The professional partnership: Relic or exemplary form of governance?

Abstract

The creation of the public corporation in the 19th century drove out the partnership as the predominant form of organizational governance. Yet, within the professional services sector, partnerships have survived and prospered. Moreover, professional services firms that chose to abandon the partnership form tended to become private rather than public corporations. Drawing upon several theories, we compare the efficiency of the partnership relative to corporate forms of governance in the context of the professional services sector. We argue that the professional partnership minimizes agency costs associated with both the private and public corporation. We also argue from tournament theory and property rights theory that partnerships have superior incentive systems for professionals in particular and knowledge workers more generally. However, drawing upon structural-contingency theory, we identify limiting conditions, which affect the relative efficiency of the partnership. We argue that the corporation, especia lly the private corporation, will be the preferred form of governance where the limiting conditions are prevalent. Nevertheless, we also argue that under specific conditions the partnership form of governance will persist and prosper because it remains unusually suited to the management of knowledge workers.

Keywords: organization form, governance, professional partnership, knowledge workers

Introduction

A central theme of organization theory is the attempt to understand the diversity and longevity of organizational forms (Clegg and Hardy 1996; Aldrich 1999). Structural-contingency theory relates organizational configurations to contextual and task exigencies (Donaldson 1995b). Population ecology examines the founding and survival rates of alternative forms, focusing upon the processes of organizational variation, environmental selection, retention and diffusion. Institutional theory focuses upon how organizations increase survival prospects by converging around socially legitimated forms (DiMaggio and Powell 1991). These perspectives combine two tasks: identifying and explaining organizational variation. While in recent years more attention has been given to the latter than the former task, there has been increasing interest in discerning hitherto neglected forms (Aldrich 1999). This article seeks to explain the survival of one such neglected form, the professional partnership, an organizational form found i n the professional services industry.

Following Blau and Scott (1962), organizational form is defined in terms of governance structures. Although governance represents a significant source of organizational variation, to date interest in governance arrangements has been selective. The governance literature has dealt primarily with the limited-liability public corporation, though public-sector and not-for-profit organizations have received some attention. By contrast, other governance structures, including the professional partnership, have been relatively neglected.

The professional partnership is deserving of study for several reasons. First, it is a form of governance that precedes the public corporation by several centuries (Forbes 1986; Lamoreaux 1995, 1998) and exhibits high survival levels, especially in the field of business services. Second, the partnership is associated with the successful management of knowledge workers and, as such, has been praised as an exemplar for the 'new' economy (Ghoshal and Bartlett 1997). Third, professional firms that use the partnership form of governance are significant entities, both in terms of their size and their role in the modern economy. There are three accounting firms, for example, in the Forbes Global 500 largest firms and the largest professional partnerships are more geographically complex than most manufacturing firms (Greenwood et al. 1999). Fourth, the role that these firms play is such that Sharma (1997: 758) was prompted to conclude that without them 'business as we know it would come to a grinding halt'.

The professional services industry consists of firms that provide advisory services to other businesses based upon the application of complex knowledge. Typically included within this industry are accounting and law firms, advertising agencies, architectural practices, management and engineering consulting firms (Lowendahl 2000). Three governance forms are extensively used: the professional partnership (including the limited-liability partnership), the private corporation, and the publicly traded corporation. The key legal distinctions between a partnership and a corporation are as follows: (1) a partnership does not have a legal identity in its own right; (2) it represents an agreement between two or more persons (the partners) carrying on a business in common with a view to profit; and (3) each partner is jointly and severally liable for the debts of the other partners. The partnership, in effect, contains multiple 'owner-managers' bound together by unlimited personal liability for the actions of their coll eagues. A private corporation shares many of the characteristics of the partnership, but, crucially, does not impose unlimited personal liability upon its owners. The ownership of private corporations in the professional services sector, however, is similar to the partnership in that ownership is solely held by senior professionals active within the firm.