In response to the failed separation of Ernst & Young’s consulting business from its core accounting function, the firm’s leadership has sought to implement changes that involve decentralizing executive decision-making. This change, which includes a redesign of its governance structure, intends to give more say to partners and principals on important decisions.
The proposed change in EY’s governance will likely slow down the decision-making process particularly in instances such as strategic shifts, mergers with other firms, or future considerations for service line separation. However, it ensures that partners and principals in the firm have a direct link to the leadership as they are now entitled to elect the governing board’s 10 members, as well as the nominating committee.
The new decision-making model may not have any significant impact on the routine work, promotional opportunities, or career trajectory of most early-to-mid-career EY staff. Also, it is not likely to change how audit engagements are performed, how offices or engagement teams are staffed, or have any material effect on partner admissions.
While this adjustment to governance may appear more democratic in practice, it might potentially make it more challenging for the firm partners to implement significant future changes. These difficulties arise from EY’s decision to stagger the three-year terms of the board members, a move that is often seen as an indicator of weaker corporate governance in public companies.
Staggered boards, according to Proxy advisors Glass Lewis and ISS, make it harder for shareholders (in EY’s case, the partners) to remove directors who act against the best interests of shareholders. This board structure often requires multiple campaigns to replace partners deemed not aligned with the larger partnership group.
If the intention of implementing the staggered board system is to slow down the decision-making process, it would likely achieve that. However, it might limit the voting partners’ ability to remove or replace board members whose decisions they disagree with.
Moreover, governance changes would be slower either way in case the partnership group either supports or opposes a board decision for a future split, effectively making leadership changes less probable to happen quickly.
EY’s new layers of complexity in firm governance present partners with more input in the process while reducing the likelihood of rapid leadership shifts. Post the failed split, this might be what the partners demanded, or the staggered board might have been a strategy through which the partners can influence the firm’s direction while still being unable to instantly overhaul the firm leadership.
The opinions presented in the article do not necessarily reflect those of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Contributor: Jack Castonguay, a CPA and an assistant professor of accounting in the Zarb School of Business at Hofstra University. Also, he serves as Vice President of Content Development at KnowFully Learning Group.