Research On The Governance Problems Of Professional Service Firms

With the coming of the age of knowledge-based economy, Professional Service Firms have sprung up and become an important form of firm of the age. With its swift development, Professional Service Firms have become profoundly influential that they evolve as the driving source of economic growth of every country. Compared with the traditional ones, Professional Service Firms are prominent in terms of the highly customized specialized services and face to face interaction between staff and customer. In this way, the significance of material capital can be reduced while that of human capital raised.Human capital, instead of maiterial capital, has become an important source for firms to create value, which has profoundly changed the pattern for firms to carry on commercial activities and organize work and structure. Those result in sea changes in the nature of the firm and related issues, such as the power and boundary of a firm. Further, those cause major changes in firm governance. Those firms then turn into bonded unit in nature that exchange the human-capital-based critical resources for power. The power mentioned here can be defined as the control power over critical human capital, through possession of which the counterparties try to protect their own interests. However, the power does not only come from specialization, but from customization or other things. Moreover, the economic boundary plays a better role than legal boundary in explaining the boundary problem of those firms.Different natures of firms decide the difference in management. Firms providing professional services should aim at protecting the interests of critical human capital, maintain the integrity of those critical resources (that is the critical human capital) that will create value, and encourage the investment in and effective protection of human capital through reasonable power transaction. More effective governance mechanisms are "profit-sharing" mechanism and "promotion or discharge'" mechanism. Different governance mechanism will be applied according to various situations in the corporations. It can be proved by the modeling established with sample data from American accounting firms.The thriving of professional services market has brought enormous opportunities to those professional services firms on mainland China, which are still at the initial stage of development with many potential problems in management. The only way out is to get a deeper knowledge of their own natures, to emphasize the importance of human capital, to improve the mechanism and model of governance, and to preserve the common reputation of the industry, so as to build up the brand effect.