It’s What Works

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A few years back, Matt Levine was working crazy hours as a young attorney at a premier New York law firm.1 On more than a few occasions he would work until 3:00 or 4:00 in the morning, slide under his desk for a couple hours of sleep, then be right back at it come 6:00 a.m. Which has more than a little to do with a mistake Matt made that — he was certain — would get him fired and maybe end his law career.

Matt was part of a team of attorneys assisting a Midwest retailer with a very complex negotiation. His job was straightforward: keep track of all the details that got hammered out each day and update the contract accordingly. The negotiations dragged on for months. But eventually all the issues got resolved, both parties signed, and Matt headed home for some much-needed sleep.

The next day Matt set about tidying up his case files. Before long he came across an old email which said, with respect to one particular aspect of the agreement, that Matt’s client was supposed to be paid $425 million. Matt felt an immediate knot in his stomach — because he knew the contract he had drafted, and that everyone had just signed, actually said his client would be paid $400 million.

But Matt didn’t panic… yet. He assumed he’d find a subsequent email saying the parties had agreed to lower the amount to $400 million. He searched and searched. No such email. Eventually he admitted the terrifying truth — he had written a $25 million mistake into the contract, entirely to his client’s detriment. Matt went to his boss, sure he was about to be fired. Together they called the client.

Matt was already playing out scenarios in his head. Likely case: the other party to the deal responds, ‘The contract says we owe $400 million. You signed the contract. $400 million is all we intend to pay. End of story.’ Then Matt’s client fires their law firm, and the firm fires Matt. Complete end of story.

Better case: the other party says, ‘Hey, the contract says we only owe you $400 million, but we understand that was a mistake. So to show you we’re good guys, let’s split the difference.’ The law firm probably gets fired. For sure Matt still gets fired.

Matt says looking back, “I thought business was a game in which you sort of score points, and they [the other party to the contract] had scored this point, through my fault, and they were going to get something for it.”

Back to the phone call. The retail boss listens to Matt’s story, pauses… and then laughs out loud. He finds it funny that his fancy New York law firm screwed up. Then he says, “Don’t worry. We’ll fix it. No problem.” He calls his counterpart at the other company, describes the mistake, and they both agree to amend the contract to reflect the $425 million figure that should have been there all along. Crisis averted. Nobody gets fired. Life moves on.

OK, hopefully you’re right at the stage where you’re thinking, ‘Good story. And the point is…?’ First, though, let me tell you what the point of the story might be but isn’t. The story’s point could be that there is a different approach to business (and life) in the Midwest versus New York City. The Midwestern retail boss immediately assumed that his counterpart would ‘do the right thing’ and agree to fix the contract to reflect what both parties had actually intended. Matt in New York City automatically assumed that the other party would take advantage of his error, pocketing half or more of his $25 million mistake. And that difference in assumptions may, in fact, reflect some intrinsic differences in business practice between New York and the Midwest. Or it may reflect a difference in orientation between business people and attorneys. But that’s not why Matt’s story is worth our attention.

Question: Why didn’t the story play out the way Matt expected? The simple answer — but the wrong answer — would be, ‘Because the other party was stupid. The agreement both parties signed stipulated a $400 million payment. Contract law makes clear that only that $400 million amount is binding. Which means that in agreeing to amend the contract the other party gave away $25 million for no good reason.’

Matt, as we know, thought of business as a sort of game. So do economists, who use games to model all sorts of human behavior. In Matt’s view of the business game, his mistake gave a $25 million ‘point’ to his client’s opponent, one they would certainly use to their advantage.

But that logic makes sense in only a very specific sort of game — what economists refer to as a one-time game. That’s where two strangers face off for a moment, competing to win as much of a fixed-pie payoff as possible, knowing they’ll never see each other again.

But that’s almost never the sort of game that takes place in business, or in life. Mostly we encounter what economists describe as recurring games — we interact with people with whom we are likely to engage again and again. Success in that sort of game requires entirely different behavior.

Matt now realizes there was a very good reason his mistake turned out so well. The signed contract was “… not the end of the deal. You don’t just cut a check and walk away. They [the other party] were paying our client to provide services over the next couple of years— So they had every reason to keep a good relationship — both for that deal and, in general, to keep a reputation for being honest and dealing fairly with people.”

So here’s the point. Matt is not a theologian, or a pastor, or a social worker. He is a New York City lawyer. Which means Matt absolutely functions in the ‘real world,’ not some hoped-for better world imagined by idealists. And yet Matt now realizes that it was entirely sensible for his mistake to be resolved so easily and successfully. More specifically, because of the recurring-game nature of business, it was entirely rational for both parties to do something never taught in business school — practice Golden Rule behavior.

Really? Golden Rule behavior? Absolutely — the other party behaved towards Matt’s client precisely the way they would want to be treated had the situation been reversed, despite the fact that it cost them a cool $25 million to do so. And Matt’s client fully expected them to behave in just that way.

Why? Because Golden Rule behavior — treating others the way we want to be treated —  is the only behavior that really works in business (and in life). It’s the behavior that creates trust and fosters relationship. These are the essential building blocks of business success — trust and relationship with customers, with employees, with suppliers, etc. In fact, without trust and relationship, business quickly grinds to a halt. (Which, by the way, is why drug deals on TV crime shows so often end in shootouts.)

There is a foolish view often unthinkingly given credence in the business world — let’s call it the Gordon Gekko credo — that business is a cutthroat, zero-sum game in which only the most shrewd and selfish survive. But taking advantage of others — breaking the Golden Rule — always kills trust and relationship. Which makes it the very essence of business foolishness.

Treating others the way you would like to be treated is, instead, the only pathway to trust, to relationship and, therefore, to sustainable success. It’s what works. Which is precisely what Matt learned from the golden response by both parties to his not-so-costly-after-all $25 million mistake.


Notes:

  1. Matt’s story is recounted in NPR’s Planet Money podcast #563: “I Was Wrong.”

The material provided herein has been provided by Eventide Asset Management, LLC and is for informational purposes only. Eventide Asset Management, LLC serves as investment adviser to one or more mutual funds distributed through Northern Lights Distributors, LLC, member FINRA. Northern Lights Distributors, LLC and Eventide Asset Management are not affiliated entities.

 

This post first appeared on the blog at EventideFunds.com. It was republished here with permission from the author.

Featured photo by Joan Campderrós-i-Canas on Flickr, used under a Creative Commons Attribution license.