Journal of Professions and Organization, 2014, 1, 137–160

doi: 10.1093/jpo/jou002
Advance Access Publication Date: 13 July 2014

Does the emergence of publicly traded

professional service firms undermine the
theory of the professional partnership?
A cross-industry historical analysis

Downloaded from http://jpo.oxfordjournals.org/ at Pennsylvania State University on February 20, 2016

Andrew von Nordenflycht*
Beedie School of Business, Simon Fraser University, Vancouver, BC, V6C 1W6, Canada
*Corresponding author. Email: vonetc@sfu.ca.
Submitted 10 December 2013; revised version accepted 15 June 2014

ABSTRACT
Economists and organization theorists typically theorize the ‘professional partnership’ as an advan-
taged organizational archetype in the knowledge intensive setting of professional services. However,
the emergence of publicly traded corporations in some professional services seems to challenge this
theory. I identify three alternative interpretations of the existence of publicly traded professional ser-
vice firms: (1) that they are a mistake, an inefficient choice that does not survive in the long run;
(2) that they indicate that some professional service firms face a greater need for or value of capital
than conventionally thought; or (3) that their absence stems from strong professional norms rather
than any economic disadvantage, and they appear when those norms weaken. To assess the validity
of these interpretations, I analyze cross-industry and cross-firm patterns of the emergence and char-
acteristics of public corporations from 1960 to 2003 across five professional services. Although the
analysis offers some support for each interpretation, I argue there is an order or precedence among
them. Professional norms are the first-order factor: the absence of public corporations in an industry
stems primarily from professional norms. The value of capital is second order: where professional
norms are not binding, the distribution of public corporations correlates strongly with the relative
value of capital and firm size. If the mistake interpretation applies at all, it only applies to small firms.
Public ownership appears to be a viable form for large professional service firms, even where the
value of capital is low. Overall, the analysis suggests that the core assumption of typical theories of
the professional partnership—that it generates advantages in retaining talent or motivating effort—
may be flawed.

K E Y W O R D S : public corporation; professional partnership; professional service firms.

One of the central ‘stylized facts’ about professional
service firms (PSFs) is that they are organized as
‘professional partnerships’, in which ownership is
held exclusively by a group of senior professionals
who govern collectively and distribute profits
among themselves (Greenwood, Hinings, and
Brown 1990; Brock, Powell, and Hinings 1999;
Greenwood and Empson 2003; Malhotra, Morris,
and Hinings 2006). This distinctive model of ‘em-
ployee ownership’ (Fama and Jensen 1983;

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V

 137
138  A. von Nordenflycht
Hansmann 1996; Dow 2003) has traditionally been
used even by the largest PSFs, such as the big four
public accounting firms who have tens of thousands
of employees across multiple continents.
The prevalence of the professional partnership
model among PSFs has led organizational scholars
to infer that it must be particularly advantaged in
the knowledge intensive environment facing PSFs.
Theories about how and under what conditions
this advantage arises appear in organization theory
(Lorsch and Tierney 2002; Greenwood and
Empson 2003; Greenwood et al. 2005), law
(Gilson and Mnookin 1985, 1989; Hansmann
1996), and especially economics (Alchian and
Demsetz 1972; Jensen and Meckling 1979; Fama
and Jensen 1983; Dow and Putterman 2000;
Morrison and Wilhelm 2004, 2008; Levin and
Tadelis 2005). These theories generally hypothesize
that the professional partnership generates strong
incentives for retaining, motivating effort from, or
building the skills of the highly mobile, hard-to-
monitor professionals who are the primary source
of value in such firms.
In the face of these theories, the emergence of
publicly traded corporations in some professional
services is puzzling. Table 1 shows the number of
publicly traded corporations among the largest 25
US firms in five professional service industries in
1960 and in 2003. The 1960 column, indicating
Table 1. Number of publicly traded firms
among top 25 US Firms
1960 2003
Law 0 0
Public Accounting 0 0
Advertising 0 4
Consulting 2a 20
Investment banking 1 24
Sources: National Law Journal, Accounting Today, Public Accounting
Report, Consultants News, Advertising Age, Hoover’s Online, Compustat,
SIFMA Yearbook, company websites.
Notes: Top 25 firms identified from industry-specific trade journals.
Firms that are subsidiaries are coded according to the ownership status
of their ultimate parent.
a
Two actuarial consultancies were subsidiaries of publicly traded insur-
ance companies in 1960. No other large consultancies were publicly
traded.
very few public corporations across any of the five
industries, appears consistent with the theory that
the partnership is the advantaged ownership model.
But the 2003 column, which shows much greater
variation in the prevalence of public ownership,
both across industries as well as within industries,
poses a conceptual challenge. How do we square
the theory that the professional partnership is the
advantaged ownership form for PSFs with the emer-
gence of publicly traded PSFs—as well as with the
variation in that emergence across professional ser-
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vice industries (or fields)? That is the central ques-
tion of this article: what does the emergence and
distribution of publicly traded PSFs mean for our
theory of the professional partnership? There are
three main alternative interpretations.
On the one hand, if the theory of the partnership
and its fit with the PSF environment is correct, then
choosing to go public may be a ‘mistake’ for PSFs.
Although the existing owners may get rich by selling
shares to the public, the firm will become disadvan-
taged in attracting or motivating employees, relative
to privately held rivals. Thus, public PSFs will un-
derperform and ultimately fail or re-privatize. This
interpretation seems consistent with conventional
wisdom in these industries. For example, the repri-
vatizations of once-public consultancies Booz Allen
& Hamilton, Arthur D. Little, and LECG led one
manager to suggest:
‘I think by and large in the consulting industry
you’d have to say that public ownership is a
failure’ (Rothenberg 2003).
Similar cautions and lamentations can be found
in other professional services as well (see, e.g.
Groysberg et al. 1999 regarding investment banking;
Millman 1988 and Moskowitz 1989 regarding
advertising).
On the other hand, the existence of public PSFs
could indicate flaws in the functionalist theory of
the professional partnership. One interpretation in
this vein is that not all PSFs face conditions that fa-
vor the professional partnership. In particular, some
PSFs may experience greater needs for capital, rela-
tive to human capital, which thereby reduces the im-
portance of internal incentives and increases the
importance of external finance.

The third interpretation is that the historical
prevalence of the professional partnership model
among large PSFs should be attributed not to its in-
centive advantages but to its role as one component
in a larger nexus of professional norms and regula-
tions that seek to protect clients by promoting pro-
fessional ethics and integrity (Parsons 1939; Abbott
1991; Torres 1991; Lipartito and Miranti 1998).
Where professional norms are strong, the public
corporation tends not to be a permissible form of
organization because it may introduce conflicts of
interest that threaten professional integrity (von
Nordenflycht 2010). In this view, the historical
dominance of the partnership model results from
constraints on organizational form, not managerial
choices of the most efficient or advantaged form.
This interpretation implies that the existing theory
of the partnership is more centrally flawed: that it
does not, in fact, deliver significant incentive advan-
tages even in the PSF environment.
Several recent studies offer evidence to help adju-
dicate among these three interpretations. Compar-
ing public and private firms in consulting (Empson
and Chatman 2006; Richter and Schroder 2008)
and in advertising (von Nordenflycht 2007), these
studies suggest that public PSFs are not noticeably
different from private PSFs, either on various per-
formance metrics or in internal organization and
culture, undermining the first interpretation that
public ownership is a mistake that yields competi-
tive disadvantage. They also find that public owner-
ship tends to correlate with firm size and capital
intensity, offering positive support for the second in-
terpretation focusing on variations in the relative
value of capital.
However, these studies focus on single industries
(in this article, I use the terms industry, field, and
profession interchangeably). Because there are also
important sources of heterogeneity across different
professional services (Morris and Malhotra 2009;
von Nordenflycht, Malhotra, and Morris in press),
this raises the concern that the findings may be
driven by industry-specific idiosyncrasies and
limits the ability to generalize across professional
services. Furthermore, these studies utilize only one
dimension of variation: across firms. This fails to
incorporate—and thus account for—the variation
across the two other dimensions in Table 1: across
Journal of Professions and Organization  139
industries and over time. This makes it harder to as-
sess the third interpretation, because professional
norms may vary more substantially across fields
than they do across firms. It also offers little insight
into the historical dimension: explaining how and
why publicly traded firms appeared in fields where
they were absent and how their prevalence evolved
over time.
To facilitate broader generalization—across pro-
fessions and over time—of our understanding of
publicly traded PSFs and what it means for our the-
Downloaded from http://jpo.oxfordjournals.org/ at Pennsylvania State University on February 20, 2016
ory of the professional partnership, this study docu-
ments and analyzes the historical emergence and
distribution of the public corporation over the last
50 years across five professional services: law, ac-
counting, advertising, management consulting, and
investment banking. I use three sources of varia-
tion—across the five industries; over time; and
across firms within each industry—to assess which
of the three interpretations (mistake, relative value
of capital, professional norms) is most consistent
with the historical record. The analysis is based on a
range of primary and secondary sources, including
interviews with industry participants, documents
from professional associations, industry trade publi-
cations, industry histories, and academic analyses.
In the next section, I articulate the existing the-
ory of professional partnership. Given this frame-
work, I then elaborate the three alternative
interpretations of the existence of public PSFs and
their implications for the theory of the partnership
and develop each interpretation’s key empirical hy-
potheses. In the remaining sections, I explain my
empirical approach, present empirical evidence
across the several sources of variation, and discuss
the conclusions and their implications for policy
and future research.
THEORIES OF THE PROFESSIONAL
PARTNERSHIP
This section defines the professional partnership
and then synthesizes existing theories of its benefits
and costs. It is important to distinguish between the
legal meaning of the term partnership—a type of
business that lacks standing as a separate legal entity
and is taxed differently than a corporation (Roberts
2004)—and the ‘professional’ partnership, which
140  A. von Nordenflycht
refers to an organizational archetype (Greenwood
and Hinings 1993), with a distinctive set of gover-
nance characteristics (Greenwood, Hinnings, and
Brown 1990; Maister 1993; Lorsch and Tierney
2002; Greenwood and Empson 2003; Empson and
Chapman 2006). Many professional partnerships
are not partnerships in the legal sense (being orga-
nized instead as various forms of private corpora-
tions for tax and liability purposes (Lorsch and
Tierney 2002)). Hereafter, this article will use the
term ‘partnership’ to mean an archetypal profes-
sional partnership.
The professional partnership archetype com-
prises several characteristics that distinguish it from
the archetype of the ‘traditional corporation’ (see
Gilson and Mnookin 1985, 1989; Eccles and Crance
1988; Gilson and Mnookin 1989; Greenwood,
Hinnings, and Brown 1990; Maister 1993; Lorsch
and Tierney 2002; Greenwood and Empson 2003;
Empson and Chatman 2006 for more details on the
following characteristics). The core characteristic is
‘employee ownership’: ownership is shared by a
group of senior professionals, exclusively (no out-
side investors) and collectively (rather than by only
one or a few individuals). Much theorizing about
the advantages of the partnership derives from this
distinctive allocation of ownership. A second dis-
tinctive characteristic is an emphasis on equality
among partners, manifested in equal sharing of prof-
its across partners, voting by partners in firm deci-
sions, rotating management positions, and low
levels of hierarchy in general. A third feature, related
to the minimization of hierarchy, is the use of ‘infor-
mal’ or ‘collegial’ processes and controls, instead of
formal rules. Finally, the partnership is also assumed
to use an up-or-out promotion system for selecting
new partners from among the firm’s non-partnered
professionals.
Advantages
To explain the historical fact that even large PSFs
have used the professional partnership archetype in-
stead of a traditional corporate archetype, theorists
have sought to explain how its distinctive features
lead to greater efficiency or advantage in the context
of professional services. Greenwood and Empson
(2003) offer the most comprehensive theories of
the professional partnership, drawing on a range of
economic and sociological work to propose its pros
and cons and thereby derive its environmental
boundary conditions. Greenwood and Empson
identify three sources of advantage that the profes-
sional partnership might enjoy, all related to manag-
ing professionals and their knowledge-intensive
work.
First, the allocation of ownership minimizes
agency costs, which are particularly high in profes-
sional services. This is the classic economic theory
of the large professional partnership (Alchian and
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Demsetz 1972; Jensen and Meckling 1979; Fama
and Jensen 1983): on the one hand, the knowledge
intensity and customization involved in professional
services makes professional labor uniquely difficult
for outsiders to monitor and, on the other hand, the
low value of capital makes the benefit of outside
ownership low, so ownership should be allocated
entirely to insiders to induce maximum effort and
minimize monitoring costs.
Greenwood and Empson (2003) add an addi-
tional aspect to this argument. Drawing on the
assumption that professionals have strong prefer-
ences for autonomy (Starbuck 1992; Winch and
Schneider 1993; Lorsch and Tierney 2002), they ar-
gue that not only is professional labor hard to moni-
tor, but that attempts to monitor it conflict with
preferences for autonomy and thus demotivate or
drive away professionals.1
Second, the ownership allocation combined with
the emphasis on equality may provide higher non-
financial utility to professionals, which yields an ad-
vantage in attracting and retaining talent. For one
thing, the participation in firm decision making that
comes with an ownership stake generates positive
utility. For another, the fact that ownership is re-
stricted to a select group of individuals creates pres-
tige (Krause 1963)—what some have referred to as
the ‘lure of partnership’ (Greenwood and Empson
2003; Greenwood et al. 2005) or the ‘brass ring’ of
a professional career (Groysberg et al. 1999).
Third, the partnership provides clients a strong
signal of quality in markets where quality is very
hard for clients to evaluate (Sharma 1997; Lowen-
dahl 2000; von Nordenflycht 2010). Greenwood
and Empson argue that the ownership model pro-
vides a greater signal of ‘integrity’: that the firm will
not exploit the client’s inability to evaluate quality

by shirking or prescribing unneeded services. This
argument draws on the sociology of the professions,
which argues that a key feature of professions is
adherence to a code of ethics that privileges client
interests above professionals’ interests (‘caveat ven-
ditor’), in contrast to the commercial logic of unfet-
tered pursuit of self-interest (‘caveat emptor’) that
characterizes non-professional economic activity
(Abbott 1991; Torres 1991; Lipartito and Miranti
1998; Nanda 2002; Greenwood, Suddaby, and
McDougald 2006). By restricting ownership to pro-
fessionals, the partnership model eliminates ‘com-
mercial’ pressure from outside investors to exploit
clients’ inability to evaluate quality.
In an alternative take on the quality argument,
Levin and Tadelis (2005) argue the partnership
model provides a greater signal of the firms’ ‘compe-
tence’. Assuming that partnerships redistribute
profit across partners, they theorize that partner-
ships will therefore only bring in high-quality part-
ners, so that the per-partner profits of the existing
partners are not diluted by redistribution to lower-
quality partners. Clients can therefore infer that
partnerships will have higher average quality of per-
sonnel than corporations.
Disadvantages
Greenwood and Empson (2003) also summarize
key limitations of the professional partnership. First,
there may be limits to the size of a professional part-
nership. Increasing firm size attenuates many of the
postulated advantages. As the number of partners
increases and each partner’s share of ownership de-
creases, free-riding problems (aka, internal agency
costs) are expected to increase (Greenwood and
Empson 2003). And the non-financial benefits may
also get weaker in larger firms with more formal,
less personal internal relations (Lorsch and Tierney
2002).
Second, professional partnerships are presumed
to have difficulties financing investments in firm-
specific, long-term assets. The absence of outside
ownership means the firm’s financing options are
limited to insider contributions or debt. However,
insiders may be reluctant to fund risky investments,
particularly at the expense of current dividends, be-
cause they are wealth constrained, they are undiver-
sified, and their time horizons may be fairly short
Journal of Professions and Organization  141
(Dow and Putterman 2000; Wells 2000). And there
are limits to debt-financing for firm-specific invest-
ments (Hansmann 1996; Dow and Putterman
2000).
Of course this disadvantage is assumed to be
unimportant because PSFs are assumed to have low
needs for firm-specific investments: they are as-
sumed to exhibit few scale economies; their physical
assets (e.g. office space, computers) are generic and
thus amenable to leasing or debt financing (Dow
and Putterman 2000), and firm-specific investments
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like R&D and advertising are minimal.
To summarize, the theory of the professional
partnership synthesized by Greenwood and Empson
(2003) contains several key assumptions. First, dis-
tinctive features of the professional partnership
archetype lead to advantages, relative to a traditional
corporate archetype, in providing incentives to at-
tract, develop, or motivate effort from skilled profes-
sionals. Second, the disadvantages partnerships face
in raising investment capital is of little import, be-
cause investment needs are minimal in professional
services.
INTERPRETATIONS OF PUBLICLY
TRADED PROFESSIONAL SERVICE
FIRMS
By making a portion of the firm’s ownership avail-
able to anonymous outside investors, public owner-
ship violates the professional partnership’s
ownership model. Furthermore, public ownership
may weaken other distinctive features of the part-
nership. For instance, mandatory public disclosure
and other shareholder protections may require the
adoption of more formal processes and hierarchical
structures (Marchisio and Ravasi 2001), which un-
dermine both the spirit of equality and the use of in-
formal controls. To be a public corporation is to be
‘not’ a professional partnership. So how do we ex-
plain some PSFs’ choice of an ownership structure
assumed to forego important competitive
advantages?
I discuss three alternative interpretations of the
existence of public PSFs: (1) it’s a mistake—an
unsustainable fad, (2) the value of capital relative to
human capital is actually substantial for some PSFs,
and (3) it’s about variations in the strength of pro-
fessional norms.
142  A. von Nordenflycht
Mistake
If we accept the full set of assumptions underlying
the theory of the professional partnership, then we
might interpret PSFs that opt for public ownership as
making a short-term choice that is ultimately unsus-
tainable—that is as a mistake. More specifically, pub-
lic PSFs may result from a temporary fad in which
partners exploit ‘irrationally exuberant’ investors.
Partners in professional partnerships eventually
face the desire or need to ‘cash out’ their ownership
stakes. Most commonly, retiring partners sell their
shares back to the remaining partners, typically at
book value or some other predetermined price that
is below the full value of the firm’s expected future
earnings (von Nordenflycht 2011a). If public own-
ership puts a PSF at a significant disadvantage, we
would not expect rational outside investors to be
willing to pay a higher price for partners’ shares
than partners could get internally. However, there
may be times when public equity investors ‘irratio-
nally exuberant’ (Shiller 2005)—when speculative
frenzy leads to underestimation of risk and overvalu-
ation of assets, such as in ‘hot’ initial public offering
(IPO) markets (Ritter 1998). In such periods,
PSF partners may be able to cash out at very high
values by taking their partnerships public (von
Nordenflycht 2011a). However, the firm is then
saddled with an uncompetitive structure and suffers
a decline in performance.
This view is consistent with anecdotal ‘lamenta-
tions’ made by participants in and observers of vari-
ous professional services. As one advertising
industry commentator lamented in 1989:
‘Going public makes a few people very weal-
thy and screws it up for the others for the rest
of the agency’s life.’ (Moskowitz 1989).
In a case study of Goldman Sachs’ deliberations
about an IPO, Groysberg et al. (1999) report a se-
nior banker saying of Morgan Stanley:
‘it was the ultimate white-shoe firm. But after
it went public, they lost something in the
translation…it lost some of its aura.’
But is there empirical support for this inter-
pretation beyond such anecdotes? In terms of the
historical pattern of public ownership, this interpre-
tation has two implications. First, public PSFs
should underperform private rivals. Second, given
that underperformance, public PSFs will not persist,
ultimately either ceasing to exist or converting to
private status:
‘Mistake’ Hypothesis 1: publicly traded PSFs
underperform privately held PSFs, ceteris
paribus.
‘Mistake’ Hypothesis 2: publicly traded PSFs
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do not persist over time.
Relative value of non-human versus human capital
A second interpretation, which preserves the core
assumption that the partnership generates superior
incentives, is to assume that some PSFs face condi-
tions that do not (or no longer) favor the partner-
ship. The theory of partnership assumes that as the
value of human capital relative to non-human capital
in the production process increases, the incentive
advantages of the partnership archetype increase.
Conversely, then, as the value of human capital rela-
tive to non-human capital ‘decreases’, the partner-
ship archetype will be less valuable.
von Nordenflycht (2010) argues that while a
‘lack’ of capital intensity has often been suggested as
a defining feature of professional services; in fact,
capital intensity varies substantially across the PSF
universe, both across industries as a whole as well as
across firms within an industry (because of differ-
ences in size and strategic position (von Norden-
flycht, Malhotra and Morris, in press)). Thus, the
emergence of public PSFs may indicate that the
value of non-human capital relative to human capital
has increased for some PSFs.
Greenwood and Empson (2003) largely adopt
this second and offer hypotheses predicting a
correlation between public PSFs and factors that
influence either the relative value of human and
non-human capital in the production of professional
services or the magnitude of the partnership’s ad-
vantages. I focus on two of these factors.
First, non-human capital will be relatively more
important where production is more capital inten-
sive. Second, the value of individual professionals
will, on average, become less important the larger
the firm. Furthermore, as already noted, the

incentive advantages of the partnership decline as
firm size increases. From these propositions, we can
derive hypotheses of the empirical patterns that this
second interpretation implies:
‘Relative Value of Capital’ Hypothesis 1: pub-
lic ownership will be correlated with the capital
intensity of the production process.
‘Relative Value of Capital’ Hypothesis 2: pub-
lic ownership will be correlated with firm size.
Professional norms
While the first two interpretations take as given the
theory that the partnership generates greater incen-
tives for attracting or motivating professionals, this
third interpretation does not. In this interpreta-
tion—driven more by sociological theories of the
professions than economic theories of knowledge
intensive work—the prevalence of the professional
partnership archetype among large PSFs stems not
from its human capital incentives but from its role
as one component in a larger nexus of professional
norms and regulations.
The sociological literature on the professions
starts from the concept of an ‘asymmetry of exper-
tise’, whereby clients are unable to assess experts’
skill level and/or the quality of the service rendered
and are thus vulnerable to experts prescribing
unneeded services or shirking on quality (Parsons
1939). The distinctive features that characterize pro-
fessions—including autonomous, monopoly control
over the practice of a distinct knowledge base, and
an ideology that privileges client interests above
professionals’ own interests2—are then theorized as
mechanisms that mitigate the asymmetry of exper-
tise by guaranteeing expertise and trustworthiness
(Parsons 1939; Abbott 1991; Torres 1991; Starbuck
1992).
One of these distinctive features of professions is
a code of ethics by which the professional ideology
of protecting client interests is instantiated in spe-
cific rules. For instance, both law and medicine
require maintaining strict confidentiality of client in-
formation. And some professional codes tradition-
ally prohibited some standard commercial practices,
such as advertising and price competition, based on
the theory that unfettered competition encourages
Journal of Professions and Organization  143
deterioration in the quality of service provided
(Torres 1991).
Professional norms are relevant to the issue
of partnerships versus publicly traded PSFs bec-
ause one common manifestation of the profes-
sional ideology are prohibitions against allowing
‘non’-professionals, who are not steeped in or
beholden to professional ethical codes, to par-
ticipate in the ownership of professional firms
(von Nordenflycht 2010). This norm against non-
professional owners stems from a concern about
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conflicts of interest: that professionals in a firm
partly owned by outside investors may experience
pressures from those outside investors to increase
profits by exploiting clients (Shafer, Lowe, Fogarty
2002; von Nordenflycht 2010). In fact, as noted
earlier, Greenwood and Empson (2003) invoke this
argument in making the case that the partnership
archetype may signal greater integrity to clients.
In some professions, then, the partnership model
may not be a choice by individual firms as to the op-
timal form of ownership, but a constraint imposed
by the wider profession. In other instances, even in
the absence of explicit restrictions, some PSFs may
have stronger connections to professional norms
and thus opt to eschew outside ownership. Whether
chosen by individual firms or by whole professions,
this interpretation views the ownership choice as
driven by a concern about ethics and conflict of in-
terest, not about incentives to attract and motivate
professionals.
From an empirical standpoint, this interpretation
would predict that the existence or prevalence of
public PSFs would be related to the relative strength
of professional regulations and norms. In other
words, where professionalization is weaker, public
PSFs would be more likely to exist:
‘Professional Norms’ Hypothesis: the preva-
lence of public PSFs will be inversely correlated
with the strength of professionalization and pro-
fessional norms.
EMPIRICAL APPROACH
Testing the alternative hypotheses entails gathering
data to measure capital intensity, firm size, and pro-
fessional norms across multiple industries, multiple
firms within those industries, and over time. It also
144  A. von Nordenflycht
requires measurement of the performance and lon-
gevity of public versus private PSFs across multiple
industries. However, the challenge of gathering sys-
tematic measures for both public and private firms
across multiple industries over multiple is consider-
able. For instance, for private firms, useful data often
requires industry-specific sources, such as trade jour-
nals, so the availability of comparable data is limited.
This article makes a first step at this endeavor,
gathering and synthesizing a disparate range of evi-
dence on the emergence, diffusion, and relative per-
formance of public PSFs across five professional
service industries from 1960 to about 2003. I utilize
some quantitative measures but draw heavily on
qualitative evidence from industry histories, trade
journals, and case studies or reports on individual
firms. And the types of evidence, I utilize are not
standardized across the five industries. Thus, the
empirical half of this article offers more of a prelimi-
nary conjecture of the plausibility of the hypotheses
rather than statistically significant tests.
Five industry sample
The five industries were chosen based on a combi-
nation of their centrality to professional service re-
search, variation in the extent of public ownership,
and data familiarity and availability. To help decide
which industries were most suitable for testing theo-
ries of professional services, I drew on von
Nordenflycht’s (2010) framework for defining the
boundaries of professional services as well as identi-
fying distinctive subcategories of PSFs. To help
identify the boundaries of professional services, von
Nordenflycht (2010) ranked industries according to
how frequently they were cited as examples of pro-
fessional services in a sample of published articles.
The sample here includes five of the top seven in-
dustries in that ranking, including the top three:
law, accounting, and consulting. The exclusion of
two industries in the top seven—engineering con-
sulting/design and architecture—is not for any the-
oretical reason but rather for lack of familiarity with
the data sources for these industries.
The five industries also differ along the factors
identified in the hypotheses: the size of the indus-
try’s largest firms, the degree of capital intensity,
and the strength of professional norms. In fact, two
of these factors—capital intensity and professional
norms—are the key characteristics that von
Nordenflycht (2010) uses to propose subcategories
of PSFs. The sample here arguably spans three of
those four categories. Law and accounting are ‘clas-
sic PSFs’, with low capital intensity and strong pro-
fessional norms. Consulting and advertising are ‘neo
PSFs’, with low capital intensity and weak profes-
sional norms. And, as argued below, investment
banking shifted over time from the neo-PSF cate-
gory to the ‘finance and technology’ category as its
capital intensity increased.
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For purposes of data availability, this study fo-
cuses primarily on USA (and US-based firms), with
minor exceptions.
Sequence of analyses
I first utilize ‘cross-industry’ variation. I begin with
discussion of explicit professional prohibitions on
public corporations. Specifically, I assess how differ-
ences across industries in the existence of ownership
prohibitions and in the strength of professionaliza-
tion relates to the prevalence of public corporations.
The second analysis discusses industry condi-
tions at the time of the first emergence of public
corporations for the industries in which it was
allowed. The question addressed is whether the
emergence of public corporations correlates with
weakening of professional norms, increases in firm
size, and/or increases in the value of capital.
I then turn to ‘cross-firm’ variation. The third
analysis considers the characteristics of public versus
private PSFs within each industry. Specifically, I
assess the role of firm size, capital intensity, and pro-
fessional norms in explaining the current and histor-
ical distribution of public versus private firms in
each industry. Fourth, I assess the ‘mistake’ interpre-
tation by assessing the performance of public PSFs
relative to their private competitors as well as the
persistence of public ownership at a firm-specific
level.
HISTORICAL PATTERNS
Ownership prohibitions
Law
The American Bar Association’s (ABA) ‘Model
Rules of Professional Conduct’ state that a lawyer

cannot share fees for legal services with or form a
partnership that sells legal services with a non-lawyer
(American Bar Association 2013). This precludes
public ownership, which would make a law firm’s
ownership available to non-lawyers. The stated ratio-
nale for this restriction is the prevention of conflicts
of interest that would pit outside investors’ interests
against clients’ interests (Garamfalvi 2006).
The ABA does not directly regulate law firms—
they are regulated by state law. However, the ABA’s
model rules strongly influence state law, and these
ownership restrictions remain in place in all states.
Similar prohibitions existed around the world,
until very recently. However, in 2007, the Australian
government legislated the removal of this ownership
prohibition; and in 2011, the UK government did
the same. In both countries, the repeal was part of a
larger set of reforms intended to increase the avail-
ability of legal services to the general public by in-
creasing competition (Clementi 2004; Garamfalvi
2006).
While no UK law firms have gone public yet, at
least two Australian firms have: one immediately
after the reforms in 2007, another by 2011. Thus, in
the narrow historical and jurisdictional window in
which the public ownership has been allowed, at
least some law firms have chosen to opt for this
ownership model.
Public accounting
In the USA, certified public accountants (CPAs)
practice under regulations maintained by the profes-
sion’s central association (AICPA) and reinforced
by state-level government licensing boards. These
regulations include a prohibition on non-CPA own-
ership of CPA firms. This regulation is intended to
help preserve CPA ‘independence’, which refers to
the ideal that a CPA makes judgments and offers ad-
vice based solely on professional expertise rather
than other biases, particularly financial incentives
(AICPA 2012).
However, the ownership prohibitions do not
cover all firms that provide accounting services be-
cause the profession’s jurisdiction only applies to au-
dits of publicly traded firms, which must be done by
CPAs. Non-audit accounting services do not require
a CPA, so firms that only do non-audit work are not
subject to the ownership rules. And, in fact, at least
Journal of Professions and Organization  145
six large non-audit accountancies are publicly
traded: four focused on tax advice and preparation
(H&R Block, Jackson Hewitt, Kaye Kotts, and
Gilman & Ciocia); and two with a broad set of non-
audit accounting (RSM McGladrey and CBIZ).
Publicly traded non-audit accounting corporations
also exist in UK and Australia (Pickering 2010).
Advertising
In 1960, the advertising industry also had restric-
tions that precluded public ownership. The industry
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trade association—the American Association of
Advertising Agencies (4As)—imposed several own-
ership restrictions on its members, including a pro-
hibition against having owners who were not
involved in managing the agency: that is, no outside
investors. Here too, the stated reason for the restric-
tions was to prevent conflicts of interest that might
compromise an agency’s ability to serve clients fairly
as well as to prevent disclosure of confidential client
information (Advertising Age 1962).
Unlike in law and accounting, however, the 4A’s
does not regulate entry into the industry via a certi-
fication process nor are its membership rules
encoded in state law. So firms can sell advertising
services without being members of the industry as-
sociation. In other words, professionalization is rela-
tively weaker than in law and accounting.
In 1963, the industry association voted to repeal
the ownership restrictions. From the year before the
repeal to 10 years after it, 18 advertising agencies
went public (von Nordenflycht 2007).
Management consulting
In 1960, one of the main industry associations—the
Association of Consulting Management Engineers
(ACME)—held its members to a professional code
of ethics (McKenna 2006; Kipping 2011), which in-
cluded a prohibition on public ownership for the
standard reason: to prevent consultants from
compromising the quality and impartiality of their
work under pressure to deliver shareholder returns
(Klein 1969; McLean 1970).
But in the advertising industry, membership in
the industry association was not required to practice
consulting. Indeed, ACME’s membership did not
encompass much of the industry: in 1969, for exam-
ple, it only had 45 member firms (Klein 1969).
146  A. von Nordenflycht

Furthermore, ACME was only one of several
industry associations. And one major segment of
consulting firms—information technology (IT)
consultancies—were not involved with ACME at
all. In this way, the reach of professional norms was
narrow and ownership restrictions, while they did
exist, did not apply to many firms.
ACME’s ownership restrictions were lifted
around 1969, after IT consultancies began going
public in 1963 and three large general management
consultancies went public after 1968 (Science
to pay the smaller NYSE firms for securities trading
services (Wells 2000; Jenrette 2002).
As in advertising and consulting, membership in
the organization that prohibited public ownership
(here, NYSE) was (and is) ‘not’ a requirement for
the practice of investment banking, so the prohibi-
tion did not preclude publicly traded investment
banks. First Boston, for example, was publicly traded
from its founding in 1933.
After an NYSE-member firm Donaldson Lufkin
Jenrette (DLJ) went public in 1969 and threatened

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Management Corporation in 1968, Arthur D. Little
in 1969, and Booz Allen & Hamilton in 1970).
Investment banking
Investment banks also faced restrictions on public
ownership in 1960. The specific nature of the re-
striction was that the New York Stock Exchange
(NYSE) reserved the right to approve all owners of
member firms (the brokerage firms that traded
stocks on the exchange—not the corporations listed
on the exchange). This effectively precluded public
corporations, whose ownership was anonymous and
changed hands frequently (Jenrette 2002; Lufkin
2002). In the 1960s, publicly stated reasons for the
preservation of this prohibition included preventing
organized crime from infiltrating the NYSE
(Jenrette 2002) and encouraging less risky behavior
because of the unlimited liability of partnerships
(Donaldson 2002). However, insiders generally
agreed that the rule was preserved primarily for
anti-competitive reasons: it prevented publicly
traded banks from joining the NYSE, forcing them
to leave the NYSE, the NYSE lifted its ownership
restrictions in 1970. And then eight more large secu-
rities firms went public over the next 2 years.
Table 2 summarizes the information described
here. What Table 2 helps point out is the close
correlation between the existence of public
corporations and the presence of professional codes
prohibiting public corporations. The fact that public
corporations do not appear where they are not al-
lowed is, of course, hardly surprising. But what is
surprising is the fact that public corporations ‘do’
appear wherever they ‘are’ allowed. Where owner-
ship restrictions don’t apply—non-audit accounting
firms, non-NYSE member banks—or were lifted—
advertising, consulting, investment banking, even
law in Australia—some PSFs chose to become pub-
lic corporations. Thus, the historical rarity of public
corporations across professional services can be at-
tributed first and foremost to regulatory constraints
stemming from professional norms.
Furthermore, whether an industry maintained
or repealed its ownership restrictions between

Table 2. Variation in the existence and scope of ownership prohibitions and the strength of profes-
sional control
Number of Rules against Rules applied to: Professional Ownership Number of
top 25 public public association’s restrictions Top 25
in 1960 ownership control over repealed in: public
(1960) practice in 2003

Law 0 Yes All lawyers and law firms High —a 0a

Public accounting 0 Yes CPAs and firms performing High — 0b
audits of public corporations
Advertising 0 Yes Members of industry association Low 1963 4
Consulting 2 Yes Members of industry association Low 1969 20
Investment banking 1 Yes Members of NYSE Low 1970 24
a
In Australia, ownership restrictions on law firms were repealed in 2007. In 2009, an Australian law firm went public.
b
When the top 25 accounting list includes firms that do not offer public audits, six firms were publicly traded in 2003.

1960and 2003 correlates with the variation in the
strength of professionalization, as measured by the
control that the professional association exerts over
the practice of the profession. These patterns offer
support for the ‘professional norms’ hypothesis.
Emergence of public corporations: industry
conditions and rationales
This section addresses the question of what led to
the repeal of ownership restrictions and the first
emergence of public corporations in advertising,
consulting, and investment banking between 1962
and 1970. Specifically, is there evidence that firm
size or capital intensity increased significantly, as per
the ‘relative value of capital’ interpretation? Or were
firms simply taking advantage of new or temporary
opportunities to cash out, as per the ‘mistake’ inter-
pretation? As in the previous section, I summarize
the information in Table 3.
Advertising
The first US advertising agency to go public,3 in
1962, was a 2-year-old agency (Papert Koenig Lois)
that had not joined the industry association and was
thereby unaffected by the ownership restrictions.
Seeing the results, the industry association’s mem-
ber firms voted to repeal the ownership restrictions
the next year (Advertising Age 1963; Business Week
1964), paving the way for additional IPOs (von
Nordenflycht 2007).
Several pieces of evidence suggest that the impe-
tus for going public was the opportunity to cash out
Table 3. Industry conditions associated with emergence of public corporations
Rules lifted First IPO
Advertising 1963 1962
Consulting: IT n/a 1963
Consulting: general 1969 1968
Investment banking 1970 1970
Journal of Professions and Organization  147
richly in the face of exuberant equity markets rather
than any increases in the value of capital. Review of
the contemporary trade press reveals no indication
of an increase in the capital intensity of the business.
Although television represented a new advertising
medium, ad agencies did not own the expensive
equipment required for TV, outsourcing such pro-
duction to specialists (von Nordenflycht 2011a).
Instead, contemporary trade press indicates that
a booming (i.e. exuberant) stock market lead invest-
ment bankers, who were looking for new sources of
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deals in the relatively untapped service sector, to so-
licit ad agencies to go public (Advertising Age 1963).
Second, the wave of ad agency IPOs occurred
largely during what Ritter (1998) has described as
‘hot’ IPO markets—surges in the number of IPOs
of all kinds, when investors were eager to speculate
on new issues.
Third, analysis of what ad agencies did with their
IPO proceeds indicates most went public to cash
out senior partners, rather than to finance invest-
ment. Of the 13 agencies for which I located de-
tailed IPO prospectuses, 9 had 100% of the IPO
proceeds go to selling stockholders rather than to
the firm itself. Of the remaining 4, where 50% of
the proceeds went to the firm’s treasury, two used
those treasury funds to pay off debt that the firm
had incurred to buy out retiring owners in previous
years. Thus, in only two instances did the firms re-
tain significant shares of the IPO proceeds that
would then be available for investment.
Apparent reason for going public
Cashing out in exuberant capital markets:
• No evidence of increased capital intensity
• Underwriters soliciting IPOs in ‘hot’ market
• IPO proceeds went to individuals, not firm
Investment capital: high value of capital relative to labor
Cashing out in exuberant capital markets:
• Rapid growth in 1960s made firms unaffordable to next generation
• ‘Hot’ IPO market
• IPO proceeds to individuals, not firm
Investment capital: increased value of capital in late 1960s for:
• large block trades
• transaction processing IT systems
148  A. von Nordenflycht
Management consulting
In analyzing consulting, I consider two somewhat
distinct types of consultancies: general management
consulting firms and IT consulting firms. The two
branches stem from different bodies of expertise—
general management consulting grew out of indus-
trial engineering and especially cost accounting,
while IT consulting grew from a computing/tech-
nology background (McKenna 2006; Kipping
2011)—and face differences in the role of capital
and standardization (Richter and Schroeder 2008).
The first consulting firm to go public was an IT
consulting firm, CSC, in 1963. As noted earlier, IT
consulting firms did not belong to ACME, so faced
no restrictions on ownership form.
The IT consulting firms tend to face higher capi-
tal requirements than firms in other professional
services, particularly IT firms that offer outsourced
data centers (Kipping 2011). For instance, data
from the 1992 US Economic Census indicate that
the ratio of depreciable assets to payroll—a measure
of the relative value of capital versus labor—was
twice as high in IT consulting (SIC 7373/NAICS
541512) as in law, accounting, advertising, and gen-
eral management consulting. Thus, the choice of IT
consultancies to be publicly traded may indeed be
linked to a higher relative value of capital.
General management consultancies first went
public in the hot IPO market of 1968–70. In addi-
tion to the three previously mentioned firms that
went public, another leading player, Cresap
McCormick & Paget (CMP), was acquired by
Citibank in 1970 (McKenna 2006). And as these
leading firms pursued public ownership, ACME’s
membership voted to repeal the prohibition in 1969.
Anecdotal evidence points to the conclusion
that, like ad agencies, consultancies went public to
cash out during exuberant markets, rather to raise
investment capital. The consulting industry experi-
enced strong growth in the 1960s (McKenna 2006).
Thus, firms’ values appreciated substantially, making
it difficult for retiring owners to sell their shares to
junior partners (Rothenberg 2003). The hot IPO
market offered an attractive alternative.
For instance, at Booz Allen Hamilton, the IPO
decision was fueled by the desire of senior partners
with large stakes to cash out (Rothenberg 2003). All
of the IPO proceeds went to the pockets of the senior
partners rather than to the firm. At CMP too, the
founding partners were seeking to retire and arranged
the Citibank merger after several mergers with other
consultancies fell through (McKenna 2006).
Investment banking
As noted earlier, there was at least one investment
bank (First Boston) that was already publicly traded
in 1960. It was not an NYSE member, so faced no
ownership restrictions. The first NYSE member to
go public, in 1969, was DLJ. DLJ was only 10 years
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old at the time and focused on the emerging seg-
ment of institutional investors, and thus faced a
need for greater working capital to facilitate large-
block trading (Donaldson 2002; Jenrette 2002).
DLJ told the NYSE it was going to leave the ex-
change for another exchange if it was not allowed to
go public. As in advertising and consulting, the ex-
ample given and pressure exerted by a member firm
trying to go public induced NYSE members to vote
to allow members to be publicly traded in 1970
(Morrison and Wilhelm 2008).
Industry participants and historians agree that de-
velopments of the late 1960s raised the value of capi-
tal. In the late 1960s, Wall Street experienced what
has been termed the ‘paperwork crisis’ (Wells 2000).
A long bull market, broadening public participation
in the stock market, and the rise of institutional in-
vestors who traded in large volumes (Donaldson
2002; Jenrette 2002) led to surging trading volumes.
This volume overwhelmed brokerages’ manual trans-
action processing capabilities, and many brokerages
lost track of their liabilities (Wells 2000). When the
bull market ended in 1969, many brokerages found
themselves in financial crises (Wells 2000). This
highlighted the need for investments in computing
systems (Wells 2000; Morrison and Wilhelm 2008).
In addition, the emergent demand from institu-
tional investors for large block trades facilitated by
short-term funding from brokerages increased the in-
dustry’s working capital requirements (Donaldson
2002; Jenrette 2002; Lufkin 2002).
Consistent with the aforementioned theory of
the professional partnership, Wall Street partner-
ships faced difficulties justifying and raising funds
for these longer-term investments. So the public
ownership appears to have been a solution to these
investment needs.

As Table 3 summarizes, the emergence of public
firms in investment banking appears to have re-
sulted from an increase in the value of capital, which
offers support for the ‘relative value of capital’ hy-
pothesis. However, this did not seem to be the case
in advertising or consulting. The firms went public
simply to cash out senior partners while equity mar-
kets were exuberant and receptive to new issues.
Thus, capital intensity does not appear to be a nec-
essary condition for the existence of public owner-
ship. More specifically, even where the value of
capital is relatively ‘low’, some PSFs have still cho-
sen to abandon the professional partnership and its
purported incentive advantages, simply to cash out.
Of course, this raises the question of whether such
PSFs—who choose the public ownership in pre-
sumably inappropriate settings—experience reduced
levels of performance or longevity, as would be pre-
dicted by the ‘mistake’ interpretation.
Characteristics of public versus private PSFs
In this section, I turn from cross-industry compari-
sons to cross-‘firm’ comparisons within the three in-
dustries where the public ownership emerged. The
question I address is whether differences across firms
in whether they choose public or private ownership
correlate with differences in firm size and capital in-
tensity—or with differences in the strength of profes-
sional norms. For each industry, I list and discuss the
ownership status of the largest 25 US firms in 2003,
recap existing research findings on the differences be-
tween public and private PSFs, and discuss historical
distributions of public versus private firms between
1960 and 2003 where relevant.
Advertising
Table 4 identifies the name, size, and ownership sta-
tus of the 25 largest US firms in 2003 in advertising,
consulting, and securities brokerage. In 2003, there
were only 5 public advertising agencies among the
industry’s top 25 (headquartered in USA).
However, four of these five were not only the larg-
est—they were the largest by far, representing 94%
of the total revenue of the top 25 firms. At the same
time, outside of the top 25, there were no other
public advertising agencies. So the distribution of
public and private ownership correlated tightly with
Journal of Professions and Organization  149
firm size: a few very large agencies are public, and
all others are private.
However, if we look back at the period when ad-
vertising agencies first went public, the correlation
with size is not as pronounced. And there is some
case to be made that the strength of professional
norms played a role in influencing which firms went
public—or at least which firms went public first.
Table 5 lists the 19 ad agencies that went public be-
tween 1962 and 1973, in chronological order of
their IPOs. The table also lists key characteristics of
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each firm at the time of its IPO.
One thing that Table 5 shows is that the agencies
that chose to go public varied widely in size. Eleven
of the 19 agencies were not among the 25 largest
agencies at the time they chose to go public. Three
were not even in the top 100.
The second point that Table 5 illustrates is that
five of the first eight firms to adopt public owner-
ship deviated in at least one way from the character-
istics of what might be considered ‘mainstream’ or
‘establishment’ agencies. The table identifies three
potentially deviant characteristics: young (<10
years in business); owned by a minority (in this
case, women or Jews); and having a strong creative
reputation, which typically comes from bending or
breaking conventional approaches to advertising.
Each of these might mark a firm as an ‘outsider’.
One could argue then that these outsiders were less
attached to the profession’s normative core, which
included the norm against outside ownership.
In the previous section, I argued that when ad-
vertising agencies first began going public, they did
so not because of any increase in capital intensity
but merely to cash out during periods of equity mar-
ket exuberance. So I interpret these two points
about the characteristics of ad agencies that went
public in the following way. In the context of cash-
ing out, the ‘relative value of capital’ hypothesis is
not a strong predictor of which firms elect to go
public. And variation in the strength of ‘professional
norms’ may in fact have some explanatory power.
Management consulting
For consulting, Table 4 indicates that while there
are many more public firms among the top 25 than
in advertising, there is not the same stark difference
in size between the public and private firms. Among
 150


Table 4. Largest 25 US firms in 2003, with ownership status: publicly traded firms shaded gray
Rank Advertising agencya Revenue Rank Consultancyb Employees Revenue Segment Rank Securities firmc Capital ($m)
($) ($m) (2001) (ee’s) ($m) ($)

1 Interpublic 7,981.4 1 Accenture 83,000 13,105 IT 1 Merrill Lynch

2 Omnicom 7,404.2 2 CSC 67,000 11,426 IT 2 Morgan Stanley 77,046,000
3 Grey Global 1,863.6 3 PWCC (IBM BCS) 55,000 6,400 IT 3 Goldman Sachs 57,714,000
A. von Nordenflycht

4 TMP Worldwide 358.5 4 Deloitte 37,790 3,150 IT 4 Lehman Brothers 48,330,000

5 Doner 114.2 5 Sema 19,349 2,262 IT 5 Citigroup Global Markets 44,860,000
6 Rubin Postaer 90.3 6 Mercer Inc 16,000 2,400 HR 6 Credit Suisse First Boston 30,810,929
7 Panoramic Communications 86.2 7 KPMG (BearingPoint) 15,000 2,368 IT 7 Bear Stearns 30,063,482
8 Richards Group 84.5 8 Booz Allen Hamilton 15,000 2,200 General 8 UBS Securities 8,246,832
9 Gerbig Snell/Weishemer 76.1 9 Hewitt 15,000 1,750 HR 9 Alliance Capital Mgmt 7,217,970
10 Wieden & Kennedy 73.8 10 CMG 13,484 1,336 IT 10 Deutsche Bank Securities 5,497,506
11 Cramer-Krasselt 72.7 11 McKinsey 11,000 3,300 General 11 Banc of America Securities 5,369,335
12 Ryan Partnership 56.3 12 CapGemini/EY US 9,800 2,637 IT 12 Charles Schwab 4,653,000
13 MARC USA 53.2 13 Perot Systems 9,100 1,332 IT 13 J.P. Morgan Securities 4,573,377
14 Kirshenbaum Bond 50.3 14 Towers Perrin 8,300 1,400 HR 14 UBS Financial Services 3,623,849
15 GlobalHue 49.5 15 Aon Consulting 7,863 HR 15 Wachovia Securities 2,221,676
16 Meridian 48.5 16 Keane 7,331 873 IT 16 TD Waterhouse 2,202,001
17 WestWayne 45.9 17 AMS 6,300 987 IT 17 Legg Mason 1,993,759
18 Bernstein Rein Advertising 43.4 18 Watson Wyatt 6,300 710 HR 18 A.G. Edwards 1,668,155
19 Cliff Freeman & Partners 38.0 19 IMS Health Inc 6,000 General 19 Prudential Securities 1,654,479
20 Abelson-Taylor 37.8 20 A.T. Kearney 4,000 434 General 20 ABN AMRO 1,647,522
21 Ackerman McQueen 34.0 21 CTP 3,824 587 IT 21 CIBC World Markets 1,590,568
22 BVK/McDonald 30.2 22 Gartner 3,700 General 22 Nomura Securities Int’l 1,576,328
23 Kupper Parker Comm. 28.7 23 Renaissance 3,000 437 IT 23 Fidelity Brokerage 1,436,696
24 Barkley Evergreen 27.9 24 Bain 2,800 825 General 24 SG Cowen Securities 1,369,996
25 Eisner Communications 26.4 25 CTG 2,800 263 IT 25 LaBranche 1,276,044
a
Source: Advertising Age, firm websites.
b
Source: Hoovers, Consultants News, firm websites.
c
Source: SIFMA Yearbooks.

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Table 5. Characteristics and ownership fates of IPO ad agencies (1962–80)
A: Characteristics of IPO Agencies B: Ownership Fate of IPO Agencies

Year Firm Size Age NOT in <10 years Female / Creative Size Firm Public Outcome
of IPO rank at IPO top 25 old Minority reputation rank in 1980
at IPO owner at IPO

1962 Papert Koenig Lois 74 3 x x x 1 J Walter Thompson Y

1963 Foote Cone Belding 6 90 1 Interpublic Y
1964 Doyle Dane Bernbach 14 15 x 6 Foote Cone Belding Y
1965 Grey 12 48 x 8 BBDO Y
1966 Ogilvy & Mather 11 18 11 Ogilvy & Mather Y
1967 Gaynor 92 16 x 12 Grey Y
1967 Adams Dana 317 1 x x 14 Doyle Dane Bernbach Y
1968 Wells Rich Greene 30 2 x x x 14 Needham Harper Steers privatized
1969 J Walter Thompson 1 105 26 Clinton E Frank privatized
1969 McCaffrey 34 36 x 30 Wells Rich Greene privatized
1969 Doremus 39 66 x 34 McCaffrey privatized
1969 Grant Advertising 45 23 x 39 Doremus acquired
1969 Lampert 158 21 x 45 Grant Advertising acquired
1969 Herbert Arthur 431 nf x 46 Tracy Locke privatized
1971 Interpublic 1 41 74 Papert Koenig Lois privatized
1971 Clinton E Frank 26 17 x 92 Gaynor Y
1971 Tracy Locke 46 58 x 158 Lampert unknown
1972 Needham Harper Steers 14 47 317 Adams Dana acquired
1973 BBDO 8 45 431 Herbert Arthur failed
Journal of Professions and Organization
151 

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152  A. von Nordenflycht
the top 25, it is not immediately obvious that firm
size is a deciding factor in the choice of ownership
type.
For consulting firms, the table also indicates each
firm’s main segment (IT, general, or HR). With this
coding, we can see that IT consulting firms ‘are’ pre-
dominantly publicly traded (13 of 14 firms). This is
consistent with the earlier discussion of the higher
capital intensity of IT consulting relative to other
types of consulting. More convincingly, in a system-
atic study of 119 large consulting firms in 2004,
Richter and Schroder (2008) show that firm size
and capital intensity are both significant predictors
of a consulting firm being publicly traded. Overall,
then, the contemporary distribution of public versus
private ownership is consistent with the ‘Relative
Value of Capital’ hypotheses.
What bears consideration, however, are the large
consultancies that have remained private. In the ab-
sence of constraints against outside ownership, in
the face of large firm size which reduces the theo-
rized benefits of the partnership model, and with
the opportunity to raise the value of the firm’s
shares via public ownership, why have these firms
chosen to stay private? For three of these five—
Deloitte, McKinsey, and Bain—there is some evi-
dence that professional norms have influenced this
ownership choice.
Deloitte consulting. Deloitte’s consulting practice is a
subsidiary of the US accounting firm, Deloitte LLP
(which itself is a subsidiary of the global accounting
firm, Deloitte Touche Tohmatsu). Thus, the owner-
ship prohibitions facing audit firms explain
Deloitte’s private status. An interesting question,
though, is why Deloitte Consulting’s parent firm has
not elected to sell it off, as the other accounting
firms did with their consulting divisions, after corpo-
rate accounting scandals led to pressure to separate
accounting and consulting.4 Another important
question for future research is whether Deloitte
Consulting’s private status has made it more
competitive (the ‘Mistake’ hypothesis) or less com-
petitive (the ‘Relative Value of Capital’ hypothesis)
vis-à-vis its main competitors.
McKinsey & Company. In the 1940s, McKinsey’s manag-
ing partner, Marvin Bower, adopted ‘professionalism’
as the firm’s key source of differentiation. In particu-
lar, Bower hoped to imitate corporate law firms to
establish an image as trusted boardroom advisors
(McKenna 2006). Thus, one of the main aspects of
McKinsey’s strategy was the adoption of profes-
sional norms, including organizational characteris-
tics commonly associated with law firms (McKenna
2006; Kipping 2011). So the firm’s choice of private
ownership stems, at least in part, from the owner-
ship model of law firms, even though that owner-
ship model is shaped by regulatory constraints.
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Furthermore, McKinsey’s close rivals in strategy
consulting, including Bain (also in Table 4) and
BCG, imitated this image of professionalism
(Kipping 2011), helping to explain their avoidance
of public ownership as well. I address Booz Allen’s
choice in the next section on relative performance.
And Towers Perrin became publicly traded in 2009,
via a merger with Watson Wyatt.
To summarize the management consulting case,
the distribution of public ownership is generally
consistent with the ‘Relative Value of Capital’ hy-
pothesis. But some of the exceptions—large private
consultancies—can also be explained by profes-
sional norms.
Investment banking
Table 4 indicates that by 2003 public ownership was
the dominant form for large investment banks. Only
one of the 25 largest US securities brokerage firms—
comprised primarily of investment banks and retail
brokerage firms—remained private (and that firm,
Fidelity, was a retail money management firm, not an
investment bank). Furthermore, 87 of the top 100 se-
curities firms were publicly traded in 2003.
Morrison and Wilhelm (2008) argue persuasively
that the proliferation of public ownership after the
repeal of the NYSE restrictions in 1970 corre-
sponded with increases in the value of capital that
affected different segments of the industry at differ-
ent times. The early adopters in the early 1970s
were almost all ‘retail’ brokerage houses: firms that
sold stocks to the public via extensive branch office
networks. The retail segment was more capital in-
tensive than other segments not only because it in-
volved branch networks but also because it faced
the greatest need for IT investments to deal with

the increased transaction volumes and the conse-
quent paperwork crisis of the 1960s.
A second wave of transitions to public ownership
occurred in the mid-1980s, involving ‘wholesale’ in-
vestment banks: firms that did not do retail distribu-
tion but instead focused on underwriting, trading,
and advisory services (such as M&A advising).
These firms faced an increased need for IT invest-
ments with the rise of the minicomputer and micro-
computer in the late 1970s and through the 1980s.
The capacity for powerful computation at the desk-
top facilitated the creation of new, more sophisti-
cated financial products and trading markets (e.g.
derivatives).
The third wave, from the mid-1990s to mid-
2000s, featured ‘boutique’ firms with strengths in
equity underwriting, research, and M&A advisory
services. These firms were the industry’s least capital
intensive and most dependent on human capital.
However, even these firms experienced an increase
in the value of outside capital investment for two
reasons: the rise of proprietary trading and the
weakening regulatory barriers between commercial
and investment banking.
The IPO of Goldman Sachs in 1999 illustrates
the organizational impact of proprietary trading. By
the mid-1990s, Goldman Sachs was perhaps the in-
dustry’s highest status firm, known for attracting
high-quality talent (Groysberg et al. 1999; Lorsch
and Tierney 2002; Economist 2006; Bidwell et al. in
press). As one of the industry’s last large partner-
ships, Goldman’s ownership structure was often
touted as a contributing factor to its ability to attract
and motivate top talent (Caplen 1995; Serwer
1998). In fact, Goldman’s partners considered and
rejected the idea of going public five times between
1986 and 1996, fearing it might degrade the firm’s
culture and its ability to retain talent (Groysberg
et al. 1999).
Groysberg et al. (1999) argue that Goldman’s ul-
timate decision to go public in 1999 was facilitated
by two changes during the 1990s. One was the
growth in the firm’s proprietary trading business,
which was putting large amounts of the firm’s capi-
tal at risk and exposing the partners to much greater
volatility. Second, as the firm grew and globalized
over the 1990s, it added more hierarchical levels,
undermining the firm’s culture and team spirit.
Journal of Professions and Organization  153
Consistent with the Relative Value of Capital hy-
pothesis, increases in the value of outside capital
and in firm size made public ownership more attrac-
tive to Goldman Sachs.
To explain the current prevalence of public own-
ership across US securities firms by 2003, it is also
important to take into account the steady deregula-
tion of the prohibitions against commercial banks
owning investment banks that occurred from the
1980s onward. As large commercial banks diversi-
fied into investment banking, the ability to offer cli-
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ents commercial loans—that is, to risk large pools
of capital—became an important factor in compet-
ing for investment banking services, including M&A
advice and other specialty services. Thus, capital be-
came important even for these supposedly low capi-
tal intensity functions. In the late 1990s, many
smaller investment banks were acquired by com-
mercial banks. By 2003, of the 87 securities firms in
the top 100 that were publicly traded, 66 were pub-
licly traded by dint of being subsidiaries of publicly
traded commercial banks and other diversified fi-
nancial services corporations.
Looking across the three industries with public
firms, we see patterns consistent primarily with the
relative value of capital interpretation: larger firms
and those for whom the value of capital is higher
are more likely to be public. However, where firms
do not face a strong need for capital (advertising
and non-IT consulting), variation in the strength of
professional norms may also play a role in shaping
firm’s ownership choices.
RELATIVE PERFORMANCE OF PUBLIC
VERSUS PRIVATE PSFS: IS THE
‘MISTAKE’ A MYTH?
Finally, cross-firm comparisons should ideally help
us to assess the hypotheses that follow from the
‘Mistake’ interpretation: that public PSFs should
underperform private PSFs, ceteris paribus; and that
public PSFs will not persist. However, comparing
the performance of public versus private firms is em-
pirically problematic because financial performance
of private firms is not publicly available, thus few rel-
evant studies exist. In this section, I note a few
pieces of evidence that speak to whether public
ownership leads to inferior performance for PSFs.
This evidence suggests that for large firms, public
154  A. von Nordenflycht
ownership is not associated with inferior perfor-
mance; but for small firms, it is associated with
lower performance and is ultimately abandoned as
an ownership form.
Greenwood, Deephouse, and Li (2007) compare
the performance—measured by revenue per profes-
sional—of private and public firms in a sample of
50 large management consultancies. They report
that private firms show higher performance.
However, their analysis includes both IT and gen-
eral management consulting firms, which vary sub-
stantially in their capital intensity and business
models. In particular, larger IT consultancies, which
are mostly public, tend to have lower-paid consul-
tants, relative to smaller general management con-
sulting firms (especially strategy consulting firms),
which tend toward private ownership. Thus, a com-
parison of revenue per professional measures differ-
ences in strategic position at least as much as
differences in underlying financial performance.
This claim is bolstered by research by Pickering
(2012), which shows that differences in both strat-
egy and accounting methods between public versus
private accountancies in Australia make revenue per
employee a flawed way to compare underlying prof-
itability differences between public and private
firms. In their aforementioned study of consulting
firms, Richter and Schroder (2008) conduct a simi-
lar comparison of revenue per employee between
public and private consultancies, but on a larger
(119) firm sample and using controls for differences
in size, strategy, and capital intensity. They report
no performance differences, once those additional
variables are controlled for.
Looking more historically, several consulting
firms that went public ended up reprivatizing, in-
cluding Booz Allen & Hamilton (1969–75), Arthur
D. Little (1969–88), and LECG (1997–2000). This
could be seen as support for the second ‘mistake’
hypothesis: that PSFs do not persist as public cor-
porations. However, Table 4 indicates that many
other consultancies have remained publicly traded.
Furthermore, Booz Allen’s decision to reprivatize
(and stay that way to this day) may have been
driven as much by the timing of its IPO as by any
organizational effects of public ownership.
According to a former officer,5 Booz Allen had a
bad experience with public ownership. However,
this experience was driven primarily by the fact that
the company’s IPO in 1969 occurred just before
both a general stock market decline and a recession
that significantly dampened demand for consulting
services. Booz Allen’s stock price fell from the IPO
price of $24 in 1969 to $2 by 1972. The public visi-
bility of the company’s troubles was embarrassing to
partners who sold themselves as management ex-
perts, and the low stock price made them hesitant
to make investments to preserve the company’s tal-
ent and culture, for fear that shareholders would
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view them as unwarranted private benefits.
However, public ownership did not lead to the de-
parture of talent, as very few partners left. And the
firm did not perform any worse than its private
peers, who were also suffering.
The firm went private 6 years later in 1975. And
this brief experience has left a legacy among the
firm’s senior officers that they will not try it again.
But its negative experience was arguably influenced
by adverse external conditions rather than a disad-
vantage in providing incentives to retain talent.
Similar to Richter and Schroeder (2008), von
Nordenflycht (2007), in a study of 122 ad agencies
from 1960 to 1980, finds no difference in perfor-
mance—measured by revenue growth—between
public and private firms overall. However, when in-
teracting ownership and firm size, the study finds
that ‘small’ public firms showed lower performance
than small private firms, while large public firms still
showed no difference from private firms.
The role of firm size in moderating the effect of
public ownership on performance is further revealed
when considering the ultimate fate of the 19 ad
agencies that initially went public, as summarized in
Table 5. Of the 8 agencies that were in the top 25 in
size when they went public, 7 remained independent
public corporations through the mid-1980s and
none reprivatized. Of the 11 that were outside of the
top 25 in size when they went public, by 1978, only
1 remained a public corporation. The others had ei-
ther failed, re-privatized, or been merged into larger
agencies. In other words, for small ad agencies, the
‘mistake’ hypotheses were borne out.
CONCLUSIONS AND DISCUSSION
This study’s motivating question is what the histori-
cal and cross-sectional distribution of publicly

traded PSFs means for our theory of the profes-
sional partnership. I proposed three explanations
that differed in the degree to which they challenge
the standard theory of how and where the profes-
sional partnership generates incentive advantages.
The mistake explanation preserves the theory, the
relative value of non-human versus human capital
explanation challenges the theory’s assumptions
about the value of capital to professional services,
and the professional norms explanation challenges
the core assumption that the partnership generates
incentive advantages. Each explanation implied dis-
tinct hypotheses about the distribution and/or per-
formance of public PSFs.
This review of the historical distribution of public
corporations across five professional service indus-
tries actually reveals some support for each of the
explanations. Cross-industry variation in the extent
of public ownership and cross-firm variation in the
choice of public ownership can be associated both
with professional norms and with firm size and capi-
tal intensity, supporting the ‘Relative Value of
Capital’ and ‘Professional Norms’ explanations. For
the ‘Mistake’ explanation, there is evidence from the
advertising industry that small public PSFs under-
perform and do not persist as public corporations.
I argue, though, that there is a hierarchical order
to the explanations, in the following sense.
Professional norms are the first-order factor in ex-
plaining the historical prevalence of the professional
partnership. The basic presence or absence of public
corporations in a given professional service industry
stems first and foremost from the strength of profes-
sional norms. Where professional norms are strong,
the role of firm size and capital intensity does not
matter. The almost complete absence of public cor-
porations across these five industries in 1960 can be
attributed to prohibitions against outside ownership
in all five, rather than to choices by firms themselves
to eschew outside ownership. But where public own-
ership has been allowed, it exists—not just in the
three industries where prohibitions were repealed in
the 1960s, but also among accounting firms not en-
gaged in public audit work and in the Australian le-
gal industry where ownership prohibitions were
lifted in 2007.
The second-order explanation is the relative
value of capital. Where professional norms are not
Journal of Professions and Organization  155
binding—where public ownership is not prohibited
or strongly discouraged—public ownership corre-
lates with firm size and capital intensity. This is illus-
trated by patterns from both ends of the spectrum.
Public ownership may be essential for PSFs facing
high capital intensity, as evidenced by the domi-
nance of public ownership among investment banks
and IT consulting firms in 2003. But for firms that
are small and not capital intensive, the professional
partnership may be the dominant model, as evi-
dence by the poor performance and brief existence
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of small public advertising agencies (however, simi-
lar evidence has not yet been gathered for small
firms in investment banking and consulting).
Third, the ‘mistake’ explanation, if it applies at all,
seems only to apply to small firms. In advertising
and consulting, large firms have adopted and per-
sisted with public ownership—even those facing low
needs for external capital. And two empirical studies
find no performance differences between public and
private ad agencies and consultancies, when compar-
ing large firms. Thus, for large PSFs, public owner-
ship appears to be a viable ownership form.
My overall conclusion is that there is little evi-
dence that the professional partnership generates
economic advantages, relative to the traditional cor-
porate archetype. The historical dominance of the
partnership archetype across professional services,
which has been interpreted as evidence of its eco-
nomic advantages in the professional service con-
text, can largely be attributed to normative
constraints, rather than managerial choice. In the ab-
sence of those normative constraints, large capital-
intensive PSFs adopt public ownership. And even
where capital intensity is low, public corporations
have emerged and thrived, apparently equally com-
petitive with private partnerships. To the extent that
small firms persist as private entities (whether part-
nerships or private corporations), this may simply
reflect the higher fixed costs of public ownership
rather than any incentive provision problems.
In other words, this analysis suggests that the
patterns of public ownership in professional services
indicate that the common theory that the profes-
sional partnership archetype generates advantages in
retaining or motivating effort from talented profes-
sionals may be flawed. Later, I discuss the potential
implications of this suggestion.
156  A. von Nordenflycht
Implications for research
A key contribution of this analysis is linking varia-
tion in the existence of public PSFs to variation in
the strength of professional norms. However, I have
taken these variations as given. Scholars have ques-
tioned whether the strength of professionalism as a
logic or ideology has been waning across all profes-
sions, losing ground to the commercial, free-market
ideology (Faulconbridge and Muzio 2009; Kipping
2011). But such a trend does not explain cross-
industry variation in the degree or timing of weak-
ening professional norms.
Professionalization has been explained by both
sociologists and economists as one possible solution
to the market failure that can arise in markets for
expertise (Parsons 1939; Blair and Rubin 1980; von
Nordenflycht 2010). Thus, differences in the
strength of professional norms may arise from dif-
ferences in the degree of knowledge intensity.
However, whether law and accounting are more
knowledge intensive than management consulting
and investment banking seems far from obvious—
an open empirical question at best. For instance,
scholars analyzing the underprofessionalization of
management debate whether it can be linked to the
nature of knowledge and work in consulting or to
path-dependent historical idiosyncrasies (Gross and
Keiser 2006; McKenna 2006; Kipping 2011). A
more systematic inquiry into the reasons for
variation in the strength of professionalism across
professions is thus a topic for continued future
research.
Independent of the question of why professional
norms vary, another important question to ask is
whether professional norms against outside owner-
ship are beneficial or detrimental to clients. The
rationale behind these norms is to protect clients
from conflicts of interest which would lead pro-
fessionals to exploit their expertise to benefit
themselves (and their investors) at clients’ expense.
In other words, the prohibitions are intended to
prevent professionals from cheating clients.
Whether such prohibitions achieve this objective is
an open question that has received little empirical
attention. Von Nordenflycht and Assadi (2013) ad-
dress this question explicitly, assessing whether pub-
lic securities firms cheat clients more frequently
than private ones. They find no steady-state differ-
ences in rates of cheating between public and
private firms. Additional empirical research on this
question would be invaluable.
On the other hand, constraints on outside capital
may mitigate the degree of competition in an indus-
try. In the name of preserving professional integrity,
professional codes have traditionally prohibited
a number of commercially competitive behaviors,
including soliciting competitors’ clients, advertising
(Cox, DeSerpa, and Canby 1982; Torres 1991), and
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even competing on price (Torres 1991; Morrison
and Wilhelm 2008). Several such prohibitions have
in fact been struck down or challenged in the USA
on the basis of antitrust laws (Torres 1991). Thus,
prohibitions on outside ownership may play a
similar role in constraining competition and, thus,
keeping prices high (Torres 1991; Clementi 2004;
Suddaby and Greenwood 2005). Such concerns
also motivated the Australian and UK govern-
ments’ liberalization of ownership restrictions on
law firms.
Thus, professional norms against outside owner-
ship may pose an important trade-off: on the one
hand, preservation of professional integrity and pro-
tection of clients against cheating, but on the other
hand, limited competition and thus higher prices.
So such norms may only justifiable if they do indeed
promote more ethical behavior and minimize cheat-
ing. Thus, empirical analyses of the effects of out-
side ownership on professional misconduct are a
critical area for future research.
The findings also have implications for the in-
creasing tendency to look to PSFs for lessons for
knowledge-intensive firms in general (Alvesson
1995; Scott 1998; Blair and Kochan 2000;
Lowendahl 2000; Teece 2003). This article suggests
that the distinctive ownership feature of the profes-
sional partnership archetype stems more from
strong professional norms than from knowledge
intensity per se. So if there is a societywide trend
toward a ‘reduction’ in professional norms in the
face of liberal, free-market reforms, then rather than
assuming that corporations will look increasingly
like PSFs, it may be more accurate to assume that
PSFs will look increasingly like traditional
corporations.

There is one major caveat to that last conjecture.
This article focuses on the presence or absence of
outside owners, which is just one distinctive dimen-
sion of the professional partnership archetype. My
analysis is silent about whether the ‘internal’ features
of the professional partnership yield advantages in
knowledge-intensive settings. In fact, there is anec-
dotal evidence that managers of public PSFs attempt
to retain internal features of a professional partner-
ship, such as an emphasis on equality, low levels of
hierarchy, the use of informal processes to foster a
strong spirit of teamwork (Groysberg et al. 1999;
Donaldson 2002). Furthermore, Empson &
Chapman (2006) compare two strategically allied
consultancies: one a public corporation, the other a
private partnership. They find that managers under
both ownership models express a similar commit-
ment to the ‘interpretive scheme’ of the professional
partnership model—or a ‘spirit of partnership’
(Donaldson 2002; Lorsch and Tierney 2002)—
which entailed limited managerial authority, high in-
dividual autonomy, and long-term over short-term
performance. This points to another direction for fu-
ture research on the appropriate organization of
PSFs (and knowledge intensive firms in general): de-
termining whether the internal features of the pro-
fessional partnership yield advantages in retaining or
motivating talent or in fostering teamwork; and
whether these internal features are compatible with
public ownership. As von Nordenflycht (2011b) ex-
horts the PSF research community, let’s get testing.
ACKNOWLEDGEMENTS
I thank Matthew Bidwell, as well as JPO editorial board
members David Brock, Huseyin Leblibici, Ian Kirkpatrick
and Pam Tolbert for insightful comments and helpful sug-
gestions on earlier versions of this paper.
FUNDING
This work was supported by funding from the Social Science
and Humanities Research Council of Canada.
ENDNOTES
1. Morrison and Wilhelm (2004, 2008) propose
another incentive-based theory that relies on
ownership allocation. They argue that the fact
that partners cannot sell their shares prior to
Journal of Professions and Organization  157
retirement makes them care about the firm’s
long-term reputation. This induces them to
make the effort to mentor the firm’s associates
(i.e. future partners). Thus, partnerships de-
velop higher levels of tacit human capital.
2. For example, the Hippocratic oath, by which
physicians pledge commitment to ethical prac-
tices, states:
‘I will use those. . .regimens which will ben-
efit my patients according to my greatest
Downloaded from http://jpo.oxfordjournals.org/ at Pennsylvania State University on February 20, 2016
ability and judgement, and I will do no
harm or injustice to them’ (North 2002).
Similarly, the ABA has articulated the ‘core
values of the legal profession’ which include
‘(1) the lawyer’s duty of undivided loyalty to the
client, (2) the lawyer’s duty competently to exer-
cise independent legal judgement for the benefit
of the client’ (American Bar Association 2000).
3. To be sure, the first US advertising agency to go
public (Albert Frank–Guenther Law), did so in
1929, at the peak of the bull market before the
Great Depression. It did so to pay off the mort-
gage on its office building, then reprivatized
soon after.
4. Four of the big five consultancies quickly be-
came publicly traded in 2001, either via IPO
(Andersen, KPMG) or acquisition by a publicly
traded parent (PricewaterhouseCoopers/IBM,
Ernst & Young/Cap Gemini) (Kipping 2011)
5. Unless specifically noted, the information on
Booz Allen comes from an interview with a for-
mer officer who worked at the firm from the
mid-1960s until the late 1990s.
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