The Avoidance of Business Disputes Rests on a Foundation of Ethical Conduct
By: Jeff Grody
Prior to joining Orchid Advisors last month, I enjoyed the great privilege of serving as Chief Legal Officer of Colt Defense LLC for almost nine years. There were very few things I did that weren’t interesting, challenging and fun, but at the top of the short list of things I didn’t enjoy was fixing problems that could have been avoided. Spending time fixing a problem meant not spending time helping the company sell product and make money. Business disputes were particularly wasteful of time and management attention and were an unnecessary expense.
I devoted considerable effort to preventing business disputes. At Colt, we paid attention to the contractual commitments we undertook, we endeavored to make sure that those with whom we did business also understood and abided by their commitments, we looked down the road to see potential trouble coming, and we employed a variety of techniques for diverting potential trouble when something went wrong. I learned over time that much of what needs to be done for a business to avoid disputes with third parties can be built into the business’s day to day processes. Thinking of discrete business functions as parts of a system into which controls can be built is the starting point. For example, an international sale of firearms, from the point of initial contact with a customer through fulfillment of the order and any post-sale issues, involves numerous functions in a manufacturing company, including sales, finance, materials, manufacturing, shipping, export and ATF compliance, among others. Understanding the linkages among functions, creating procedures—internal controls—to avoid mistakes, training employees in the procedures and, finally, adhering to the procedures are the necessary first steps in building a dispute- and violation- free company in any industry. Orchid Advisors consultants have been helping Fortune 500 and other companies for the past 20 years create and implement systems that reflect these dynamics.
Good systems, clear policies and tight internal controls can only take you so far, however. The judgment and decisions of individual employees will, at the end of the day, determine how effective a company is at avoiding disputes. Employees who act improperly will defeat the best of systems, and do so every day. A supervisor who cuts corners on a customer contract in order to reduce costs creates dispute risk. A quality manager who approves deficient product so the company can meet a delivery deadline creates dispute risk. An engineer who steals a third party’s design creates dispute risk. The Vice President who lies to a third party as a means of addressing the company’s inability to perform a contract creates dispute risk. The best of systems, procedures and policies will fail to prevent disputes if a company’s employees act in ways that provoke them.
In our experience, the one way to line-up the behavior of everyone in the company properly is to ensure that ethical behavior is understood, at all levels of the company, to be the only way the company does business. Every employee must understand that, under all circumstances, the most important thing is that he or she do the right thing. Smart companies know this, but they also know that doing the right thing can be hard. People who do the wrong thing generally aren’t bad by nature. Many times good people choose to do the wrong thing—knowing it is wrong—because they perceive the company’s best interests, or sometimes their own, as requiring that they do so. Therefore, employees need not only to be taught that “doing the right thing” is the only acceptable way to behave, they also need to know where to go for help when figuring out what to do is a challenge. Finally, in the well-run company, there should be consequences for failing to uphold corporate values.
I joined Orchid Advisors because the firm’s methodology employs the same approach to compliance that I do to the avoidance of business disputes—build the solution into the fabric of the company so that the day to day behavior of employees leads to the intended outcome. In the coming weeks and months, I will use this forum to explain techniques for building trust, avoiding disputes, and addressing other legal risks by incorporating sensible controls into a company’s business processes.
It should be understood, however, that success in the avoidance of commercial disputes and compliance problems ultimately depends on a Board of Directors and CEO who consistently set the right “tone at the top” of the organization. The starting point for an ethical company is leadership that consistently delivers and reinforces the message that their company always does business in an ethical manner. That message should be transmitted and retransmitted downward not only in words but more importantly by behavior of supervisors at all levels of the company. Each manager must keep in mind that everything he or she does will be observed by others and taken as the real example of the company’s values.
Business systems that assist a company in avoiding disputes and compliance problems facilitate growth. Orchid Advisors helps clients create robust infrastructures that give CEO’s, Boards of Directors, and other decision-makers confidence that their organizations are able to undertake new challenges successfully. Read more about our Strategic Lifecycle Consulting Services.