Jack Van Hartesvelt on Transparency in Negotiations

Jack van Hartesvelt is vice president of a real estate development trust fund and former vice president of Westin Hotels. In both positions he has been responsible for negotiating multi-hundred million dollar deals. But he decided he wanted more transparency in the process of negotiations. He tells what happened the first time he tried it[1]:

I have been involved in many contract negotiations. I am not a lawyer, but I am with them all the time, in this constructive confrontation. Here’s the way it typically works. If I want to get a 3 percent fee, I would tell the other side that I absolutely must have 4 percent, recognizing that they are going to have to drag me down to 3 percent to feel like they “won.” The whole negotiation is based on a lie.

This had been wearing on me for a long time and, in 1992, I decided I didn’t want to do negotiations the standard way anymore. Part of this came from a bad experience I had had, where I really took advantage of someone—completely legally. But I didn’t like the result. The second part came from my faith—there was this dissonance between what I believed in that part of my life, and what I did in the rest of my life. I told our lawyers, “I think that there is a fair deal out there for everybody, and I want to actually make sure everybody gets what they bargain for. I am not going to say I want something when I don’t really want it, and I don’t want someone’s legitimate interests to be undermined.”

The lawyers told me I couldn’t do that. The board of directors expected me to put these projects together for our benefit, only protecting the interests of our company. They said they wouldn’t work with me unless I got permission from the board to amend the approach. In fact, the board didn’t realize all of the twisting and turning that went into a typical contract negotiation, and to their credit they just said, “Yes. Those are actually our values, too.” I do not think they realized how hard it is to do that sometimes.

The first negotiation I did after that was on a project in the South with two real estate developers who were really struggling due to an economic downturn. They had lost some of their properties, others were embattled. They were locked in unpleasant confrontations with lots of bankers, lawyers, and partners. It was a very difficult time for them. I walked in and said, “Here is the way I want to do the deal. I want this to be a deal that is good for both of us, so I will look out for you and I want you to look out for me.” They looked at me skeptically and said, “Right, sure.”

Early in the negotiation I said, “If you turn to page 3, section 1.2.5, it says your development fee is 3 percent, but if you go over the development agreement here, it says that if you are ever in default for any reason, you can never recover your fee. I think that could deprive you of what you actually earned, so I would like to change this provision here or that provision there so that I cannot legally take away what was rightfully yours.”

They laughed uneasily, but of course agreed to the change. A little further in the negotiations, I pointed out another combination of provisions that could be bad for them. They looked at me as if to say, “Who are you? What is going on?” I reminded them that I wanted this deal to work out for both of us and would be most grateful if they could find something that might not be good for me. They did not do it, not right away anyway, but I really wanted to do this thing right. I was pumped, and so I never backed down. By the end, they also identified some provisions that would be better for our side.

The project ended up doing very, very well. In the end, we made a $20 million profit; they got half and we got half. These two developers who were on the brink of bankruptcy at that point in time came out very well, and so did we. They told me later that the approach to the negotiation also changed them, and that they decided that they want to do business like that in the future. We developed a lifelong relationship.

For an extended conversation with Jack on this topic, see "Jack Hartesvelt - Hard Choices for the Long Term" in the Nov.-Dec. 2012 issue of Ethix.

God Loves Honest Scales in Finance

By Brian Isaac Bauer

“Do not use dishonest standards when measuring length, weight, or volume. Your scales and weights must be accurate. Your containers for measuring dry materials or liquids must be accurate." (Leviticus 19:35–36, New Living Translation)

“The LORD detests the use of dishonest scales, but He delights in accurate weights.” (Proverbs 11:1 NLT)

The scales we use today are abstract. Modern finance is the set of scales relied upon by business leaders, owners, and customers. Accounting reports tell owners about the performance of their business. A cash flow analysis tells a buyer whether or not they are getting a good deal when acquiring a company. A discounted cash flow view can help a manager know if his project is worth launching. And here’s where things get interesting. Accounting is governed by a set of rules, but the rules must be interpreted and the methods for adhering to those rules spark vigorous debate. Publicly traded companies are required to have their books audited by external auditors, but that’s still no guarantee of universal equivalent measure. As anyone who has been through an audit can attest, there is variation from person to person on how audits are conducted and findings published. Corporate finance has guidelines, but even fewer objective weightings. One analyst’s decision about excluding an item as a sunk cost in an analysis may differ from another’s, and they may both have good reason to do so. While sale of financial products to the public is governed by a set of laws, often there are complexities inherit in the products themselves that make the job of judging them accurately a difficult task indeed. For accuracy in weights, there is an international prototype kilogramme made of nine-tenths platinum and one-tenth iridium, locked under 3 glass jars in the Pavillon de Breteuil . But there is no vault in Paris where a set of true financial products are locked away for comparison to the deals being evaluated.

Let's think about what else Proverbs 11:1 is saying to us. God is passionate about honesty in commerce. Some translations use the word “abhor” instead of “detest.” The word means disgust and hatred, strong language for how God thinks about dishonesty in business dealings. What about the other side? Does He say, “I hate dishonest scales, get rid of the tools of commerce and go back to bartering?” No, He says honest scales are delightful to Him. Let’s consider that for a moment. Making a deal with a customer that’s accurate, fair, and honest is something that pleases God. We as business men and women should be encouraged that God is delighted when we do our job with integrity

Brian Isaac Bauer is a financial manager at Boeing.

Ken Melrose on Pay Equity at Toro

Ken Melrose describes the importance of pay equity at the Toro Company:

In 1981, when I was appointed CEO, Toro was on the verge of bankruptcy. I felt it was my calling from God to build a culture using the concept of servant leadership. It seemed obvious to me to look at the “rank & file” employees as the real strength of the organization.

We were careful not to let the salary gaps up and down the organization get too large and cause disgruntlement. We were particularly concerned about stock options getting out of hand creating a feeling of “haves and have-nots”, paying particular attention to the employees at the lower part of the pay scale. We wanted to engender the idea that we all were one big team and all had a stake in the company’s success. To initiate this we gave every employee a share of Toro stock as a symbol, and then built on it by creating a 401k that annually rewarded all employees with stock in the company. While the managers at the top had more stock than those at the bottom, the fact was that we were all “owners”. We then designed durable name badges with each employee’s name, followed by the word “Owner”!

Moreover, to “put our money where our mouth was”, we worked hard to preserve our employee force as well as their compensation when times turned tough. If we had a bad year, it was often because of weather. Reacting to this via layoffs and/or hurtful wage cuts made no sense since weather usually corrects itself within a year. If we did have to cut wages and salaries, we started with the officers, and then the management (e.g., no bonuses first, then salary reductions, and so forth). Our plan was to protect the lower paid employees as long as we could. After two El Niño years without cuts, the employees became believers.

This reflected our philosophy that every employee was important, and it was management’s responsibility to keep the work forces’ compensation intact.

This case is an illustration of the parable of the laborers in the vineyard, Matthew 20:1-16. Click here to go (or return) to the passage.