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When Honesty’s Not the Best Policy

Shareholder class-action suits frequently allege that a company’s management team has acted dishonestly, withholding critical information that adversely affected the stock’s value. In dramatic cases like the Firestone-Ford Explorer debacle, there certainly seems to be evidence of a less-than-forthcoming management team. I certainly don’t defend dishonesty that endangers lives, but I must concede that virtues are like Plato’s ideal — easy to agree with but difficult to grasp.

Shareholder class-action suits frequently allege that a company’s management team has acted dishonestly, withholding critical information that adversely affected the stock’s value. In dramatic cases like the Firestone-Ford Explorer debacle, there certainly seems to be evidence of a less-than-forthcoming management team. I certainly don’t defend dishonesty that endangers lives, but I must concede that virtues are like Plato’s ideal — easy to agree with but difficult to grasp.

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Wouldn’t we all like to custom-order colleagues and clients who are honest and forthright? Sure, but is the individual who always states his mind really honest or just a pain in the neck? True honesty, I have found, results from analysis and judgment — judgment concerning when, how, and why forthright comments are appropriate. Herein lies the dilemma for many managers — myself included.

Because accounting rules govern corporate progress reports, summaries often place undue emphasis on dollars and inadequate emphasis on sense. They neglect to consider leaders’ ability to use good judgment. I believe managers hold important commitments to a company’s shareholders, its customers, and its employees, and I believe those commitments should be revered. A manager’s job is to make the right trade-offs that meet the needs of those three constituencies. In making such decisions, managers must evaluate data concerning the company’s performance and goals — information that is usually highly confidential and potentially disastrous in the wrong hands.

For example, during Evolutionary Technologies International’s (ETI) second year, we expected sales to close in April. By July, we still had only prospects, and cash was getting scarce. I had a term sheet from a venture capitalist, but I wasn’t happy with the valuation, so we were holding our breath every day. Only two other executives and the board of directors knew about the company’s cash problem. We kept quiet because we believed that if employees knew the situation, it would distract them from their work and possibly lead to attrition. As it turned out, business began to close in mid- August, and the company met its objectives for the year. But had I been honest? Not exactly.

Conventional wisdom says that employees remain loyal and effective when given accurate information about their employers’ financial status and goals. But the following examples illustrate how candor can compromise a company’s goals and productivity.

Hot Job Market

The retention of technical staff is critical for software companies, where programmers face steep learning curves before they can take over the implementation and support of a product. Before the recent dotcom collapse, easy access to venture capital allowed technical employees to receive 20% – 30% pay increases by changing jobs. In this situation, a company that discloses its losses in detail may trigger a mass exodus that could decrease the company’s near-term ability to generate revenue.

Legal Considerations

At ETI, I have encountered more than one manager whose style and practices were unacceptable. ETI, for example, has had to deal with managers who set unreasonable schedules or who fail to demonstrate professional courtesy to others. In one case, employees registered numerous formal complaints against a manager. When he failed to remedy his behavior, ETI put him on a formal plan to improve his behavior. Eventually, he resigned rather than face the humiliation of termination. In that situation, the managers who knew about the corrective action kept quiet in order to guard against potential litigation from the disgruntled former manager, although in the short term, many employees felt that management had not been responsive to their stream of complaints.

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Mergers and Acquisitions

Though significant layoffs may follow a merger or acquisition, it is advisable for only a few key managers to know about the transaction. If word leaks out early, companies run the risk of prompting an employee exodus that could sweep away key players or hurt revenue as customers wait to see the effect of the transaction before purchasing a product. Honesty in this situation can drive down the valuation of the company and put merger or acquistion at risk — thereby damaging the potential return to shareholders, customers, and employees. It can also drastically diminish the company’s ability to maintain operations in the case that the transaction fails to take place.

The fine line between selectively filtering information and knowingling telling lies is demonstrated in those examples. The Firestone-Ford Explorer tire debacle, however, illustrates how failure to communicate pertinent information can lead to criminal wrongdoing. But that is seldom the case when dealing with talent issues.

There are no easy guidelines. As manager, you must keep in mind the well-being of all your constituencies when reaching decisions. Along those lines, you must also make trade-off decisions that require withholding information. Most employees understand that decisions are made in their best interests, and they begin to feel comfortable when they believe that the company’s management subscribes to a value system that will lead to the most ethical compromises possible.

In next month’s column, I will examine how management can define and demonstrate that kind of value system.

More columns by Katherine Hammer.

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