16. The Value Proposal to the Partners

The first value proposal demanding a response from the Culture’s basic principles in any company is the one to be made to the partners, to its owners or shareholders.

If the partners do not perceive the value proposal as attractive, as neatly superior to any other alternative, they will leave the company. And the company will not attract new partners. It happens so both for purely capitalist partners and for partners than on their turn perform their professional work in the company. Whether in a service partnership company, as Andersen, or in any other capitalist company, the first thing is for the value proposal to be as attractive as possible to present or future partners.

Let’s see what elements supported the value proposal to the partners at Arthur Andersen.

Owners of the Firm

Participating in the company was not seen as the promise of another plus to the compensation package. It was more than that. It meant reaching a higher status, something like been knighted into a prestigious order. In legal terms, on being named international partner, the professional became formal member of worldwide cooperative society uniting all of the Firm’s international partners. The appointment coincided with the signature of a formal adhesion agreement, which was linked to a small capital disbursement. The partner was a member of the global Cooperative and his compensation was computed as a function of the Cooperative’s profit.

The entity was named Arthur Andersen & Co. Societé Coopérative, and was registered in Geneva, Switzerland. We think it has been the only truly global that has ever existed, at least in the professional world. Only now some professional firms, like Ernst&Young, are trying to mimic that.

Andersen’s partners could say properly that the Firm was theirs. And the Firm could speak about them as true “partners”. The partners that took care of the management as members of the Executive Committee, were not “more” partners nor “more” owners than freshly appointed partners. The by-laws specified that each partner had a vote in the Partners Assembly, independently of his seniority or hierarchical level. And that was valid throughout the world.

As any other cooperative society, that condition did bring some additional, also important, elements:

• There was no purely capitalist member.
• The partners entered and left the Firm investing and divesting a certain capital, but without paying the goodwill value, nor getting paid for that value when leaving the Firm, whether voluntarily by agreement or when retiring. The accumulated goodwill value was to remain in the Firm to be enjoyed by the active partners at each moment, benefiting the Firm’s continuity.
• The partners did not have the same share of the Firm’s profits, which depended upon the experience and contribution of each particular partner. Every partner was awarded a certain number of units from the total number of units dividing the worldwide Firm’s profit. The number of units ranged from 300 (on appointment) to a maximum of around 2000, although the lower limit changed over time.

The worldwide profit was distributed amongst the Firm’s international partners as a function of their respective number of units, and was adjusted amongst the partners of the different countries by a correction factor, intended to obtain a similar level of purchasing power on the amounts paid out in each country, considering each cost of living index. That did not prevent that similar category partners would stand as upper middle class in the US or Europe and as upper class in developing countries such India.

The new partners had between 200 and 300 units, and progressed until reaching 500 and, exceptionally, over 1000 at the end of their career. Every two years, their number of units was eligible for a rise, as recommended by each country managing partners; recommendation that was to be approved by the Worldwide Committee on Unit Assignment.

Variable compensation

The partners touched a monthly pay in account of profits. So they had a remuneration that was variable and could oscillate considerably. It depended upon two elements: the personal one and the general one.

The personal one was the number of units assigned to the partner according to his evaluation and career evolution. As already mentioned, it started at 200-300 units (depending on the years and circumstances) and could be over 1000 units. Usually the units figure grew over the years, but could be frozen if it was considered that the partner had not made progress. It could also be reduced if the partner had a negative evaluation (probably as the prelude to his exit from the Firm) or, in the case of aging partners, i.e. over 50 years old, the partner ceased doing management functions.

The general element depended on the Firm’s profits evolution; more precisely on the consolidated profits of all practices all over the world. That is easy to say but quite difficult to do practically. In fact, Arthur Andersen was the only Firm that actually did. And, so far as the authors know, no other firm has done so, although some have taken some steps in that direction, a Ernst&Young has done recently.

If worldwide profits came down, so did the partners remuneration. However, that never happened. Even in the lower growth years, profits always went up. A caution reserve was always kept, just in case.

The partners, in sum, were motivated to improve their personal position by standing out professionally in their practice, but also to contribute to the Firm’s success in all fields: all offices, all practices, all partners, all countries...

The results from all countries and all practices were made available to all partners worldwide. The units assigned to each partner were disseminated as well. At all levels, from countries to individual partners, the issue was an economic matter, but also, equally important or even more, a matter of pride and self-esteem. A healthy internal competition.

In compensation, it was necessary to pay much attention to the model’s health and, more specifically, to the evaluation system and the compensation calculation. There were conflicts, but they were generally solved in a positive way.

Entrepreneurial spirit

The Andersen partners adopted, in general and from the early days, an entrepreneurial attitude which set them apart from most of their pars in other firms.

In some countries there was more entrepreneurial emphasis than in others, but it was a worldwide feature. It was visible, perhaps more naturally, in the consulting partners, but also in the auditing ones. Perhaps, had it not been so strong, it could have made easier a pacific separation between Arthur Andersen and Andersen Consulting.

This entrepreneurial spirit was a great contribution to growth and innovation in the Firm and endowed Andersen partners with an outstanding profile, reinforcing their professional image, in and out of the organization.

Belonging to the professional elite

The partners reached a high social status as member of a very prestigious professional elite. On its turn, the Firm’s reputation derived from the members’ personal prestige, especially that of the partners.

Total involvement

As a consequence of this last feature, the partners were very committed to the Firm.

First of all, they felt the Firm as their own. But, on top of that, the feeling of belonging to an elite team called them to be at their colleague level. You cannot play with the best team if you are not up to them.

The need to be at the required level was perhaps the most important link. Not the money. The money was a consequence of playing with the best.

Partners and friends

At Andersen, during the best years, the partners were “true partners” between them in an environment of friendship and comradeship beyond mere business. Successes were really shared and seldom one partner stood out above the others. Everybody shared in everybody’s success.

It is important in every professional society that the relationships between the members exceed the legal and business sphere and extend to cover the personal realm. Having partners who are friends helps the company’s success.

A part of that spirit started to be lost only when growth at any cost became the objective as a consequence of the unbridled race between Arthur Andersen and Andersen Consulting that broke out after the split into two business units in 1989 and subsequent independence of Andersen Consulting in 2000.

At the international partners meetings, taking place at least once every year, the Firm’s global success and the development of each of the practice areas (auditing, consulting, tax advice) or the three main geographical areas (America, Emea (Europe, Middle East and Africa) and Asia) were extolled, without mentioning specific countries or regions. The same pattern was followed at the national meetings in each country.

The Firm was generous enough so that the partners did not feel in a competition. Or at least that they would not experience internal competition as a problem. Team spirit prevailed.

The partners’ evaluation process took care of that. Although it does not mean that the evaluation processes (both partners’ and other professionals’) left everybody happy.

The important thing was that the evaluation was made in a serious and reasoned way, and much care was taken to prevent anybody feeling discriminated.

The evaluation of the partners

The professionals kept being evaluated after they were appointed partners. This condition did not exempt them from submitting to the annual evaluation process that, as previously mentioned, brought every two years a possible proposal of a rise on their number of units. The partners, with all professionals, were under a permanent evaluation process.

Because of that, without any doubt, the professional career did not finish once they became partners. There was a career as partner as well.

The career of the partner had a minimum of three stages, which could be compared with a javelin throw competition:

1. This was the “junior partner” stage, starting usually at an age between 35 and 40, in which the partner had to assume his new role, with the joy of the new status but with the pressure to achieve the ambitious goals set for him. Like the thrower’s run, this stage will determine the throw’s momentum, based mainly on the athlete’s force.
2. At the age between 45 and 50 the partner had reached a level that anticipated almost perfectly the level of units that the partner would hold at the end of his career. This was the throw stage, which required force and skill.
3. From 50 onwards, the partner was already at his proper position and managing the last years of his career, so that nothing would alter the proper order of things. The stage to prepare the succession and to start living well and think of retirement (usually at 58). The stage when the thrower waits for the javelin to hit the ground, thinking about the awards ceremony.

Andersen discerned perfectly between the partner’s condition and that of management executive. There are companies that do not know how to make the distinction and make a gross mistake not doing it.

The Andersen partner had to keep his boots on, showing every day that he was worth his position and the generous “pay” he took (not really a salary but payments on account of profits).

The evaluation came from the partner he was reporting to and included the opinion of the partners he was, direct or indirectly, reporting to ( like those responsible for the functional line or for the industry sector). The evaluation was a mix of facts and attitudes, tangible results and attitude in face of the market, the other partners, the employees, etc.

Much care was taken to make an objective evaluation and to exclude any personal friendship elements that could have an influence. For example, the family kinship between the partner and his evaluator was forbidden. However, when there was a close relationship between a senior partner with a less senior one he was tutoring, advising him on his career, it was impossible to avoid that the senior one had a certain influence on the junior one’s evaluation, and vice versa.

The partners, in any case, were evaluated from the opinion of several partners, although in each case there was a specific partner that led and signed the evaluation and had the task of communicating it to the examinee. It used to be the partner with hierarchically authority over him. The same scheme was repeated to evaluate managers and team leaders.

The evaluation’s result had not only an economic impact on the partner’s compensation, but had a stronger impact on his ego. Each partner’s units were known by all worldwide partners, who could thus assess anyone’s professional progress in absolute terms and in relation to all the others.

It was not a perfect system, but, in our belief, it was one of the less imperfect that ever existed. The Firm’s continued success along many years is the best demonstration of its validity.