In 2013, negotiators from Citigroup and the U.S. Department of Justice (DOJ) began meeting to discuss what penalties the bank should face for allegedly defrauding investors in 2006 and 2007. The DOJ accused Citigroup of ignoring signs that a significant portion of the mortgages it had packaged and sold had underwriting defects. Widely criticized for being too soft on the banks that contributed to the 2008 financial crisis, the DOJ was eager to make an example of Citigroup.
In April 2014, Citigroup made its first settlement offer: $363 million. The DOJ deemed that figure to be so low it didn’t warrant a counteroffer. Try again, it told the bank. Citigroup bumped the offer up to $700 million. The DOJ responded with a demand for $12 billion.
The two sides were so far apart that the odds of a deal seemed low. Making matters worse, each side was using very different measures to calculate the extent of the harm Citigroup’s mortgage securities had inflicted on investors, reports Michael Corkery in the New York Times. Citigroup based its offers on the bank’s relatively small share of the market for mortgage securities. Given that the DOJ had reached a $13 billion settlement with JPMorgan Chase over its much broader sale of mortgage securities, Citigroup argued, it should pay a much smaller amount.
The DOJ rejected this standard, saying that Citigroup should be penalized based on its level of culpability, as reflected in damning e-mails and other evidence. “There’s no way you’ll get anywhere with us if you are only going to make the market-share argument,” one DOJ official reportedly told a Citigroup lawyer. The two sides were at an impasse.
Think about the last time you tried to negotiate an end to a dispute or resolve a sticking point in an otherwise cordial bargaining session. Maybe you were far apart on price, or perhaps you and your counterpart disagreed about which of you bore responsibility for solving a serious problem. Chances are, each party had different views and justifications about what would constitute a fair settlement, just as Citigroup and the DOJ did in their negotiations.
As we will see, the fairness standards we cite to support our positions can greatly influence our odds of reaching a mutually satisfactory agreement. In this article, we explain how appealing to our rights can hold us back in negotiation, and how we can do better.
Three approaches to dispute resolution
There are three fundamental ways of resolving disputes, write William L. Ury, Jeanne M. Brett, and Stephen B. Goldberg in their book Getting Disputes Resolved: Designing Systems to Cut the Costs of Conflict (PON Books, 1993). First, parties can reconcile their interests—the needs, desires, concerns, and fears that underlie their stated positions. Through negotiation or mediation, disputants can engage in the difficult but often rewarding work of probing for underlying concerns, searching for creative solutions, and making tradeoffs across opposing interests.
Second, negotiators can resolve disputes on the basis of power, typically by imposing costs on the other party or threatening to do so. Labor unions, for example, sometimes try to harness their power to get what they want by threatening to strike or actually going on strike.
Third, disputants can try to resolve their differences by determining who is right. They do so by referencing standards they perceive to be legitimate or fair, as the DOJ and Citigroup did, or by taking their dispute to court and allowing a judge or jury to weigh who’s right.
Asserting your rights and exercising your power can be valid negotiating strategies. Threatening a lawsuit, for example, on the grounds that the other party has violated your rights, may at times be necessary to convince your counterpart to engage in settlement negotiations. When possible, however, Ury, Brett, and Goldberg encourage us to focus on reconciling interests. Interest-based negotiators are more satisfied with their outcomes than those who focus on asserting their rights or power, and they also tend to incur lower costs, less strain on the relationship, and fewer subsequent disputes. Yet in negotiation, most of us rely on asserting our rights and power more often than is necessary.
When fairness becomes an issue
Our perceptions of what constitutes a fair settlement in a given negotiation are heavily biased by our perspective and our goals for the negotiation. Each party to a dispute may be able to make a strong case for its view, and each view is likely to be slanted in favor of its self-interest.
Citigroup negotiators may have honestly believed that the market-share argument was the proper standard to apply in their negotiations with the DOJ, just as the government negotiators likely viewed culpability to be the fairest standard. Not surprisingly, Citigroup’s fairness standard supported a low settlement, and the DOJ’s supported a much higher one.
Unfortunately, when negotiators cite conflicting fairness standards, it can become nearly impossible for them to come to agreement. With each side arguing that its standard is the fairest, the parties become locked into their positions and incapable of seeing the other side’s point of view.
Consider the recent dispute between New York City’s Metropolitan Opera and its unions. Facing rising costs and a declining endowment and disappointing ticket sales in recent years, the Met urgently needed to adjust its mounting budget shortfalls. Labor and management agreed on that point, but they disagreed about who was to blame and what would constitute a fair solution.
Management said labor costs were too high and that the unions must accept their fair share of cuts. Meanwhile, the unions accused management of overspending on productions and said the proposed labor cuts were unfair. We will discuss how the parties finally came to agreement in a future issue.
From rights to interests
For an example of how you can get out of the trap of arguing over rights, let’s see how the Citigroup negotiation unfolded. After the bank upped its offer slightly from $700 million to $1 billion, it learned through news reports that the DOJ was planning to take it to court. The threat—a power play that, once in motion, could have settled the fairness question once and for all—inspired Citigroup to move beyond its market-share argument.
Finally, the parties began brainstorming options. The DOJ, for instance, wanted Citigroup to provide substantial mortgage assistance to struggling homeowners. But because Citigroup’s mortgage business had diminished since the financial crisis, the bank was not in a position to grant significant homeowner relief. Noting that many people who lost their homes during the financial crisis are now renting, the DOJ persuaded Citigroup to provide $180 million to build affordable rental housing in areas where the cost of living is high, writes Corkery in the Times.
Similarly, Citigroup put one of its key interests on the table: its desire to avoid future encounters with government negotiators. In return for higher penalties, the DOJ agreed not to pursue cases related to Citigroup’s pre-2008 sale of collateralized debt obligations.
A deal became even more possible thanks to “a simple feat of accounting,” according to the Times: Citigroup agreed to shift a portion of the settlement from state attorneys general to the DOJ. The move will prevent the bank from claiming a tax deduction on the settlement, a concession highly valued by the DOJ.
Thanks to this creative negotiating, the two sides were able to reach a deal. Citigroup agreed to pay a $4 billion cash penalty; $2.5 billion for the financing of rental housing, mortgage modifications, and other consumer relief; and $500 million to state attorneys general and the Federal Deposit Insurance Corporation.
Looping back to interests
In these negotiations, the parties were motivated to focus on interests by a bold-faced assertion of power and rights—the DOJ’s threat of a lawsuit. The breakthrough attests to the intricate relationship among interests, power, and rights in negotiation. In other words, though it pays to focus on interests whenever possible, power and rights have their place.
How else can you move beyond clashing fairness appeals in your negotiations? In Getting Disputes Resolved, Ury, Brett, and Goldberg encourage organizations to design dispute-resolution systems that include “loop-back” procedures that enable disputants to replace contests over rights and power with interest-based negotiation.
Some loop-back procedures work by educating negotiators about the rights they are asserting and the likely outcome of a rights contest such as a lawsuit, according to the authors.
In advisory arbitration, for example, an arbitrator provides a nonbinding decision that should give parties insight into how a binding arbitration or lawsuit could unfold.
Similarly, you may be able to avoid rights contests or call them off after they’ve started by engaging in a joint fact-finding process, writes Massachusetts Institute of Technology professor Lawrence Susskind in his book Good for You, Great for Me: Finding the Trading Zone and Winning at Win-Win Negotiation (PublicAffairs, 2014). In joint fact-finding, both parties to a negotiation mutually choose and hire expert advisers to gather the data they need to chart the best course. The negotiators then assess the data together and decide how to proceed. Joint fact-finding helps negotiators avoid the temptation to cherry-pick data that suits their interests.
In addition, negotiators can try to overcome their differences by engaging in mediation. Mediators trained in interest-based negotiation can help parties replace their focus on fairness with a deeper consideration of the issues at stake. Through mediation, they can begin to explore opportunities to create value and come together.