Governance matters for professional service firms

Most professional service firms are entrepreneurial and the product of an organization conceptualized by a small group of people who have either maintained a status quo or, with good vision, have scaled to a larger company with added service offerings. The financial investors are the firm’s owners, bound together as employees and through their common ownership. In a professional service firm, leadership and governance rest with a group, or even a person, in contrast to a public company where the board is composed of people who have professional expertise and who are accountable to stockholders.

It is important for the governance structure of a professional service firm to include members with more vision and a longer-term perspective than an external board member so they may shape the strategic direction of the firm and ensure it continues on track. Professionals who have ascended to ownership frequently maintain an entrepreneurial and independent mindset and may resist policies they believe restrict their freedom. A visionary professional service firm board will develop policies that ensure performance throughout the organization while maintaining flexibility to allow its professionals to excel.

The stakeholders in a professional service firm entrust their governing board to:

  • Hire, fire, and monitor the performance of the appointed executive leader
  • Approve strategic direction and review performance
  • Create a management structure, oversee it, and, when appropriate, refine it
  • Monitor financial performance
  • Approve major expenditures
  • Manage any investments
  • Approve the compensation philosophy
  • Determine the continuity plan
  • Monitor industry trends
  • Evaluate and recommend promotions and/or terminations
  • Mandate adherence to technical requirements
  • Oversee the firm’s culture and maintain its integrity

Ultimately, the size of the firm will dictate the composition of its governance board, with consideration given to adding appropriate, skilled outside directors. Further governance depth may be added by creating board committees that call on the talents of insiders or outsiders.

Board member terms should contain limits. A best practice is to stagger terms so that no more than one third of board members turn over in one year. Appointments may be renewable. For a firm to remain dynamic, it is also good practice to place age restrictions on qualification for board and leadership positions to ensure continuity and succession of a viable organization.

The governance board does not take on day-to-day management. Those roles should be left to individuals appointed by the board. However, the board can be a resource to guide management in its operation of the firm. And, if functioning effectively, the board will monitor and counsel managers, frequently by providing input to the CEO or firm leader for that person to share with the manager. The ultimate role of the board is to confront the tough decisions that no one else will resolve.

Timothy C. Hilbert can be reached at Email or 215.441.4600.


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