What is the Best Form of Governance Structure?

Source: Partner Insights

The following excerpts are reproduced, with permission, from Partner Insights.

There are three types of systems for managing CPA firms:

• Benign dictator.
• Republic.
• Democracy.

Dictators eventually surround themselves with weak partners, since strong-minded partners can't flourish under this system. These firms are usually able to survive and prosper for at least one generation.

The chief characteristic and distinguishing feature of a democracy is that it’s ruled by the omnipotent majority (perhaps the few partners that own the majority of the firm). But with no protection for the minority partners, there can be a great deal of tension and frustration.

A republic is representative government ruled by law. The United States is a republic. The Constitution is our law. In your firm it's the partnership or shareholder agreement. A republic recognizes the inalienable rights of individuals, while democracies are only concerned with group wants or needs (the public good).

Dictators become too powerful and take over every aspect of the firm. A democracy may become too weak to protect the firm from external threats. What checks and balances exist in your firm to keep it strong but also to protect the minority interest? Maybe it's time for more firms to consider a republic instead of a so-called democracy. The larger firms in the country are surely run more like republics than democracies.

Smaller firms would be well advised to change their governance to mirror the larger firms.

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From Partner Insights, Aquila Global Advisors, LLC, March 11, 2008, www.aquilaadvisors.com.

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