Cultural Disconnect: An Alert
It is clear to the point of obviousness that there are cultural differences between the entrepreneurial mind-set and the corporate mentality, having largely to do not so much with perverse people but with the structure of large institutions. James Buchanan won the 1986 Nobel Prize in economics for elaborating elegantly on a more or less obvious proposition: that people within a political system behave so as to maximize their personal outcomes. Such is also the case in a large industrial organization, and it is critical that the founder understand the point so that he can appreciate what is motivating his corporate partners. He must understand that the corporation itself is an abstraction. It represents a basket of a number of interests, sometimes synchronized and sometimes competing. It acts, as only it can act, through people-a large number of people processing decisions vertically up and down the corporate hierarchy and horizontally from division to division. Theoretically, people in a large company are working together for the good of the institution; in fact, of course, they are often competitors. For some, their near-term, and perhaps long-term, interest is focused first on figuring out ways for each of them to succeed within the corporate structure, and, often as a complement to that strategy, figuring out ways that their competitors for desirable job opportunities fail; finally, often in distant third place, the players attempt to maximize the outcome of the corporation itself. This phenomenon was colorfully brought home to the author when his firm represented a major Midwestern corporation engaged, as a defendant, in product-liability litigation. Manager A, who had since gone to other responsibilities within the corporation, had initiated the product in dispute, but Manager B was providing direction to the litigation team. It became difficult to figure out the instructions being given by Manager B; they seemed to be self-defeating, until the key to the Rosetta Stone made itself apparent: Manager B actually wanted his corporation to lose the lawsuit, thereby embarrassing Manager A and maximizing manager B's chances to beat A to the finish line-the job for which they were both competing. This lesson needs endless repetition when dealing with a major company. The people at the table have their own agendas, which do not necessarily coincide with the interests of the company for which they work.
Control of a joint venture is usually vested in a committee composed of representatives of each side, the people most involved in the process and invested with the power of decision. As stated by E. Martin Gibson, then-president of the health and science group of Corning Glass: "The kiss of death for any joint venture is for its board to be a play board when the real power is back at corporate headquarters." When, as is often the case, the parties have discrete areas of responsibility. Start-up doing the research and Goliath providing the resources for sales, marketing, and distribution. Start-up's management may not realize how important it is that they have a voice in the management of Goliath's sales force. If Start-up's management does not have a say in the decisions whether to discharge unproductive salespeople and replace them, to direct salespeople in the field to concentrate on high-profit lines of business, and to target particular customers, then its products can be at the mercy of distracted, uninterested salespeople concentrating on other items in Goliath's line and the venture can fail-an annoyance to Goliath but a disaster to Start-up. "Milestones," achievement benchmarks which can be monitored by the controlling committee with respect to technical qualifications, on-time performance, and market penetration, ordinarily control funding provided by Goliath. Consultants are often employed to break ties if the parties disagree on progress payments against ambiguous milestones, an ambiguity that is often inherent because the "product," if truly the end result of experimentation, is shrouded in some mystery when the drafting occurs. The issue of cost overruns is often neglected in the initial drafting, usually to the detriment of Start-up, which must bargain for needed completion monies without a shred of leverage in the absence of contractual provisions.
As a practical matter, a system of reporting is critical to smooth sailing. Frequent reporting is needed to alert Goliath to a pending milestone and generally to maintain interest in the project among easily diverted managers in the Goliath organization.
The failure to think through appropriate procedures for unwinding the venture is an often-encountered sin. Frequently, one of the venturers-the classic start-up-will have staked its business existence on the success of the venture. How can the status-quo ante be restored if the venture doesn't work, at least to the extent the start-up enjoys a residual chance at resuming independent existence? In drafting what amounts to a prenuptial agreement anticipating divorce, planners should focus on the questions set out below.
Part II next Tuesday, September 10th, 2013.
Joseph W. Bartlett, Special Counsel, JBartlett@McCarter.com
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