New Year’s Eve is always a magical time. It’s a tipping point between old and new and this year it’s extra special because tomorrow will bring the dawn of a new decade in addition to a new year. While we may be eager to forget the decade that began with the financial scandals of Enron and Worldcom and ended with mortgage meltdowns, and Tiger Woods falling from his pedestal; it is always cheaper to learn from other people’s mistakes. That’s why I want to spend a few minutes on the three most important legal literacy lessons of the past decade in this, my last blog posting of the year.
1. Bending the rules can cause them to snap back in your face.
What I’m talking about, of course, are all of those overly clever off the books accounting techniques used by Enron and others to boost their earnings per share. At the time those practices may not have been illegal per se, but they were nonetheless a manipulation of the truth that helped create a false appearance of propriety. Just because it was technically legal didn’t make it right. Those techniques were smoke and mirrors, and when the smoke cleared the “smartest guys in the room” were under indictment and are now doing jail time. We also have a new law called Sarbanes-Oxley that requires big companies to do what they should have ethically been doing all along – provide accurate and transparent financial information.
Today we’re watching the rule of law snap back in the area of executive compensation and exotic financial products – those that allegedly contributed to the mortgage crisis. (Did anyone really believe that if you slice, dice, and repackage these mortgages enough that you could safely squeeze out risk? Isn’t that like saying if you cut cookies into small enough pieces the calories fall out and you can then stick them back together without consequence? Hmmm . . . a derivative cookie.) When the existing law is insufficient to right a wrong, a new law is created to fill the gap. This is not rocket science. The best way to avoid regulation is not to give regulators a reason to regulate you.
2. The only thing worse than bending the rules is not understanding the rules in the first place.
Ignorance, or denial about the facts, can set you up to fail. Home buyers who entered into mortgage agreements they didn’t understand and got in over their heads are a perfect example of that. Contracts are nothing more than a set of rules that govern a transaction. Your New Year will go much smoother if you take the time to read and understand your contractual obligations before you sign on the dotted line. It’s all about managing expectations.
Not understanding how bad behavior drives new regulation is another recipe for disappointment and failure. It’s fed by the mistaken belief that no one will know or that they can somehow get away with it. Yet, the principle of regression (the rule many don’t understand) predicts that bad habits eventually do catch up with us because statistically over time the highs and lows of our experience continuously regress toward the mean — toward average. With respect to item #1 above it means it’s not a matter of if the bad stuff catches up with you, it’s only a matter of when.
3. Unwritten rules can trip you up as badly as the written ones.
When Goldman Sachs’ CEO Lloyd Blankfein said Goldman was doing “God’s work” during an interview with the London Times the public relations backlash was swift, immediate, and even comedic. When Tiger Woods’ infidelities first became public the response was stunned disbelief, but is slowly translating into the loss of sponsors, first Accenture, and now AT&T.
In sum, if you don’t want you or your business to be the butt of someone’s joke it pays to be grounded in the facts and in the expectations of your constituents. Taking the high road is more profitable in the long run.