Uneven bargaining power exists at some level in all negotiations. One side may have more money, more knowledge, more skill, more resources, yet both sides have something of value desired by the other – which is why they are talking. How each party to a negotiation views their position and power relative to their potential partner’s position or power deeply impacts the process. The values, ethics and level of need of each party often defines how a party will leverage its power to achieve a desired outcome.
The psychology of the negotiation dance and the interplay of ethics in the potential range of outcomes has been examined and discussed by many. Check out Carrie Menkel-Meadow and Michael Wheeler’s What’s Fair: Ethics for Negotiators (Jossey-Bass 2004) for an insightful and thorough resource.
Looking for the overlap in each side’s objectives (the frequently cited “win-win” approach), I have found that the most productive and the least costly outcomes are characterized by fair and balanced agreements. Where excessive leverage is used to extract agreements, possible upside may be limited, and damage could ensue, because the disadvantaged party is less motivated and may ultimately find it preferable or necessary to breach the agreement.
Domination and advantage-taking by any means or cost, even in some rare cases through illegal and unethical acts, does happen. When I witness these behaviors, as I have on a few occasions in my career – most recently the startlingly illegal and unethical acts of a client’s lender and largest competitor working together to create a monopoly in a small industry – it drives home the point that there are predictors or red flags that can be observed, which should guide the unwary away from these dangerous situations.
There is a tension between “getting a deal done” quickly and getting a fair outcome. Sometimes companies follow Warren Buffett’s model of handshake business deals. Their focus is consistently on “the relationship” and “the business,” and their inclination is to trust their partners regardless of the risks. When it works, this model works great. The focus should be on the relationship and the business. If business proceeds successfully, the partners’ trust and reliance will naturally increase. For Warren Buffett, the handshake deal works well. Mr. Buffet has the financial resources to protect himself and pursue legal remedies against a partner who proves to be untrustworthy. But a partner without Mr. Buffet’s resources may find our justice system to be woefully inadequate.
Everyone complains about our litigation system. Companies are rightfully upset about “harassment lawsuits” brought by unhappy plaintiffs (or inspired by a plaintiff’s attorney) with no real merit. But it should also be noted by parties with less bargaining power in a negotiation, that justice is virtually inaccessible to those with limited financial means. A more powerful adverse party may use financial muscle to manipulate the legal system to gain unfair advantage. Sometimes, as lawyers, we downplay this possibility, because we know (at least theoretically) that our legal system has error correction built into it – with appeal processes and financial recovery available to an ultimately prevailing party. We forget that the Bad Guys “win” simply because they have the financial staying power to use the system unethically. A meritless lawsuit may expose a plaintiff to attorney’s fees – but first the harmed defendant must finance a process that results in a judgment in their favor, while experiencing the harm caused by specious litigation.
Avoiding messy situations at the outset by finding the Right Partners is key, whether your company is large or small. If you have higher leverage than your prospective partner, you can afford to be somewhat more risk tolerant. Mr. Buffet’s leverage is his financial strength and business control, making him a partner that all but a select few would want to cross.
What are these “red flags?”
- Reputational Facts. Though it may seem like an unnecessary and time-consuming chore, everyone needs to be reference checked. In the financing context, exceptional VCs pride themselves on their relationships as well as their most recent success. Experienced and successful VCs often propose less onerous and more balanced terms than their peers. These VCs know that success of their investment involves trust and business success that benefits all stakeholders. They also enjoy the power of their leverage, so, like Mr. Buffet, they are less likely to be crossed or challenged (who would want to be blacklisted from their network?). Lenders should also be investigated. Large organizations may have a reputational legacy of troublesome behavior. Are they known for ruthless, aggressive or unethical practices? Could be a clue that this potential lender relies on their leverage for unilateral business advantage rather than for mutual business success.
- Business Terms. How balanced are the terms? Does the agreement work now and in the longer term? One red flag that indicates a tendency toward unethical behavior is when a more powerful partner knowingly seeks terms that are of questionable enforceability or legality. A few examples of unenforceable or questionable terms that appear often are: noncompete agreements in California (terms that do not fit the narrow California exception permitting enforceability – which involves acquisition of a business interest); agreements not to “hire” as opposed to “solicit” employees in California; agreements with provisions that are contrary to public policy (eg waiving certain employment claims, or agreeing not to pursue the option of bankruptcy protection), among many others.
- Reasonable Players. Are your future partners smart, successful players with a leadership style that encourages flexibility and mutual success? Is there a high level of respect being demonstrated by the other side? Does the opposing side see value in your success? I am sometimes told by clients that they “need” to do a deal at any cost. If that is true, then the downside scenario should be understood and accepted, not just by the deal-makers, but all involved in the business deal. Trusting a partner of questionable ethics is trouble. As the old folktale about the scorpion and the turtle teaches, a scorpion is still a scorpion.
- Gut Feel. Realize that a good arrangement is healthy. Stay focused on objectives and understand your partner’s needs and wants. Don’t be intimidated. Get your objectives and priorities on the table respectfully. Listen, don’t leap. Take your time and be sure you get it right for both sides. You may need this transaction today, but, in most cases, you also want a long-term partnership. Make sure you have the Right Partner at the table with you.
