Published in the San Diego Union-Tribune, June 19, 2023
by Neil Senturia
Let’s think about risk and outcomes.
Tim Koller and Dan Lovallo, McKinsey executives, recently put out a paper on “Overcoming a Bias Against Risk.” Their theme is that corporations have become too timid and the financial decisions of individuals in the arena of risk appetite are affected by a combination of personal greed and job security.
In other words, the first thought of leaders/executives is often, how does this decision affect me? First me, then the company. Behavioral economics cautions against taking undue risk and exercising overconfidence, but the duo says that playing small ball can actually be deeply harmful to the company.
Their theme is that executives need to be bolder in their innovation. Only making modest bets, only choosing incremental improvement to the technology or the product won’t create true company value.
But what about when it comes to the “bet the farm” decisions where an adverse outcome might create massive financial distress if wrong? Then companies need to exercise extreme caution. And they need to carefully vet and manage individual motivations.
We have all read about Fox and Dominion. An extensive article in The New York Times by Jim Rutenberg, Michael Schmidt and Jeremy Peters dissected the decision-making process of the corporate attorneys.
What I find interesting here is that massive decisions are often informed by human biases, petty jealousies, internal revenge, risk of humiliation, by confirmation bias — in other words, the assessment of risk, whether legal or a new product innovation, is often held hostage by a lack of “rational man behavior.”
After the defamation lawsuit was initiated, Rutenberg reports that the Fox legal eagles were making a persuasive case that they would either win outright or on appeal. They did not want to show Rupert any weakness. May I suggest perhaps they needed a quick visit to the resident shrink?
Why didn’t the corporate attorneys do their own document discovery review first? If they had seen the emails that they eventually had to turn over, well, I’m just saying.
My favorite personal attorney, Marty Waters, asked me 20 years ago: “What does the E in email stand for? Evidence.”
I am the CEO coach of a young man. He calls and describes his dispute with an ex-employee. The employee wants to be paid for the work time he ostensibly provided. My guy is outraged, offended and determined to not roll over. The disagreement difference was less than $6,000.
Stupid. Pay the man, because there is always the future risk of unintended consequences (employment lawyers).
A few years ago, I had to sue a former partner. He owed me money (at least that was my opinion). The facts were a bit fuzzy. It was not a slam-dunk case. I would consider it “found money.” I offered to settle for 30 cents. The ex-partner was outraged and suggested I pound sand. Then the lawyers got involved. Some documents (those pesky emails) appeared. On the courthouse steps, I accepted 84 cents.
When I was much younger, I had a massive case against Bank of America. Lots of discovery and finally, they agree to settle. We are at the lawyer’s office — with a giant conference room — and there are 23 neat piles of documents circling the table. Everyone is ready to sign.
At the last minute, with a bit of bravado, the BofA lawyer does a modest re-trade. Nicks us for a couple of dollars.
My business partner goes ballistic. He is outraged (do you sense a pattern here), his patrician sense of decency is offended, he wants to cancel the deal, next step scorched earth, so I take him physically out of the room and put him in the men’s room in a cubicle. “And don’t come out till I tell you.”
Then I walk back into the conference room, tell the other lawyer that I think his last-minute legal extortion is beneath an “officer of the court” — and then I sign every document. Deal closed.
We had spent more than two years and risked $700,000. At that point, we had less than $3,000 in our bank account.
The net profit was more than $14 million. And you didn’t want to sign?
This risk /reward stuff — it can make you crazy.
Rule No. 766: “I can’t help it if I’m lucky.”
— Idiot Wind, Bob Dylan