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Passion, People and Principles

Professional Firm Boards

post # 8 — January 27, 2006 — a Managing post

An old friend and client writes to ask:

How do professional service firms obtain independent, external input at the leadership level? Do they add a few independent directors to the board of (inside) directors, if there is one? Do they form an external advisory board of people? Do they hire specialized consultants on an issue-by-issue basis? Do they bring in outsiders as co-CEO, COO or as a full- or part-time vice chairman?

Corporate boards bring valuable experience, expertise and networks to their managements. But doing this in a professional services firm would pose numerous challenges, not least of which is the amount of time it would take the outsiders to really get to know the business, the top managers and customers before their counsel would be valuable and valued.

As to advisory boards, in the 1970s a number of high-profile American companies created international advisory boards peopled with former heads of state (e.g., Willy Brandt), high-profile foreign corporate leaders, statesmen (Henry Kissinger) and others.

Hiring a highly talented retired executive or regulator as full- or part-time vice chairman or senior advisor might be a viable approach to accessing ongoing independent thinking at the top. However, in a number of years the thinking might lose some of its “independence.”

Are any of these approaches wise or viable for today’s professional service firm?

Let’s begin with the cheap shot. What does it tell you that one of the most pioneering, prominent, distinctive and heavily promoted advisory board in professional services (with the caliber of people you mention) was that of Arthur Andersen? I have no way of knowing whether that instance was cynical window dressing or a real strategic advantage to the firm, but as a professional cynic I incline towards the former interpretation, especially given the way events unfolded.

I would be more impressed by a firm that had such a Board, but told no-one about it. Now that would be a good clue that they weren’t doing it just for the image!

I am willing to believe that getting high-level input and access to great minds is helpful to any top executive (CEO or managing partner) in any business, large or small. That’s why organizations like The Young Presidents’ Organization, Rotary Clubs and private dining clubs in every major city exist to allow business people from different industries to get to know and help each other.

I don’t at all accept your implication that professional service firms are going to be particularly difficult for an outsider to understand. That’s pomposity. Professionals themselves pretend they can quickly understand all their clients’ industries and businesses when they get hired, but to turn around and say “our business would take years to understand” is the (unsurprising) height of arrogance (and self-delusion.)

The biggest barrier for professional firms acting like corporate businesses and getting high-level input at senior levels would likely be their (un)willingness to accept advice! Who is going to successfully get the world’s top advice-givers to accept critiques and suggestions that what they are doing could be done another way? Who’s going to tell some of the world’s smartest brains that they have reached a faulty conclusion? Who’s going to get away with doing this more than once, and still be asked back again and again? It’s a very peculiar set of skills to have, and only a (small) subset of top professional firm leaders who would want this on a regular basis. (I don’t think I ever could have got started in this business without the crimson H of Harvard glowing out of my forehead!)

So, should firms have these formal structures? One of my eternal rules is to eagerly look for productive processes, but beware of sticky structures. The key here is to engage in activities (or processes) that get input from fresh perspectives (dinner clubs, mentors in other industries, use of consultants to do make evaluations and recommendations and to do so in such a way that there is a route for the input be surfaced, dealt with and responded to, not just collected and ignored.

However, for me the warning sign would be that if this ever goes beyond being a process (the regular way you do business) and becomes a structure (an board, a committee, a bureaucratic system) then that’s a pretty good sign that you’re only playing games, and its likely to be of limited value. There’s no more certain way to avoid facing hard issues than to form a committee, establish an oversight board, or hire a new executive to a new position who actually cannot influence how the firm actually does things.

One final thought: you may be overestimating the impact of corporate boards. We all know they are not only supposed to provide wisdom to top management, but also to exercise oversight on behalf of the shareholders. So it is, in theory also, with professional firms. Many partnerships, for example, have a board of partners whose job it is to oversee the activities of the firms’ executive. My take is that, most of the time, these are no more and no less effective in controlling management than they are in the corporate sector. And adding outsiders theoretically should give the board more power, but rarely does. It’s usually a well-paid boondoggle for the board member who is expected to behave.

1 Comment

Brian Sommer said:

As a former Big 4 partner and one quite familiar with the way leadership functions in these firms, I find the willingness of partners to solicit and actually embrace outside advice and counsel to be quite limiting. Remember, these are individuals who make their living telling others what to do. These people are experts and are used to giving not taking advice.

The most significant proof of this not-invented-here way of thinking is that few of these firms have ever hired an external CEO. Few have ever hired any external executives for top management slots. A culture so distrustful or disdainful of outsiders (who may be more qualified) is one to watch out for.

In the Arthur Andersen example you described, one case where external counsel/leadership would have significantly benefited the company was when its audit/tax practice was competing with its consulting division (now Accenture). Any neutral third party would have seen the politics in play and made the needed Solomonic decision(s) that would have stopped the divorce and other business decisions that were not only tearing the firm apart but also setting up other business problems to come.

Whenever I see oversight or advisory boards, I generally dismiss them as many are no more than window-dressing. Too often they serve as a toothless Marketing adjunct for the firm and never get their hands dirty investigating what’s really going on.

David’s commentary, albeit frank, is quite spot on when it comes to professional service firms.

posted on February 8, 2006