EY risks paralysis and a power vacuum after break-up failure

Carmine Di Sibio was derided by some colleagues as a mere “caretaker” when he was appointed as global boss of EY in 2019.

The Italy-born executive confounded expectations by attempting a once-in-a-generation break-up of the Big Four firm. But after months of internal arguments and delays, the deal’s collapse has pitched the firm into fresh turmoil — and thrown his legacy into doubt.

“I don’t think anybody knows what happens next,” said one partner involved in the plan to break up the firm’s audit and consulting businesses.

EY had trumpeted the split plan — code-named Project Everest — as the “road map for reshaping the profession”. Di Sibio even won a two-year extension to his term as global chair and chief executive to get the deal done, despite reaching the firm’s mandatory retirement age of 60 last month.

Messages to partners and staff after the break-up was called off emphasised that leaders still want to find a way to split the business. But who will actually be in charge of a renewed effort is unclear with the future of Di Sibio and other senior executives in the balance.

It was “unlikely” that Di Sibio would lead a different type of restructuring, said one person familiar with the situation. However, his supporters say the chief executive should stay on for at least a while to give the firm some badly needed stability.

What went wrong?

Di Sibio gambled that he could win support from EY’s 13,000 partners for a deal that would have liberated its consultants from conflict-of-interest rules that restrict them from advising audit clients.

The firm had announced in September that the break-up plan would be put to country-by-country partner votes but it never got that far.

Project Everest’s fate was sealed over the Easter weekend when the executive committee of the US business voted against proceeding. Such is the US firm’s power — accounting for 40 per cent of EY’s $45bn in revenues last year — that going ahead without it was not an option.

The proposed split, which included a stock market listing of the consulting business, would have handed audit partners cash payouts of up to four times their annual earnings. Consulting partners would have received shares in the standalone advisory business worth up to nine times their annual pay.

But despite the riches on offer, leaders of the US firm torpedoed the deal, which had been hanging in the balance since US boss Julie Boland angered her international colleagues by calling for a “pause” last month.

“The world today looks different from when Project Everest was initially conceived,” said the US executive committee in a memo to partners and directors on Tuesday, seen by the Financial Times. “Having this transaction process over our heads for an extended time would increase the risk of distraction, and we should not continue to incur transaction-related spend for an outcome that remains uncertain.”

A central concern of some partners on the US executive committee was the deal “perimeter”, which determined how the different parts of the business should be divided in the split.

Di Sibio’s plan was for most of the $11bn-a-year tax business to be spun off as part of the consulting arm, but senior US auditors objected, fearing that the firm would lack the expertise needed to deliver quality audits.

Pausing for breath

“Everyone still agrees with the strategic intent and the strategic questions that were behind [Project Everest]. How to execute it was the issue,” said one senior EY partner involved in the split negotiations. “In particular, it was execution around one deep specialist service that both businesses wanted to have, which was the tax business.”

Another partner said the plan to pursue some form of alternative transaction was “bad news” because it “will mean the paralysis continues”. 

A third partner said that governance may need to be addressed before any other transaction is attempted.

“Nobody wants to go through this again where the [US executive committee] plays along for the better part of a year and then basically blindsides everybody,” the person said, reflecting a view among some partners internationally that the US business backtracked on the plan to put the Everest split to partner votes.

Finding a deal that EY’s partners can agree on will be the difficult part. Alternatives that will be considered are expected to include a sale of the advisory business to a rival, a large technology company or private equity. “I think we’ve got to keep all our options open,” said one of the partners.

A memo from the global leadership sent to EY’s 390,000 staff on Tuesday signalled that there would need to be big changes in strategy even without a split on the immediate horizon.

“Winning in a rapidly evolving market and better preparing ourselves for a future transaction will require us to adapt our governance, operating model, cost structures, capital investments, and go-to-market approach,” the 18-person global executive committee wrote in the memo, seen by the Financial Times. “Globally, we are committed to changes that allow all of our businesses to thrive.”

Asked what those changes would be, the senior partner involved in the negotiations said: “We’re only a couple of days after making the decision so I think we need to do a bit of reflection.” 

The reference to “cost structures” has caused anxiety in some quarters. One of the partners called it “deeply worrying”. 

Another concern for partners will be the bill from the aborted break-up plan, which had already run to hundreds of millions of dollars and will now need to be covered out of profits.

Power vacuum

The burst of uncertainty over the future also risks causing partners to reconsider their position at the firm as rivals try to capitalise from the turmoil.

A partner at another consulting firm said he had been contacted by multiple people from EY seeking new jobs. “It is lucky for EY that the consulting market has slowed down, otherwise all the other firms would be going in there like going into Whole Foods with a giant shopping basket,” he said.

“We will still keep shaking the tree and see what falls out,” said another rival partner at a Big Four firm.

The biggest question mark, however, remains at the top of the firm — nobody inside EY or in the industry is sure of who can or will replace Di Sibio.

“There is going to be a power vacuum”, said one of the partners at a rival firm, pointing to the involvement of almost all of EY’s senior leaders in the Everest debacle.

Part of any successor’s task will be to build bridges between the warring factions within EY and heal the wounds that have opened up in recent months.

One of the partners who was heavily involved in the failed plan said: “Everything is repairable and we can rebuild trust, but you’re not going to do it overnight.”