KPMG’s new chief executive Jon Holt has taken over the Big Four audit giant this week in what can charitably be described as a challenging time for the firm.
His predecessor Bill Michael resigned after a backlash to comments he made in a virtual town hall meeting where he told staff not to moan about Covid-19 working conditions and described unconscious bias as “complete crap”.
Former audit head Holt will have to “steady the ship” following Michael’s exit, in the words of one ex-partner, as well as deal with longer-standing issues for the firm such as staff morale, the upcoming results of the probe of its part in the collapse of Carillion, and the potential loss of talented staff tempted away by greater rewards elsewhere, partners and ex-partners of the firm said.
Holt also faces the task of turning around the firm’s profitability, which has fallen from £356m in 2018, to £307m in 2019 and then down 11% to £288m in 2020.
Partner profits at KPMG are down more than 20% on the £715,000 partners were paid as recently as 2014, and are comfortably the lowest of the Big Four firms.
Scandal upon scandal
KPMG has undergone a series of scandals in recent years with Michael’s spectacular blunder in February, which grabbed headlines everywhere, not even the most recent to have emerged.
“There are new fires every week,” a partner no longer with the firm said.
The Financial Times reported on 12 April that the Financial Reporting Council had made early-stage enquiries into KPMG’s audits of advertiser M&C Saatchi which misstated its profits by more than £14m, it told the London Stock Exchange last year.
Meanwhile, the publication of the audit regulator’s decision regarding KPMG’s audit of Carillion is expected shortly, with reports the firm could be fined up to £25m by the regulator for its failings in the run up to the outsourcer’s 2018 collapse.
The KPMG partner who led Carillion audits, Peter Meehan, quietly left the firm on 1 April in what another former partner said could be an ominous sign of the outcome of the FRC’s investigation.
“Culturally, the company is tired because there is a scandal every couple of weeks,” the former partner said. “Imagine having to deal with that as an employee and explain it to your clients, it’s not easy for an organisation to go through that constantly.”
Michael’s comments and ensuing exit hit KPMG’s standing hard, with only McKinsey’s reputation worse than KPMG’s for the period from December to February, according to a recent ranking of the reputation of professional services firms by stakeholder intelligence firm Alva.
“This issue was particularly damaging for KPMG because of the nature of what professional services firms do,” Alva co-founder Alastair Pickering said, noting its prominent role in advising on issues such as diversity and inclusion.
“There is a reputational risk gap between what has been said and the reality of what has been seen to be done,” he added.
Poor assessment-reward model
Holt will also have to focus on mending fences with staff and restoring some much-needed stability for the firm following Michael’s scandal-hit reign and his dramatic exit.
“Top of Jon’s in-tray is going to be steadying the ship; that is number one, two and three in his in-tray,” another former partner said.
“One of the big things is really reconnecting with our people,” a KPMG partner said, who then pointed to the firm’s controversial forced distribution curve assessment system as a key drag on staff morale.
In forced distribution assessment models, which are also known as “rank and yank,” employees are graded and ranked with the top percentile rewarded and the lowest percentile treated as underperformers.
Critics of this type of model argue it can lead to poor morale and encourage bad behaviours and gaming of the system.
The firm told staff in February that it was moving away from a set distribution in its assessment model and said it will now allow greater flexibility in rating distributions, a person with knowledge of the matter said.
The partner said the assessment system underpinned a lot of negative behaviour at the firm and said its replacement would be a key feature in improving morale among staff.
“Getting the employee experience right will be very important,” they said.
A person close to KPMG denied that staff morale was a problem, and said recent surveys showed engagement levels had improved and staff were satisfied with the support they have been offered throughout the pandemic.
This has included introducing a special leave code to allow people to take unlimited time off to care for family and friends, as well as allowing staff to flex working hours to better suit caring commitments, the person said.
The person said the firm had also worked hard on investing in its culture in recent years, pointing to a gender balance of 51.2% male versus 48.8% female across the firm and initiatives such as its Black heritage talent insight programme, aimed at students of Black heritage interested in a career in consulting. The firm has also put effort into empowering parents, aiming to support parents at the firm with one-to-one and group coaching.
Can Holt do it?
Ex-audit head Holt was nominated by the board for the role of chief executive on 31 March with a majority of the firm’s partners endorsing the decision in a vote this week.
Partners and ex-partners speaking to FN were broadly positive about Holt’s appointment, but he was very much seen as a “safe choice” in the word’s of one former partner.
“Jon is a very good guy, very well-respected, level-headed and will play it straight down the line,” a partner said. “I suspect he will be conservative with a small c,” they said of his leadership approach.
“His first job will be getting consensus and people backing him and setting out his strategy and what he will do,” an ex-partner said.
The current partner agreed, arguing that Holt, who has spent much of his career in the firm’s Manchester office, will need to embark on a charm offensive to raise his profile within the firm.
“I suspect many people don’t know him so he will have to build a profile in the business appropriate for a chief executive,” they said.
Costing the damage
When Michael was elected as chief executive in 2017 he was reportedly described as “the Donald Trump candidate”, with partners saying he was elected as a hard-nosed commercial leader who could turn around KPMG’s languishing profitability.
However, Michael’s reign did not usher in a new financial dawn for the firm, despite aggressive cost cutting which has included a partnership restructuring, the sale of its Canary Wharf headquarters and the disposal of its pensions business.
KPMG’s partners are paid much less than any of their Big Four rivals, with average pay sliding 11% last year to £572,000 which the firm attributed to the Covid-19 pandemic.
“You’re well adrift of the rest of the Big Four and you are going further behind”
In contrast, Deloitte partners received an average of £731,000 for the last financial year, even with a steep 17% pandemic-related decline.
PwC UK partners received an average of £685,000 last year, while EY partners were paid an average of £667,000.
Partner profits at KPMG are down more than 20% on the £715,000 partners were paid as recently as 2014.
“You’re well adrift of the rest of the Big Four and you are going further behind,” one ex-partner said, saying that KPMG’s partner profitability is now comparable to challenger firm BDO which paid its partners £602,000 in 2019 and £518,000 in 2020 following the impact of Covid-19.
Holt will now be in charge of trying to turn around KPMG’s woeful numbers, with one of the firm’s partners saying “the return to increased profitability will be one of Jon’s challenges”.
An ex-partner added: ”Jon is going to have to show to the partners and the associates that he is focusing on the economic health of the firm.”
A person close to the firm said KPMG’s remuneration packages were “competitive” and said the firm had recently paid bonuses to reward staff for their work during the pandemic.
Big change ahead for the Big Four
The firm Holt has taken over this week could look very different when his term ends in September 2025.
The FRC told the Big Four firms in October that they had to operationally separate their audit arms from their consulting businesses by 2024 at the latest.
In a possible sign of things to come, KPMG sold its pensions arm in a management buyout backed by private equity firm Exponent in March 2020 for a reported £200m.
Its restructuring arm is also on the verge of being sold for a reported £400m in a management buyout backed by private equity firm HIG.
Partners and ex-partners speculated there could be more carve-outs with other parts of the firm’s advisory business deciding to strike out alone.
“I am sure there will be teams within the firm looking at that. I suspect the leadership are working very hard to make sure that doesn’t happen. That will be a real shame for the firm if that came to pass,” one partner said.
“Inevitably when you see high multiples being paid the teams being left behind will think, ‘Hang on, what about our team?’”, the partner said.
“I’d be surprised if any professional team in the Big Four aren’t listing their options and saying ‘let’s consider where we are and determine whether we would do this or not,’” another partner said.
A third partner, however, argued that the restructuring business faced greater issues with conflicts than other parts of the firm and pointed to Deloitte’s sale of its restructuring unit to Teneo as an example of the specific challenges restructuring faces within a Big Four firm.
“The conflicts are most acute in restructuring,” they said. “There aren’t the same external drivers in other parts of the business,” they added.
A person close to the firm said it was committed to the multi-disciplinary model and had “no plans” to sell further business units.
Holt will also have to keep hold of the firm’s best partners who might be tempted to follow lucrative opportunities elsewhere.
“They are talent shops,” an ex-partner said, arguing that holding onto the firm’s best people will be a challenge, particularly if they think they can get paid better outside the firm.
The audit separation also raises the question of whether the firm will eventually split between its audit and non-audit arms.
“We are separately operating anyway,” a partner said. “It will ultimately be a legal separation and a question of whether you ultimately spin the whole thing off.”
There is no doubt that Holt has a real challenge on his hands with multiple legacy issues to clean up and new obstacles looming on the horizon.
Improving morale and increasing profitability will be Holt’s main tasks, which one partner said would go hand-in-hand.
“We are a people business,” they said. “Clients are crucial to our business but we won’t have any clients without the best people who feel supported and inspired to do great work. We need a lot more of a focus on getting the best out of our people,” they added.
Mending the firm’s culture and boosting confidence both externally and internally will be another key test for the new boss.
“Culture has been coming through as an issue and they haven’t solved it, they pretended they dealt with it and now they are really going to have to deal with their cultural issues and I hope they do,” an ex-partner said.
“With a new leader there is always a new hope,” they added.
To contact the author of this story with feedback or news, email James Booth