of people ask me for definitions of (a) what is a profession (b) what is a professional (c) what is a professional service and (d) what is a professional service firm?
On the last question, I have always argued that a professional service firm, as a special type of organization, is one where the current partners develop and pass on the firm to the next generation. (Itâ€™s also called the partnership model)
In the old days, when professional firms acted like they cared, many of them ran on the principle of stewardship or â€œlegacy.â€ The firm was run not only for the current generation, but with an eye to building an institution that would flourish and survive in future years. Partners, so the argument went, held the firm in trust for the next generation.
This was not just a cultural issue. Under the stewardship model, equity in the firm was transferred at book value — in at book, out at book. Partners made their money from the income they earned while working at the firm, not by equity appreciation.
I got a call yesterday from a CPA firm partner who thinks that continuing to think this way today is all hogwash. Firms today arenâ€™t REALLY run to leave a legacy or build an institution for the next generation, and firm leaders should stop pretending that they are. Theyâ€™re fooling no-one, he says.
Todayâ€™s partners want not only to maximize their income, but also (when the time comes) they want to be bought out at fair market value when they leave the firm, not just depart with a token retirement pension.
In part, the commonality of the â€œstewardshipâ€ versus â€œif you want ownership you have to buy it from meâ€ model depends on which profession / industry youâ€™re talking about. PR firms, ad agencies and other marketing communications firms have ALWAYS been â€œowned.â€ Theyâ€™ve always been â€œbuilt to flipâ€ (ie sell to one of the big conglomerates like Omnicom or WPP.) From the beginning, their founders ran them to create a â€œcapital event.â€ They didnâ€™t usually give away equity for nothing to rising young people.
On the other hand, in the profession of law (in the US, UK and Australia, but not necessarily elsewhere) there is still a history of running a partnership model, not a corporate model. The message is still (so far) â€œearn your income while youâ€™re here, thereâ€™s no capital gains to be made from your ownership of the firm.â€ In part, thatâ€™s because in many countries there are barriers to who can own a law firm.
But what do you think is going to happen in the UK when the Clementi reforms are (finally) implemented and outsiders can buy the equity of a law firm? How long do you think it will take for the existing partners to rethink (even more than they have been doing) whether they want to admit new partners without forcing them to buy in at fair-market value? Why give away a part share of ownership in your law firm when you can sell it to Goldman Sachs?
In accounting firms, it depends on the size of the firm. Big global firms still pretend they are â€œpassing on the heritageâ€, while many small CPA firms owners are unapologetic in saying: if you want ownership in my firm, you have to buy it from me!
So, what do the rest of you see going on out there?
- Is Stewardship (or the partnership model) dead, even among the firms that pretend to still have it?
- Should we all just admit that the way firms are being run today is to maximize the wealth of the current shareholders?
- If you ran a firm, would you run it on ownership or stewardship principles (be honest)
- Is there a price to be paid if firms switch from one approach to another?