Next EY CEO’s Tall Order: Heal Rifts, Fix Consulting Conflicts

EY faces a pivotal moment as partners prepare to choose a new leader who will steer the $50 billion global accounting firm and begin to repair the rift caused by its now defunct separation strategy.

Ernst & Young this summer will begin choosing a successor to global chairman and CEO Carmine Di Sibio, who is retiring in June 2024.

The firm’s next leader will face a long list of challenges familiar to the executives of other large multinational businesses—inflation, economic uncertainty, and political divisions over issues such as diversity and climate change. But internal angst over the failed split—with the US and some international operations sharply divided over strategy—makes the role even more challenging.

Di Sibio still advocates for a future split and defended the restructuring even as he announced his pending departure. Some industry watchers like University of Delaware corporate governance professor Charles Elson, however, say healing divisions, and not plotting a breakup, should be the priority

“Now that this thing apparently is not on the near horizon, how do you bring an operation back together,” Elson said.

EY’s separation plans, first publicly discussed more than a year ago, would have spun off the firm’s lucrative consulting business and much of its tax practice into a stand-alone public company. A combination debt and equity deal would have raised enough capital to fund the new business and pay out partners in the legacy audit practice.

Di Sibio, who would have led the new company, and other top leaders argued that the restructuring plan would free the consulting business of strict independence rules tethered to its audit practice. As a separate company, it could work with a broader range of clients and compete more freely with consulting-only firms like McKinsey & Co. Inc. and Accenture Plc.

“We challenged the status quo; we asked tough questions;, and we were bold in our ambitions. Actions such as these will make us a better organization in the long term,” Di Sibio said in a Tuesday statement.

Soaring inflation and the sudden rise in interest rates altered the market outlook for such a deal. Meanwhile challenges divvying up the tax practice and concerns about the impact to the pensions of retired partners helped to torpedo the plan’s support among top partners in the US.

“It’s just a sign that there were major disagreements between the partners as to the direction in which the firm should be moving,” said Paul Chaney, a professor at Vanderbilt University, of Di Sibio’s pending retirement.

The fizzled plan and failed promises rankled partners, who have directed their ire at Di Sibio and other top leaders. And since leaders halted the separation in April, two of the firm’s largest affiliates—the US and UK—have announced spending cuts and layoffs.

“The credibility capital has been shot,” said Christine Smith, an accounting professor at Tulane University. The firm’s next CEO must have “a calm but clear plan.”

Next in Line

The CEO of a Big Four firm must be able to build a coalition and find cooperation among the partners who own the firm. Typically those top leaders come steeped in the firm’s traditions and legacy and often have two decades or more experience at the firm, said Tom Rodenhauser, managing partner of Kennedy Research Reports, which analyzes the consulting industry.

Current members of EY’s global executive are likely contenders for the promotion to EY’s top spot. Surrounding Di Sibio on the current leadership team are Andy Baldwin, who holds Dibio’s old job as managing partner for client services, and Steve Krouskos, managing partner for business enablement.

Partners running fast-growing regions or business lines could also end up on the short list. However, some contenders may be ruled out due to proximity to retirement or other issues, and the search may well broaden to another leadership tier.

Leaders with an accounting background are more likely to gain support over their peers who come from the consulting side of the firm, like Errol Gardner, who is EY’s global vice-chair for consulting and a potential candidate, Rodenhauser said.

“This next decision of leadership is going to be super-important for them,” Smith said. EY’s new leader shouldn’t be someone identified as either a major opponent or advocate of the split, but be able to find a middle ground, she said.

EY’s Identity

EY may be forced to grapple once again with its identity as a professional services firm as the issues that led to the proposed restructuring aren’t going away. Di Sibio defended the plan even as he announced his pending retirement and pushed last week for the firm to reconsider such a split “in a few years.”

Regulators around the globe continue to press firms on conflicts of interest that could erode the effectiveness of an independent audit. And EY has recently faced hefty penalties from regulators in Germany and the US related to its audit practice.

The firm must overhaul its corporate culture and decide whether to separate consulting and audit or find a way for those two businesses to co-exist while still protecting the independence of the audit practice, said Chaney, an auditor reputation researcher.

“You can’t look at this purely from a monetary standpoint. You have to look at it from the basis of your core auditing business. And independence is what drives the value of your auditors,” he said.