Accountancy firms must be able to adapt to new and changing circumstances. The firm’s constitution needs to create the right framework. This article explores the key points that accountancy firms need to address in their constitution in the current market? It will be vital to address compensation, governance, external investment and succession planning.
Change is everywhere. It is inevitable, often a bit scary and usually involves great opportunity. The trick is being ready for it.
Accountancy firms must be able to adapt to new and changing circumstances. The firm’s constitution needs to create the right framework.
What are the key points that accountancy firms need to address in their constitution in the current market?
This article assumes a firm is an LLP, and therefore discusses LLP agreements, but the principles apply equally to firms operating through companies and/or complex group structures.
There has been a shift in accounting firms over the past generation from compensation models which recognise and reward collective firm success to those which devote a large proportion of total reward to an individual’s contribution and performance.
The compensation system needs to incentivise desirable behaviours for the firm’s strategic goals. For example, if collaboration and cross-selling is strategically important, monitor and reward partners who make internal referrals. Likewise, if retention of the next generation of talent relies on good culture and strong ESG credentials, reward partners who walk that walk. Firms should also reduce reward for partners whose behaviours undermine the firm’s values (for example, if the firm promotes freedom to work flexibly yet an individual partner insists that team members cannot work remotely).
Many firms’ governance arrangements were agreed years ago, often before periods of growth and/or diversification. They were sometimes even designed with specific individuals in mind, often by those individuals themselves. Firms need workable governance arrangements which support and drive the firm’s strategy and growth. Each firm is unique, but accounting firms often address the following in their LLP agreements.
The industry headlines are filled with examples of accounting firms pursuing their strategy and growth ambitions through external investment, consolidation (such as mergers) and disposal of associated businesses/assets. PE investment currently dominates these discussions. Even firms who do not pursue these options must adapt to a rapidly changing competitive environment.
A key source of division and dispute between the partners can be whether to pursue those options and, if so, how the benefits are shared. This is especially complex if, as is often the case, the financial benefits are both short and long term. This creates tension between the senior partners, who often have the highest profit shares and more limited time before retirement, and the junior partners who typically have the longest periods at the firm ahead of them, thus experience the greatest impact of the transaction. This can be exacerbated if senior partners control the decision making regarding the transaction. In reality the transaction will only be successful if there is a strong rationale and the vast majority of partners -senior and junior- are supportive of it.
The LLP agreement can help manage the risks of division by having LLP agreement which addresses the prospect of a possible capital event, including how decision making, capital profit sharing, exits and post transaction covenants would apply.
Robust succession planning is important to all businesses. This requires transparent a discussions between the firm and partners, as well as system to incentivise healthy succession behaviours (e.g. linking reward to positive succession behaviours, like introducing clients to other partners).
The LLP agreement needs a full suite of exit provisions, including the power to expel for cause (including for poor conduct) and to remove without cause. The latter is often the backdrop to a discussion about voluntary retirement. Some firms still operate mandatory retirement age. This is only lawful if it is a proportionate means of achieving legitimate business aims, and these need regular review. Retaining a retirement age because ‘it’s always been like that’ does not work.
To protect the business, firms also need wide and flexible powers to suspend partners, for example to investigate allegations of improper conduct, and to place departing partners on garden leave while client relationships are cemented with successor partners. The final layer of protection is post-exit restrictions to prevent former partners from poaching staff and clients. These should sit alongside delayed repayment of capital and current account balances to manage cashflow and encourage good behaviour after leaving. Ideally all these powers would be capable of variation by management, to enable the firm to negotiate nimbly and effectively with departing partners.
Firms should also ensure their LLP agreements include additional important provisions, such as confidentiality provisions, positive and negative duties, indemnities, admissions, absences (incl. parental leave and illness) and access to information.
Firms wanting a free, anonymous health-check of their LLP agreement can use this free online tool here: https://www.cm-murray.com/knowledge/cm-murray-llp-launches-online-tool-to-review-llp-agreement-compliance-and-best-practice/
Corinne Staves is a partner at CM Murray LLP who specialises in advising professional services firms.
