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, especially 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.