EY’s Partnership Empowerment Plan Would Slow Meaningful Changes

The fallout from EY’s failed split of its consulting business from the core accounting functions is continuing. In response to the concerns of some partners and firm leaders that their voices weren’t adequately represented in the failed split, EY is proposing a redesign of its firm leadership structure that decentralizes executive decision-making and allows for more partner and principal input on major decisions.

The decision most likely will slow the decision-making process if EY’s leadership want to shift strategic directions, merge with another firm, or reconsider splitting service lines in the future. But it does offer partners and principals at the firm a direct line to leadership, as they’ll be able to elect the 10 members of the governing board and the members of the nominating committee.

For most early-to-mid-career staff at EY, this decision won’t likely have any meaningful effect on their daily work, promotional opportunities, or career trajectory. It’s not likely to change how the audit or tax compliance engagements are performed or how local offices or engagement teams are staffed. It also likely will have no material effect on partner admits.

From a governance standpoint, however, the proposal could make it harder, not easier, for the firm partners to enact meaningful changes to the board in the future, despite allowing them to vote for the nominating committee and board members. EY is electing to stagger the three-year terms of the board members.

Generally, this is considered a sign of weaker corporate governance at public companies (the firms for which we have data to assess), as it makes it harder to remove directors not acting in the best interests of shareholders (or in EY’s case, the partners) and requires multiple campaigns to replace partners not seen as aligned with the partnership group at large.

Proxy advisers Glass Lewis and ISS have recommended shareholders reject staggered board proposals, support annual elections of all directors, and support proposals to repeal staggered boards already in place. If the staggered board is designed to slow the decision-making process, it likely will succeed. But it also will limit the voting partners’ ability to remove or replace board members making decisions they disagree with.

For instance, if the board would agree to attempt a future split again, and the partnership at large disagrees, they wouldn’t be able to remove the partners voting for the split at once. They would have to do it one-by-one as their terms expire. Consequently, the same would be true if the partnership group preferred a split but the staggered board resisted. Either way, governance changes would be slower.

By adding more layers of complexity to firm governance, EY is offering partners more input in the process while making it less likely leadership changes will occur quickly if the partners want them. After the split, this may be what the partners are demanding, or the staggered board may have been a way for the partners to have a say in the direction of the firm while still being unable to overhaul firm leadership at once.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jack Castonguay, is a CPA and an assistant professor of accounting in the Zarb School of Business at Hofstra University. He also is vice president of content development at KnowFully Learning Group.

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