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One of my clients is a large American manufacturing company. At this company there are two executives. One named Bruce and the other named Roger.
Bruce has built his career on his loud voice and imposing physical presence, something that is possible at a large American company. Roger has built his career on being friends with Bruce, something that is possible anywhere.
They are in my office today. Their usual approach is that Roger spends the meeting talking about what Bruce wants, and Bruce interjects from time to time with remarks like: "You becha!" and "Called it!"
Today's discussion is on the subject of a loan that their Asian subsidiary took out during the financial crisis that they would now like to refinance at a cheaper rate.
There is a slight problem with this plan. The loan agreement, which Bruce personally signed, prohibits them from pre-paying. That means that they have to keep the loan until the end of its term, so two more years.
I am finding this very difficult to explain this to them.
"It's in the loan agreement," I say, "the legally binding document you signed. The thing that sets out what you agreed."
"We all know that's BS, Alan," says Roger leaning back in his chair and looking at Bruce like an obedient puppy looks at its master.
It's tough to respond cleverly to this argument. This is partly because I don't know what the argument is, but mostly because whatever Roger's point is, the only sensible answer is: "No it isn't", which doesn't sound particularly clever.
"Umm, do you mean that's not what it says or that's not what it means?" I ask.
"I mean it's BS, dude," says Roger, "Bruce and I talked about it this morning." I guess this is as far as the conversation went. It appears Bruce did not explain to Roger why he has this view.
Luckily Bruce decides to fill in the gaps. "Let me say something here. We can all read what it says. Truth is we just signed it, we didn't agree to it."
"So we'd like to renegotiate the loan terms," explains Roger.
"Right," says Bruce.
"Right," says Roger.
"Right," I say.
Deviating from a signed contract is generally regarded as a strict no-no by Western businessmen. Starting in the United States and moving progressively eastwards though, it is increasingly acceptable, to the point that on the mainland it is often said that signing of the contract is the first step in negotiations.
Roger and Bruce, however, have always remained extremely scornful of this approach. Three years ago they were out here for negotiations with one of their China suppliers discussing this exact issue. Their supplier had realised that the specifications it had agreed to would cost double what had been budgeted, and was asking Bruce and Roger to renegotiate.
Roger's words at the time were: "These PRC companies don't understand the rules. You make an agreement, you stick to it. That's it. You can't renegotiate."
Bruce expressed the same sentiment, although more succinctly. As I recall, he said: "That's BS."
They refused to renegotiate, the China supplier went bankrupt and they sourced the materials from someone else at a higher price. But they did not compromise on their principles.
But, as I am now discovering, when the rules that they believe in so strongly don't suit them, well the rules are BS. Now I would like to tell them to pack up and go home, and stop wasting my time. But I can't. For two reasons.
One, I've seen Bruce get angry and it's quite frightening. Bruce yelling at me because I won't bend the rules for him would be like Serena Williams yelling at the lineswoman at the US Open for not bending the tennis rules for her.
Except, in this case, there is no umpire to rescue me from Bruce. But the main reason is that the head of our New York office called me last night to tell me how important this client is and that if we lose a bit of revenue on this loan we'll make a whole lot more on their capital markets business in the US. Of course when he said "we" he didn't mean "we", he meant "he" will make money from their capital markets deals in the US and that "I" will lose money in Asia when I renegotiate their loan.
Anticipating my objection, he had taken the pre-emptive step of clearing it with head office.
"Yeah, I went ahead and had a sit-down with the higher-ups and they've given the go ahead to go ahead and reduce the margin by 200 bips," he explains, which in English means that he has gone behind my back and got senior approval to remove money from my pocket.
I object that this arrangement will result in the Asian business losing money, to which he replies: "I hear ya, Alan. Message received loud and clear."
I hate the way this guy talks.
He continues: "We all can leverage the upside here. I'm on board to leave the door open to a sharing of ideas on transfer pricing here. At the appropriate juncture."
Or to put it another way, I can ask him at the end of the year to let me share in his capital markets fees in return for dropping my loan rates and he will come up with a complicated way of saying, "Fat chance."
So I have to cave. I give Laurel and Hardy what they want. They leave happy, our New York office is happy and I lose some money. Now that really is BS.
Doing business with Laurel and Hardy, by the rules
Sunday, September 20, 2009
