Monday, November 13, 2006

Kids With Candy Bags and Financial Transparency

Children can teach us so much about human nature. . . . and a lot about how not to do business (yet so many never learn from childish mistakes). I was told a story about a teacher who sat a bunch of young children in a circle in the classroom. She asked the kids if they wanted a "surprise." Naturally, they all got excited exclaiming "yeah!!! we want a surprise. We love surprises." The teacher said to the children that she would give them each a surpise only on one condition . . . they must promise never to show anyone else what they got. "We Promise!" they exclaimed as their imaginiations ran wild with wonder. The teacher then handed out paper bags with candy inside to each student. Each on of them peered into the bags from above, and with mouths watering, they cheered with excitement. Ooohs and Aaahs filled the room. Minutes later, she then asked each of the children to pour out the contents of their bags onto the floor in front of them. As each one did so, it became clear that one child had 5 candies, another 7, and yet another 25. What do you think happened? Well, Naturally, what was a positive experience was turned to fightining, resentment, and jealousy. Some kids were arguing that it was not fair that some children got more than others, and they all started to fight. You and I both know that this is an important lesson in human nature . . . one that is no different when you are an adult. For those who are really keen, this is also an important lesson in how NOT to run a business:

So, What do kids with candy bags have to do with financial transparency? Well, it certainly answers the question of how much transparency in a partnership is too much. Lawyers in partnerships are like kids with candy bags. They sit around a table every once in awhile and pour out their spreadsheets filled with data on theirs and everyone elses billable hours and business originations, then they fight like all hell trying to justify who should get more, who should get less and why. They never learned a very simple lesson from childhood. Consequently, partners in law firms tend to endure the most challenging, negative, and nasty work environments of any profession. I was told by one partner for a big firm in crisis (it eventually dissolved) that "the compensation committee, which was (no surprise) comprised of the highest producers in the office, went into the board room, closed the door, and then accommodated themselves out of existence. The level of greed and nastiness was beyond belief." What is the lesson here? The lesson here is that you cannot beat human nature. If you want a culture of collaboration and teamwork, you simply cannot have 100% financial transparency with the partners in the firm. Everyone has a self-interest in the numbers, but not everyone is competent (99% of partners are not competent) to decide how to divide profits fairly. If you put a bunch of hungry children in a room with candy and asked them to divide it amongs themselves and 10 that are not present, what do you think will happen?

Now, let me draw a distinction. We are operating in a time where shareholders are pushing corporate America for greater financial transparency. How does that jive with what I am saying? Here is the distinction: Financial transparency in corporate America is about protecting the integrity of decision making through disclosure. In Partnerships, the opposite can often be true since the shareholders are employees of the firm (therefore subject to self-dealing). Here, protecting the integrity of decisions is accomplished by safeguarding against too much Financial Transparency (partners usually demand 100%). If law firm compensation committees set compensation criteria and policy in advance and made those policies clearly known to the people, then it would be unnecessary to distribute individual numbers to the committee for comparison because no subjective review and decisions need to be made on hard data. In other words, the application of sound policy can replace the comparative analysis with regard to hard data, leaving the subjective anaysis to the most important factors (additive rather than comparative) that are more difficult to calculate. This way the old white men in the boardroom spend less time whipping it out and comparing size and more time actually thinking about the qualitiative ways in which their fellow partners contributed to the firm. Waht a wonderful change that would be, right? Ignorance can, indeed, be bliss. After all, Great performance is not great beacuse everyone else sucks. Great performance is, well, simply Great! So, learn a lesson from childhood and stop spending your life making everyone else the benchmark of what you "deserve" in life. It is no way to live. . . and certainly NO WAY TO RUN A BUSINESS!

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