Business leaders must be careful about the messages they send. They are often unaware of the incentives created by organizational politics and how they can have a chilling effect on the amount of information available to the organization, which in turn affects the amount of risk the organization unintentionally assumes.
Take for example a situation I found myself in when teaching business law to business students in an MBA program. “Negotiate a fair deal,” I told them as I handed out their final exam, a mergers and acquisitions case study simulation. “That’s your assignment.”
The class was divided into transaction teams and given a fact pattern that included an unfolding due diligence process. Some of the new information was accurate and relevant; some was not. Some of it was communicated to everyone, and some of it was not. Would the team openly share information, or would individuals hoard it? What kind of corporate culture would they embrace in their negotiations? How would it impact the amount of legal risk each team was willing to take?
On the last day of class, the teams reported their results. The overwhelming majority reached what they thought was a fair deal. Less than 5% of the transactions resulted in gridlock due to irreconcilable differences.
When I asked how many students would have walked away from the deal if their own money were on the table, an amazing 95% of the hands flew into the air. “If we found this many problems now,” one student volunteered, “there’ll only be more later.”
“Okay, then why would you spend the company’s money when you know it’s a bad deal?” I asked. “Why accept these liabilities?”
“It was expected,” most of them said. “It’s what you told us to do.”
Well, not exactly. But it is how they interpreted my instruction. They did what they thought I wanted because they needed a passing grade and the course credit to graduate. That was their incentive. Unfortunately, their self-interest and the desire to please trumped their courage to speak out about the deal.
What the students didn’t know at the time was that the simulation was cobbled together from various real deals, including some deals that weren’t consummated due to unacceptable legal risks. It was literally a combination of the best of the worst.
But even with the facts stacked against a good deal, very few were willing to stand up and say it wasn’t good at any price when wearing their team hats. The prevailing thinking was that the right discount would compensate for the risk, even though in their hearts they knew that some actions shouldn’t be taken at any cost.
It makes me wonder about how many employees in the real business world turn a blind eye to a business or legal risk to protect their paycheck, their bonus, or their benefits. How many would raise a challenging issue if they thought that it would displease their boss and he’d shoot the messenger?
Answer: not many.
Given the corporate scandals and other meltdowns we’ve seen since the turn of the century, the degree to which even rank and file employees will look the other way is pretty far. It’s therefore up to the business leadership to be aware of the chilling effect miscommunications can have on employee behaviors and how it can inadvertently lead to high levels of legal risk within an organization.
The risk of retribution or retaliation should never outweigh the value of open and honest communication. If businesses really want to benefit from the intellectual horsepower of their employees, it’s essential that employees be allowed to safely challenge the status quo. Such loyal opposition facilitates legal risk management, letting companies identify problems and fix them while they are still small and relatively inexpensive.