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Sacha Romanovitch, PEP, and the perils of herding cats

24th Oct 2018
Partner CM Murray LLP
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Sacha Romanovitch
Grant Thornton

Sacha Romanovitch’s dramatic resignation last week as CEO of Grant Thornton UK highlights the difficulties of managing a large professional services firm, writes Zulon Begum.

The role of chief executive at a big firm is often described by those in management as akin to “herding cats”, ensuring rank and file partners get behind any fundamental shift in strategy.

In 2014, Romanovitch became the first woman to be elected as the head of a major UK audit and consultancy firm. Since then, she has restructured the firm’s profit-distribution, allowing for some profits to be shared with all staff, rather than only partners. In a climate of public concern over competition and quality in the audit market, Romanovitch also sought to reposition the firm’s focus to “profits with purpose”, with an emphasis on not only the firm’s own corporate social responsibility, but also a move away from working for clients who lacked those principles.

Whilst “profits with purpose” may in reality be a PR strapline, it is much more likely that the radical departure from a traditional profit-sharing model may have sown the seeds of discontent amongst partners. In an anonymous briefing to the media, a writer allegedly representing some 15 partners and directors at the firm accused Romanovitch of pursuing a “socialist agenda”, also alleging that under her leadership the firm had “no focus on profitability” and was “out of control”.

Reading between the lines, the fall in the firm’s profits per equity partner (often referred to as “PEP”) compared to the relative financial success of its major competitor in the market, seems to be the catalyst that spurred a minority of partners to take such extreme action.

PEP continues to be the metric by which the success of a professional services firm is measured. Some firms are almost single minded in their pursuit of PEP in order, not only to reward and retain their high-performing partners, but to also attract lateral hires. Whilst sharing profits with non-partners and focussing on “profits with purpose” are laudable aims and may have reaped financial as well as other benefits in the medium to long term, it is clear that a minority (at least) of Grant Thornton UK partners were not willing to take the short-term hit in their profit drawings.

All of which raises the question: what could Romanovitch or Grant Thornton UK have done differently to avoid what has become a PR embarrassment for the firm? We will of course never know, but there are important lessons that can be drawn for all professional services firms from this unfortunate episode.

Firstly, it should always be at the forefront of minds for management when making major strategic decisions that, notwithstanding that the firm may operate a “corporate” style management structure, a partnership business remains a collection of owner managers – many of whom will have varying agendas. It is crucial that those partners are co-opted into the process of decision-making on fundamental issues such as a change in remuneration structure. How best to achieve that will depend on the nature and size of the partnership. It could be through representation on the board through elected non-executive partners who represent the interests of certain partner constituencies or it could be through direct consultation and partner vote.

Another important point to address in a partnership governance structure is how dissenting partners can be given opportunities to make representations against a particular decision or management in general. The Grant Thornton UK partners who briefed the press may have felt that there was no other way to be heard (we of course do not know their motivation or whether they had had the opportunity to raise issues internally). Ensuring that the firm’s partnership agreement incorporates “relief valves” to help resolve any disputes over management is therefore vital. For example, this could be through the ability to raise issues with a governance oversight committee. Ultimately, many firms include the ability to trigger a vote of “no confidence” in management. If a CEO perceives that such a vote may be called, they are likely to resign quietly to avoid both personal embarrassment and negative publicity for the firm.

Finally, ensuring that there are robust confidentiality obligations in the firm’s partnership agreement and enforcement of those obligations are crucial. It will be interesting to observe if Grant Thornton UK will sanction those partners who may have breached their confidentiality obligations and potentially other duties (such as a duty of good faith) owed to the firm.

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By Justin Bryant
25th Oct 2018 09:54

It sounds like she was treated a bit harshly (it did not exactly sound like Venezuela there or anything).

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