When asked why a certain individual was not promoted to partnership, advisors frequently respond "because he or she does not act like an owner." I've long pondered this expression. What does it mean to "act like an owner"?
The answer to this question crystallized for me during a discussion at Pershing's U.K. Advisor Council meeting in Lower Slaughter, a 1,000-year-old village located in the Cotswold region of England. In addition to the usual English and Scottish contingent, several members of our U.S. Advisory Council participated as well. It was enlightening to learn that the challenges of running an advisory business are universal, especially when it comes to questions about recruitment, retention, compensation and ownership.
The discussion about what it means to "act like an owner" started following comments by the CEO of a very large advisory firm. He shared: "Our business is not the same now as when it was founded. We grew, but without an organizational chart and performance reviews. Now that we have more partners, more people and more moving parts, we have to standardize the way in which we do business. We have to balance the wishes of the founder to be entrepreneurial with the needs of the business to develop people and hold them accountable."
In describing the history of his firm, this CEO went on to explain, "When we started this firm, we had to write checks to buy equity. That was a financial strain for many of us, but that is what it takes to create a business. Nobody gives it to you.
"When subsequent employees were invited to become partners, they complained about not having the ability to fund the purchase, so we loaned them the money from the company and issued dividends to help them cover their payments. In a way, it was a riskless transaction for them since they didn't have to pull from their own savings to buy in.
"Some obtained their equity in 2007, the point of its highest value. We loaned a lot of money to make this happen. As you can imagine, the firm's valuation declined with the market. When we sold the business in 2010, many of these shareholders were underwater in terms of valuation, just like a lot of homeowners who had heavily mortgaged their homes. They wanted us to write off the loans as worthless."
When asked by meeting participants what he would have done differently, the CEO cogently stated three key recommendations:
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Never give away equity, always sell it; partners need to write a check to feel like owners.
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Remind all partners continuously and repeatedly of the obligations, responsibilities and liabilities of ownership.
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Be diligent in the evaluation process to ensure that prospective partners grasp the concept of ownership and are willing to accept the risks to enjoy the rewards that come with it.
On this final point, the other meeting participants jumped into the fray. "What does it mean to be an owner?" someone asked.
The exchange of ideas was fast and furious. "If you see something, say something." "Hold your partners accountable for their commitments." "Develop others in your firm." "Make prudent decisions about spending money." "Speak as one voice to the employees to show a shared vision and commitment." And most of all, "You're not an employee anymore, so take responsibility for what you are doing and what the firm is doing."
