Should Non-Equity Partners Vote?

We recently received this question from a long-time client about income partners and voting:

“We can see having several income partners in the next two years and have been discussing what voting rights, if any, they should have. We are currently restating our partnership agreement to include our new Executive Committee and thus we would like to make any other changes as necessary. 

In a nutshell, our agreement simply says that only equity partners vote. We were wondering if there should be exceptions to this for income partners to vote on specific items.”

Our response:

All aspects of voting are among the more deceivingly complicated aspects of practice management. It’s the conflict between owners’ (a) desire to be democratic and inclusive with (b) their fear of giving too much power to the minority. Over the past 15 years, the CPA profession has raised the bar on promotion to equity partner, resulting in more than doubling the number of non-equity partners at firms. This puts the issue of non-equity partner voting at the forefront.

Throughout our years of consulting to CPA firms, we’ve asked dozens of firms how they vote. Almost all say “we never take a vote; we make decisions by consensus.”

Virtually all firms have their non-equity partners attend partner meetings. However, the vast majority of firms do not give their non-equity partners a formal vote. But keeping in mind the comment in the previous paragraph, non-equity partners should have the right and ability to influence the equity partners on issues discussed in and out of partner meetings.

We said in the beginning that voting is deceivingly complicated. Why? Because there are so many scenarios to consider: 

• What issues should be passed by majority vs. super-majority vote?
• What constitutes a super-majority – 67%? 75%? 80%? This dramatically changes depending on the number of partners you have.
• Are some partners more dominant (in a good way) to the success of the firm than others and how much ability to impact major decisions (mergers, promotion to partner, changing the partner agreement, etc.) do you want lower producing partners or non-equity partners to have?

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If there are way more equity than non-equity partners, letting non-equity partners vote may have some merit because there is little risk they can usurp power. But what if the number of non-equity partners is close to or exceeds the number of equity partners? Certainly, no firm in its right mind would give non-owners the ability to block the decisions of the owners. In The Rosenberg MAP Survey, of those firms using the non-equity partner concept with annual revenue of $35M or more, for every 10 equity partners, they have 8 non-equity partners, pretty significant.

So, if the partner group is discussing what CPA association to join, how many interns to hire, increasing billing rates, promotions of seniors to managers and other important operating issues, and the number of non-equity partners compared to equity is low, there isn’t much harm in letting non-equity partners vote or at the least contributing to “straw polls” on issues. In fact, we would encourage this. But for major decisions (mergers, promotion to partner, changing the partner agreement, etc.), most firms would not want to take a chance on having non-owners block the owners from doing what they want to do.

As you consider updating your partner agreement, you may want to address the following:

• What issues require a partner vote. You may want to keep this list to critical issues in order to prevent requiring votes when consensus would suffice.
• What issues require a super-majority vote to pass?
• If there is a sole or small group of founding or dominant partners, do they get an override vote on some matters?
• How will voting be counted? One person, one vote? Ownership percentage?
• If non-equity partners or principals will get a vote, this may need to be explicitly included in your agreement.

How do you address non-equity partners voting at your firm? Add your comments below.