Edited by Jonathan P. Doh and Stephen A. Stumpf
Chapter 15: Management and Governance of Professional Services Firms
277 A key outcome of the work in governance and agency has been the recommendation for ﬁrms to tie executive compensation to ﬁrm performance directly through ownership (Jensen and Meckling, 1976). This notion is supported by the contention that manager-owners are more likely to act in ways that beneﬁt all owners of the ﬁrm. Hence we argue that, in the case of PSFs, this argument must be adapted to account for the three tiers of employees present in PSFs: non-owner staff, non-leader partners who have an ownership stake and ofﬁcer-leaders (managing partners) who have an ownership stake and leadership responsibilities for the ﬁrm. Following our discussion of agency theory applicability to PSFs, we examine how changes in the organizational strategy and form of PSFs will affect their governance. Changes have resulted from pressures for growth in institution size for a more global footprint, from clients to satisfy more of their demands, from shareholders over questionable auditing/advising practices and from the general turbulence in the external environment. These developments are exerting pressures on the historically loosely connected, often decentralized organizations to improve accountability and organizational effectiveness. We note that, as PSFs take on some of the characteristics of traditional corporations through their growth, merger with non-PSFs and sale of equity to non-partners, governance theories that recognize intermediate forms will need to be developed. Management and governance in professional services ﬁrms The emergence of the professional services sector Services industries account for a large and growing share of overall employment...
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