The roots of a successful partnership are not planted in a sophisticated owner compensation system or an intricate and complicated equity arrangement scheme—they are deep in an ownership culture of doing what is best for the firm and trusting your partners to do the same.
Advisors frequently look for complex equity schemes, serial redemptions, equity recycling, profit interests, balanced scorecards and other financial magic as a way to improve their partnerships, but financial tools are powerless to change what is fundamentally an issue of culture. The culture of an ownership group and the terms of the formal legal agreements and management structures interact much like law and morality in a society—in the absence of morality, law is vulnerable and futile to change behavior. In the presence of strong culture, the need for contracts to regulate partner behavior is greatly diminished, and all equity arrangements work better and more naturally.
It is my belief that to have a long-term future of success, a partnership has to focus on its shared set of values and communication patterns (i.e., “culture”) and develop a mentality of each partner being a steward of the firm. There are five cornerstones to developing such a mentality into a “habit” that in my experience are fundamental to a strong ownership group.
Firm First: The Fiduciary Attitude
Many of the lasting structures in human society are grounded in the “leap of faith” that if we submit our selfish interest to the greater goal of the “group” we will ultimately achieve an outcome that is more satisfying and perhaps more prosperous for ourselves. Concepts such as family, community, nationhood, etc. all draw on such a fundamental premise that we will subject ourselves to something bigger and by doing so we will be happier and richer. A partnership is this kind of concept.
A good partner has to be able to focus on the bigger goal and act in the best interest of the firm, even if it is unclear how this will benefit him and perhaps even when it infringes on his self-interest. Doing so makes the firm durable from within and strong in its cohesion. In return, a partner gets the “promise” of the firm that his fundamental rights and values will be respected, protected and promoted. This two-way promise has to be reciprocal to work; for the firm to provide longevity of practice, client service and ultimately equity, it has to receive the unconditional promise that each partner will think of the firm first. Otherwise, the firm is nothing but an opportunistic band of individuals who may or may not take the next step together.
This concept is important because the partners’ investments are interconnected, long term and subject to risk. In most partnerships, it is impossible to trace every dollar of contribution or cost back to a partner. Nor is it desirable. The contributions should be intertwined by design. It is also very difficult to focus on a long-term goal if every partner can grab his or her clients and run away, sapping the firm of resources and endangering the vision. Finally, when the firm is taking on risk and working under competitive and unclear circumstances, you want to know that your partners are focused on the future, not on where the lifeboats are located. According to legend, when Hernan Cortes reached the shore of Mexico, he burned the ships he came with—there was no way out but achieving the mission (though, granted, Cortes is hardly the model of a great partner).
A partner who cannot think in terms of the best interest of the firm first is a bit like an advisor that cannot think of the best interest of his client—he is perhaps more harmful than helpful. Such partners damage the enthusiasm and spirit of the owner group and create a “rain on every parade” atmosphere. Repeatedly asking the question, “What is in it for me?” is the single most destructive behavior you can exhibit in a partnership because it chips away at the foundation of the common good. It is a great question to ask when you join—“What will I accomplish and achieve here?” But it is terrible to ask at every turn, “How will this profit me?” Such partners must either be asked or coached to change, otherwise the partnership will be better without them.
Not all partners will immediately be able to think this way. The “firm first” mentality is an acquired habit and does not come easily to most advisors. It is particularly difficult for those who are in a partnership for the first time—those who merged their solo firms into bigger ones or were promoted from within. Their entire history may have been one of focus on their own personal bottom lines. Such focus may have been very effective before, but they now need to trust their new partners and know they can achieve more in a team than they can by themselves. Patience and encouragement are necessary to help these new partners at first. But at some point, their behavior will have to change.
Lead By Example, Behave Like A Partner
The power of the partnership model of ownership comes partly from the ability of the owners to inspire and lead by example. The behavior they exhibit shows employees what is expected of them. Being a partner means being a great professional, a great leader, a great manager and a great steward of the client’s trust. That is a heavy mantle to wear, and many get tired.
My grandpa once told me the story of how the bank manager in his small town in the mountains of Bulgaria was a very professional man and always acted like a banker should. He was always dressed in a suit and tie, always on time and always very professional. He had a house on the main street of the town and once upon a time he had to dig a ditch in front of his house for a new pipe. He considered hiring laborers, but he was a hardworking man and preferred to do it himself. However, this meant digging on a Sunday afternoon on the main street of town at a time when everyone was up and about. After a short debate with his wife, the bank manager went digging the ditch, shovel in hand … wearing his suit and tie. He was going to be a proper bank manager even when digging a ditch.
Many partners get tired of digging in a suit. They feel that they deserve a “break” for the many years of work they have put in. Perhaps this is true, but you should also never underestimate how the actions of a partner affect other employees. A CEO who works from home two days a week will have a very hard time asking employees to spend an evening at their desks. A partner who is rash and harsh with employees will have a hard time asking them to be good colleagues, and so on.
This brings us to the question: Should every partner be good at everything? To me the answer is, functionally no, but culturally, they had better be. If every partner sets an example and a precedent, a partner who is deficient in some areas creates a very poor example for those who aspire to be partners. The presence of partners who can’t manage people will make the implicit statement to others that managing people is not important. The presence of a partner who can’t develop new business will do the same.
Rick Anderson, the former chairman of Moss Adams at the time I was aspiring to be a partner in the firm, told me once that “we expect every partner to be at least adequate in each of the four areas—client service, new business, managing people and managing compliance.” I still believe this to be the best statement on the subject.
Much like the question, “What to do with abrasive partners?” the question “What to do with underperforming partners?” is a very difficult one. If someone is clearly not meeting the expectations you have of new partners but is already a partner, you have a very difficult decision to make. When you make it, think of the example and precedent you are setting and how important that is.
Balance Involvement With Decisiveness
There are many successful models of corporate governance in a partnership, and they all work well for as long as they are supported by the values of the partner group and they are accepted by all partners. Some firms have a strong, almost dictatorial leader who forges ahead and has a lot of authority to make decisions. Such a leadership style can be good in times of crisis or rapid change when decisiveness trumps inclusion. Other firms are very “republican” in style and repeatedly bring all partners to the table for most of the decisions. Such a style can build strong relationships and unity among the partners and leave them feeling empowered. Most firms are somewhere in the middle, and many styles can work as long as there is agreement and acceptance among the owners.
Where problems occur is when there is a disconnect between the expectations of the owners and the actual structures of the firm. If owners expect to be involved in all decisions but the firm is run by a “strongman” managing partner, this will be a constant source of friction. If the firm relies on a committee management structure but partners are not willing to dedicate the time to the process, the result will be equally frustrating.
Frequently, partners are not aware of the contradiction in their own positions. More than one full-time CEO/managing partner has shared with me his frustrations that his partners don’t spend time studying decisions that the firm needs to make and don’t commit energy to following a project. Yet these partners are also very upset when they are not consulted on those decisions. The natural impulse of most large firms is to be confederate in their decision-making style. They seek to respect the autonomy and wisdom of each partner. When partners don’t commit to participating in management, though, they damage the ability of the firm to act. Perhaps a more concentrated decision-making style will be more productive.
For the management structure of the firm to be effective, the partner group has to carefully consider the lines between ownership and management. Involvement of the owners in management creates excitement and a strong connection between decisions and the client practice. It also, however, consumes time and can substantially slow down decision-making. Dedicated management brings specialization and decisiveness but poses the danger of partners becoming “glorified employees.” Whatever the decision, choose a model that reflects your desire for involvement as a firm.
Behavior changes usually in the face of some source of accountability. The accountability can be a higher power—your spouse, your mom, your promise to yourself or your dear diary—but whatever it is, there has to be a lever fulcrum that pushes the change. In a good partnership, that source of accountability should be your partners and “the firm.” The right of the firm to tell partners whether they are doing well and ask them to change behavior if necessary is fundamental to building a strong partnership. If there is no mechanism for the firm to check the behavior of a partner, then the concept of partnership quickly deteriorates to the anarchy of accommodations.
The tendency for most firms is to look to create a formula that rewards or punishes partners for “doing the right thing.” Formulas, though, rarely reflect important factors such as developing staff, contributing to the strategy of the firm, participating in management, developing intellectual capital, etc. They are mechanical and frequently backfire through a variety of unintended consequences. Most of all, they turn partners into the equivalent of street musicians who only play when you give them a dollar. (In Eastern Europe, the opposite business model can be seen—often, they play until you give them a dollar.)
Compensation plays its role, but the system of accountability comes first from “the firm,” represented by its partners, taking the time to tell each partner how he is doing and what he should focus on. Such a process should be regular (much like performance evaluations) and will only make the partnership healthier. The interesting part is that very often the partners who receive some criticism are thankful for it—usually they know about the issue and feel relief when it is brought to daylight and discussed openly. If only you can force yourselves to have the difficult conversations.
Have the Difficult Conversations
There is only one way to constructively deal with difficult issues—dealing with them. Partnerships frequently avoid difficult conversations to protect the feelings of a partner or to avoid a confrontation. Over time, the emotional cost of “waiting for the other shoe to drop” is higher than it needs to be. Many issues become “sacred cows” and stand in the path of the firm making any progress. My experience has been that sweeping them under the carpet never resolves them. A good partnership will only become stronger if it faces its problems and acts to solve them. They do not have to be dealt with in insensitive or unfair ways—they just have to be dealt with.
Such difficult decisions include what to do with an underperforming partner, how to approach retirement for a founder who is now 85, how to tell a partner to communicate better with staff, how to ask a partner to step up his or her business development, etc. The managing partner usually draws the short straw and has to initiate such conversations, but to be effective he needs support from the entire group. Such a mechanism to correct behavior is particularly important when the correction concerns a firm founder. A small change can change the atmosphere of the firm. Failing to change may set the tone that partners are “above the law.”
Developing The Right Partnership
Developing a partnership does not happen overnight. There are some interesting sociological theories on the subject of group formation and dynamics, including the theory developed by Bruce Tuckman. Tuckman’s research shows that each group goes through four stages—forming, storming, norming and performing. Forming is when the group comes together for the first time. Storming is when everyone rushes to contribute, but roles and responsibilities are unclear and people fight and trip over each other. Norming is when the roles are clarified and rules are set. And performing is when the group fulfills its purpose and is at its best. Perhaps this applies to all real partnerships, which are likely more dynamic than the therapy groups Tuckman worked with.
Whatever stage you are in, the key to building your culture is to interact with one another and to be open to challenging yourself and your partners to improve. You will not build a better ownership team by staying in your respective offices. Meet, talk, argue, drink if you have to, but spend the time to learn about each other and to understand each other.
If the cultural foundation is there, the issues of compensation, equity and succession become much easier. In the presence of trust, commitment and the right habits, succession and compensation become merely technical subjects. In the absence of a good partner culture, they become fights.
Sometimes, when discussing the “firm first” culture with advisors, I find that it scares them. It feels restrictive and it feels threatening. The firm seems like some sort of anonymous force that will take over their lives. That is when I can’t help but remember the first line of perhaps the most freedom-centered document in history: “We, the people, in order to form a more perfect union … .”
Philip Palaveev is the CEO of The Ensemble Practice LLC. Palaveev is an industry consultant, author of the book The Ensemble Practice and the lead faculty for The Ensemble Institute. The next Ensemble Institute is in February 2014, on the topic of “Ownership, Succession and Firm Governance.” More information about the Institute can be found by e-mailing email@example.com.