Adapted from “The Dangers of Compromise,” by Max H. Bazerman (professor, Harvard Business School), first published in the Negotiation newsletter.
In July 2000, Arthur Levitt, then chairman of the U.S. Securities and Exchange Commission (SEC), held hearings on the question of auditor independence. Believing that auditors’ close ties to their clients posed a conflict of interest that could endanger U.S. financial markets, the SEC’s accounting staff and a number of academics argued for new, tough standards, such as prohibiting auditors from “cross-selling” services to their clients and taking jobs with clients.
These changes, which could have helped to establish true independence, were strongly opposed by the “Big 5” auditing firms. Aware of the need to take some action, the SEC chose to compromise rather than push for significant reform. The SEC required auditing firms to disclose related business relationships and instated a variety of other steps too small to actually solve the problem of independence.
About a year after the SEC hearings, in October 2001, energy-trading firm Enron announced that it had lost $618 million in the third quarter of 2001 and disclosed a $1.2 billion reduction in shareholder equity. Enron’s stock price fell through the floor, and the company soon became what was then the largest corporate bankruptcy in U.S. history. Stockholders and former Enron employees left without pensions filed civil lawsuits against both Enron and its auditor, Arthur Andersen, for deceptive practices. Within a year, Andersen was found guilty of obstruction of justice in a federal criminal trial. The Big 5 had become the Final 4.
Arguably, the collapse of Enron and Andersen, as well as the wave of earnings restatements from U.S. corporations that followed in 2001 and 2002, could have been avoided if the SEC had acted more forcefully to institute meaningful auditing reforms in 2000. But reasonable people make compromises, right? While this is often true, with compromise come hidden dangers. Perhaps the most common is the tendency of negotiators to “split the difference” when a more creative solution would have allowed both sides to get more of whatever quantity was in dispute.
Compromise is a useful device for dealing with small items with people you see in an ongoing relationship. But we run into trouble when we split the difference in situations in which a compromise will harm everyone involved. When your organization is negotiating over important decisions and strategies, you must question the wisdom of compromising and strive to be more cautious, thoughtful, and insightful. The next time you face a serious negotiation, ask yourself the following questions:
• What should the meeting agenda look like?
• Are two polar opinions likely to develop, such that only a compromise will save face for all?
• Would compromise come at the expense of growing the pie through creative trades?
• Would I be compromising to avoid a tough debate between reasonable alternative proposals?