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Excessive CEO power, a flawed governance model and an attitude that “revenue is king” undermined trust built up over decades, the review says.
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Switkowski exposes flaws in PwC’s results-focused culture
28 September 2023
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Excessive CEO power, a “disproportionate focus on revenue growth” and a complex structure with poorly defined responsibilities are among seven
“key shortcomings” at PwC Australia, the Switkowski report says.
The report, released yesterday, said the firm found itself in the unenviable position of losing the trust of stakeholders and regulators in the wake of this year’s tax scandal, in which PwC partners shared confidential Treasury plans to help clients sidestep tax.
The review by former Telstra chief Ziggy Switkowski identifies a range of problems with the firm in which a “shadow side” emerges from its high-performance, results-focused culture, and where its growth agenda came at the expense of values and purpose.
“One of the strongest signals of what senior leadership values in an organisation is who gets promoted and rewarded and why,” the review said.
“Interviewees and focus groups consistently reported that at PwC Australia ‘revenue is king’ and partners who exceed financial targets are celebrated as ‘heroes’. Referred to as ‘rainmakers’, individuals that exceed targets have been rewarded by promotion into key leadership positions.”
“Some rainmakers were described as the ‘untouchables’ or individuals to whom ‘the rules don’t always apply’.
“They think the revenue they bring in means they can do what they want.”
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Governance was flawed, it said, with the board of partners lacking sufficient independence from the CEO and senior leaders to offer uninhibited oversight.
“As partners of the firm, all members of the board structurally report, at least indirectly, to the CEO and members of the CEO’s leadership team in their ‘business’ roles,” the review said.
“Given this circularity, the review formed the view that members of the board of partners are likely to perceive themselves as having insufficient seniority to challenge the CEO and their leadership team, and that in recent years this may have led to sub-optimal management of important issues.”
“The power of the board of partners to hold the CEO and senior leaders accountable is also constrained by the fact that, under the partnership agreement, the appointment and removal of a CEO is not formally within the board’s authority. Instead, at PwC Australia, the CEO is appointed through election by the partnership body.”
This gave the CEO a “strong mandate” and wide-ranging powers to set strategy, appoint managers, admit partners and set policies for performance evaluation and income.
“Without sufficient ‘checks and balances’ provided by the terms of the partnership agreement, the decision-making of the CEO – and the ‘tone from the top’ that he or she chooses to set – is largely a function of the personality of the executive in the position at any time.”
Members of the executive board, it said, were expected to be loyal to the CEO and not “ruffle feathers”, and its make-up had been “inappropriately overweight with representation reflecting the ‘business empowerment’ model”.
A restructure announced in July aimed to rebalance the executive board but it was too soon to know whether it was successful, the review said.
PwC’s risk governance and compliance frameworks were also criticised for being over-complex and at different levels of maturity within its different service lines.
“There has not been, and does not yet appear to be, an overarching framework providing clear instructions to partners and staff as to how to identify or manage the various types of actual, potential, or perceived conflicts.”
“There is also insufficient guidance for how to differentiate between various types of conflicts of interest. The lack of a clear framework makes it challenging for partners and staff to understand when, and how, to seek approval, or how to escalate concerns regarding conflicts.”
It found a similar lack of an overarching management framework for issues management, with no “clear firm-wide process to identify, assess, escalate, manager, monitor and resolve issues”. As a result, they were handled in a piecemeal fashion that lacked consistency, rigour and clarity.
“The process for reporting, escalating and managing issues across a wide spectrum of events – from inappropriate workplace behaviours to legal or compliance breaches to unethical dealings – is confusing. The terms ‘ethical conduct’ or ‘business conduct’ are not clearly and consistently defined.”
The review, which was commissioned in May, makes 23 recommendations across governance, culture and accountability.
They include restructuring the board for independence and reformulating its responsibilities; revising the CEO appointment process; more rigorous operating and decision making practices for the executive board; improving risk management practices and establishing clearer accountability for it across the firm; strengthening the approach to conflicts of interest; implementing a framework for issues management; strengthening the partner remuneration process; and embedding purpose and values in a revised strategy.
PwC said it accepted the recommendations in Switkowski’s review and would change its governance, culture and accountability.
That would include applying ASX corporate governance principles “to the extent it is feasible” and the appointment of three non-executive board members. It committed to publishing comprehensive, audited financial statements by September 2025.
“Over the past four months, PwC has installed a new CEO and leadership team, exited those who failed in their leadership duties, announced plans to appoint two non-executives to its governance board, divested its government business, and created a new role of chief risk and ethics leader,” it said.
“The review details shortcomings in the firm while highlighting a failure of leadership - both by individuals and as a firm. Over time, this failure of leadership contributed to an erosion of good governance and culture, weakening focus on our professional and ethical standards.”
“Our commitments to change:
- Put our purpose and values at the core of everything we do.
- Increase the independence and effectiveness of our governance board.
- Improve discipline and rigour of executive decision making.
- Strengthen risk and conflict management and accountabilities.
- Embed a culture and practice of constructive challenge.”
PwC Australia CEO Kevin Burrowes said: “From the top down, we will learn from these findings, rebuild and re-earn the trust of our stakeholders. That is our promise to our people, partners, clients and our communities.”
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