PROFESSIONAL NORMS
Law is a regulated profession. Explicit and formal professional norms—some aspirational and some that carry the force of law—influence lawyers’ actions, as do more informal and implicit norms of behavior that exist within communities of attorneys. Lawyers swear oaths upon admittance to the bar, and they are bound by their state’s rules of professional conduct. We believe that most lawyers take their ethical obligations seriously and want to see themselves as loyal agents. This constraint, however, is obviously less than perfect. The profession’s norms afford great leeway for lawyers who wish to abuse the rules.
Tort law provides an additional constraint on lawyers’ behavior. In general, an attorney is liable for negligence in the handling of a client’s negotiations if she fails to exercise the ordinary skill and knowledge expected of attorneys who work in her field.8 This requires communicating offers and counteroffers to one’s client, advising one’s client on well-established legal principles that may affect the client’s decision to settle, and explaining to one’s client how a settlement might affect future rights and obligations.9 Although there are relatively few reported negotiation-related malpractice cases, in some but not all jurisdictions a lawyer may be liable if he mistakenly recommends settlement on the basis of an erroneous assessment of the settlement’s value,10 or if the lawyer showed poor professional judgment by engaging in questionable negotiation tactics that ultimately led to a less-than-favorable result for his client.11 All of these constraints can help dampen principal-agent tensions in the legal context. None is perfect, however. Ultimately, as we discuss in Part III, a lawyer and client must negotiate with each other to ensure that both parties are well-served by their relationship. For now, we merely point out that our third tension is highly relevant to the legal context.
THE APPROACH: MANAGING THE TENSION
The central challenge in agency relationships is to capture the benefits while minimizing agency costs. Our approach requires that the tension be acknowledged and managed explicitly; that principals and agents use the concept of comparative advantage to structure their roles and responsibilities; and that they aim to form a partnership based on reciprocal candor and respect. In Chapter 7 we discuss in some detail how this can best be done in the lawyer-client context. Here, we outline our general advice.
CREATE A COLLABORATIVE RELATIONSHIP THAT MINIMIZES AGENCY COSTS
The principal-agent tension should be acknowledged, not avoided, and treated as a shared problem. Fees and monitoring should be addressed explicitly, not left lurking under the table. Discuss these issues. Rather than have the principal worry silently about the agent’s choices and behavior, principals and agents should search together for ways to reassure the principal without overly burdening the agent. In our experience, openness and candor build trust.
The goal should be to find fee arrangements and monitoring mechanisms that are thoughtfully tailored to a given context. One size does not fit all. If a principal wants an agent exhaustively to research an issue where a lot is at stake, compensation by the hour may create a better incentive than a fixed fee. On the other hand, if a principal is worried about controlling costs and thinks she is in a position to monitor quality effectively, a fixed fee may be better. Consider the incentive effects of different fee arrangements and the feasibility of monitoring either the agent’s inputs (such as time) or the volume and quality of outputs. Similarly, to what extent can reputation constrain opportunism? Perfection may not be possible, but some agency relationships are better than others.
CONSIDER COMPARATIVE ADVANTAGE AND STRATEGY IN ALLOCATING ROLES
A principal and agent may allocate negotiation roles in a variety of ways. At one extreme, the principal may do all the negotiating herself, using the agent as a coach and consultant behind the scenes. At the other extreme, the agent alone may be at the bargaining table and may not even disclose the principal’s identity to the other side. There are many options in between. In some negotiations, the principals and agents are all at the table together. In others, the principals may negotiate broad deal points, leaving the agents to negotiate the detailed documents that implement the deal.
Sometimes conventions influence who is at the table and how roles are allocated. In residential real estate transactions, offers are generally presented to the seller’s agent, who then transmits them to the seller. Buyer and seller may have very little direct contact until the closing. Similarly, sports agents often deal with team representatives without their clients at the table. In litigation, clients typically act through their lawyers, and professional standards prohibit a lawyer from contacting an adverse party, for example, unless counsel is also present.
Principals and agents obviously should take such conventions into account, but they also must consider comparative advantage and may even want to challenge assumptions about who should be at the table. Once again, one size hardly fits all. The preferences, skills, knowledge, and resources of the principal and agent must be considered. What is the agent particularly good at? What about the principal? Who has more information that will be relevant to the upcoming negotiation? Who is more skilled at negotiating? Who has more time or desire to engage in the various tasks needed to prepare for the negotiation? By thinking carefully about their relationship and about what each can bring to the table, a principal and agent can structure their roles so that each does those things for which he is particularly suited.
Strategic implications must also be taken into account. Who your side sends to the table can depend on, and influence, who the other side sends. If your side brings a lawyer, the other side is more likely to bring one, too. Indeed, hiring an agent can often be a strategic signal. If an agent has a reputation for being a warrior, the message is very different than if an agent is known to be a collaborative deal-maker.12 Your side may wish to discuss with the other side who should be at the table and how the negotiation will be structured. Will principals attend the first meeting? Without such explicit discussion, an agent may show up alone when the other side expected principals to attend and participate. Or one side may bring a whole team of agents and advisors and unintentionally overwhelm the other side.
If an agent plays a role at the bargaining table, what is the scope of the agent’s authority or mandate, and what information is the agent authorized to share with the other side? If a principal is fearful that his agent will disclose too much, this worry can inhibit the principal from sharing necessary information with his agent. On the other hand, by sending only the agent to the bargaining table, a principal may be able to avoid having to answer awkward questions that might be posed by the other side.
The most salient question is whether the agent has the authority within a particular range to settle a dispute or make a deal. This is an important issue for principals and agents to discuss in allocating roles. Too often, however, an agent will simply ask the principal for her bottom line or reservation value to make clear just how far the agent can go. This can be a mistake for several reasons.
First, as Roger Fisher and Wayne Davis have pointed out, whenever there are multiple issues in a negotiation, “there is no one ‘bottom line.’ The minimum figure acceptable on one issue, such as price, will depend on what is proposed on other issues, such as credit, interest rate, closing dates, warranties, and restrictions.”13 By oversimplifying the principal’s interests, an agent may leave himself with much less room to search for trades that create value, and he may reinforce the notion that negotiation is purely distributive.
Second, if an agent merely asks for his principal’s bottom line, the principal has an incentive to manipulate the agent by exaggerating the reservation value in order to encourage the agent to work harder. The principal may fear disclosing her true reservation value, expecting that the agent may treat as a goal what the principal sees as a minimally sufficient point of indifference. Or, the principal may simply exaggerate to set high aspirations for the agent.
Finally, in some circum
stances, the principal cannot—if unassisted—evaluate her best alternative. In a legal dispute, for example, the best alternative to a negotiated settlement will typically be to pursue litigation. But without a lawyer’s help, most clients cannot make reasonably informed judgments as to whether a proposed settlement is reasonable in light of the opportunities and risks of litigation.
Rather than ask for the principal’s bottom line, the more appropriate, and subtle, question is how the agent’s authority should be adjusted during the course of a negotiation. Paradoxically, limiting the authority of agents may facilitate brainstorming and the development of creative solutions because neither agent has power to bind. At the outset of a negotiation, it may be best for the agent to have no authority to make a binding commitment on substantive issues but instead to have a broad mandate to design a negotiation process, discuss interests, and generate options.14
CONSIDER THE INCENTIVES CREATED BY AGENCY RELATIONSHIPS ON THE OTHER SIDE
In addition to thinking through principal-agent issues on your side, you should consider the relationships on the other side as well. Do not naively assume that the other side is a “unified actor” with a single set of interests. What are the agent’s incentives? A broker or a sales agent may get paid only if the deal goes through. A contingent-fee lawyer who is very pressed for time because of other commitments may be eager to settle. An executive on the other side may either support or oppose a merger, depending on how his career will be affected. In crafting proposals, it is not enough to consider only the interests of the principal on the other side. The agent’s incentives and interests should be taken into account as well.
BEWARE OF THE TACTICAL USE OF AGENTS
The agency relationship can be used to implement a variety of hard-bargaining tactics. An agent can play the bad cop to his client’s good cop, or vice versa. Ambiguities about authority can be exploited to take two bites at the apple: an agent at the table might extract a final concession from you in order to strike a deal, only to report subsequently that his principal demands more—he really had no authority to commit. A problem-solving negotiator must be able to recognize these tactics and deploy effective countermeasures. Naming their game and being explicit about process and authority can help, as we suggest in Chapter 8.
CONCLUSION
Agents are used pervasively in negotiations, and the principal-agent tension—like the other two—must be managed. Use of agents complicates bargaining by creating a web of relationships in which a variety of actors interact, each with his own interests, incentives, and information. The introduction of agents—and the system of relationships it generates—may be either a blessing or a burden with respect to the management of the first two tensions.
Consider the tension between empathy and assertiveness. An agent may compensate for his principal’s more limited repertoire of communication and interpersonal skills. For example, an agent may help his principal better understand the perspective, interests, and needs of the other side. At the table, an agent may be better able than his principal to demonstrate understanding of the other side and to assert effectively. In circumstances where the principals have difficulty communicating with one another, a pair of agents can construct a bridge between them.
But none of this automatically follows from the introduction of agents. Communications between the two sides may become more twisted, not less, as additional players enter a negotiation. If the principals receive all of their information about what’s going on across the table through their agents, a manipulative agent can seriously distort his principal’s perceptions and decision-making. Rather than helping his principal demonstrate understanding of the other side, an agent can inflame conflict and demonize. Rather than serve as a bridge, a damaged relationship between the two agents can itself become a barrier.
The same is true of the tension between creating and distributing value. As a counselor, an agent can help a principal better understand and prioritize his interests. An agent’s knowledge, skill, and contacts may help the principal in assessing and improving his BATNA. And an agent may be able to broaden the set of options under consideration. At the table, the agent may be more able constructively to lead the way. Agents help create a negotiation process that manages the distributive aspects of negotiation without inhibiting value creation. Even in the face of hard-bargaining tactics, a skilled agent may be able to change the game to problem-solving.
But bargaining through agents can destroy value if their involvement leads to escalating transaction costs and distributive stalemate. An agent may be a specialist in hard-bargaining tactics—a mercenary for hire. A real danger is that agents will merely increase costs, delay negotiations, and exacerbate tensions.
II
WHY LAWYERS?
Why are lawyers involved in negotiating disputes and deals at all? Although there are benefits to using an agent, there are also obvious costs. Often lawyers seem to make things worse. So why should a client hire an attorney to negotiate for her, rather than negotiate on her own behalf? The last chapter suggested that agency benefits derive from four sources: knowledge, resources, skills, and strategic considerations.
KNOWLEDGE
Lawyers are, first and foremost, experts in law and the legal system. When a client’s negotiation involves legal issues—when it occurs in the shadow of the law—the client most likely will need a lawyer’s assistance. In dispute resolution, a lawyer can invoke a court’s jurisdiction, evaluate the legal merits of a case, and determine whether a proposed settlement meets the client’s interests. If a lawsuit is filed, a lawyer can help the client through the maze of legal procedures to prosecute or defend the suit. Litigators know how to file complaints, argue motions, and manage discovery. As the case unfolds, the lawyer’s procedural moves and counter-moves will greatly affect the litigation’s value and the parties’ perceptions of that value. Thus, as we explain in detail in Chapter 4, in dispute resolution a lawyer’s knowledge about the law can profoundly influence the value of any negotiated resolution of a case.
In deal-making, legal knowledge also gives business lawyers a comparative advantage over their clients. Should a group of doctors structure a new business as a partnership or a corporation? How can a Korean entrepreneur and an American financier create a joint venture? How should lenders finance a new Hollywood spectacular? Business lawyers understand the transactional alternatives permitted by law and the implications of various legal rules relating to corporate governance, taxation, and securities. If a client has never done a similar deal, most likely she will be unfamiliar with such issues. Corporate attorneys can help identify the opportunities and risks in a transaction and create language that allocates risks to the client’s benefit. And in long-term contracts, lawyers can spot potential future problems and plan for them. Chapter 5 explores how deal-making lawyers typically manage the process of commitment, create incentives for the parties to honor their agreements, and allocate future risks in case something goes wrong. In short, to the extent that knowledge of the law is highly relevant to shaping a deal or resolving a dispute, lawyers will tend to play a more central role in the negotiations.
Beyond legal expertise, a lawyer may have specialized knowledge that is valuable to a client. Some lawyers are experts on finance; others have an insider’s knowledge of a particular industry, with a deep understanding of its informal norms and practices. In Silicon Valley, for example, a small group of lawyers often represents start-up companies. These lawyers know the conventions that characteristically structure these deals—what percentage ownership the venture capitalists are likely to want, for example, and how much representation they will seek on the board of directors. For an entrepreneurial client seeking financing, these lawyers hold a comparative advantage on the business side of a deal as well as on the legal side.
RESOURCES
Lawyers also possess special resources. Access may be the best example: lawyers often know the right people. These Silicon Valley lawyers have conne
ctions to the area’s venture capitalists and can provide valuable contacts for entrepreneurs. Similarly, many Washington lawyers invest in cooperative, long-term relationships with regulatory agencies or congressional committees. Such relationships can help a client achieve her goals more efficiently than she otherwise might.
A lawyer’s reputation is another advantage he brings to the negotiation table, because it carries an implicit guarantee about how the client will behave. For example, when start-up companies go public, they often retain attorneys who are well-known in the investment banking industry. These attorneys help them establish contact with investment bankers, but also the attorneys’ credibility can be a real asset. Clients seek out such lawyers to act as the glue that holds a deal together.
SKILLS
Finally, a lawyer may have comparative advantages simply because he is a better negotiator than his client. A lawyer may be more articulate in expressing his client’s interests. Maybe the client isn’t comfortable with the bargaining process and gets upset when things heat up. Or maybe the client has bitter feelings toward the other side and knows that her lawyer could deal with the issues more dispassionately and effectively. Whatever the reason, clients often hire lawyers for their negotiating skills as well as for their knowledge or resources.
Beyond Winning Page 11