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Fighting For A Government Threat

Rs fictionalized case studies present dilemmas faced by leaders in real


companies and offer solutions from experts. This one is based on the HBS
Case Study Fiji versus FIJI: Negotiating Over Water, by Francesca
Gino, Michael W. Toffel, and Stephanie van Sice.
What other options do we have? Alan Carroll asked his team. He stood
in front of a whiteboard that was covered with notes. The general counsel
for Mariana Ash, a Los Angelesbased cosmetics company, Carroll was
leading a brainstorming session before a scheduled negotiation with
Gerald Palacios, the governor of the Northern Mariana Islands.
A week earlier, in an effort to close his budget deficit, Palacios had
proposed a substantial tax increase on ash extracted from the Islands,
which is used in facial masks and other beauty products. Mariana Ash
was the only company doing business in the U.S. territory whose
extraction levels exceeded the threshold for the proposed tax.
Weve talked about just paying the tax, or else negotiating based on
fairness. But we could also reduce the amount of ash were extracting so
that were not subject to the tax, Gabriella said. She was a fellow inhouse counsel and one of Alans sharpest team members.
Rachels not going to want to cut down production, said Tom, another
one of the lawyers. Shes focused on growing, not shrinking.
Rachel Wisotzky was the CEO of Mariana Ash, which had been founded
by her father. She had taken the reins when he retired, in 2005. Since
then the companys revenues had tripled, and it was now a leader in the
natural luxury cosmetics industry.
Bennett, an operations manager, spoke up from the back of the room.
What if we moved to another island? Weve done the research, and we
know there are plenty of places where we could extract the same level of
ash, probably at the same cost.
Alan wrote the idea on the board. He knew it was best not to react to
suggestions in brainstorming sessions like this one. But Gabriella
responded.
That would require building an operation from the ground upnot to
mention changing our name, she said. Alan shot her a look. She caught
his eye and added, But, as Alan said, nothing is outside the realm of
possibility at this point.
Thats right. Lets capture all the ideas, Alan said. And theres another
negotiating tactic we havent talked about in detail. We could show up at

the table with a strong argument about all the good weve brought the
Islandsthe jobs, the fair wages, the community service projects.
Negotiation would be more appealing if we were dealing with a more
reasonable government, Gabriella said. Everyone nodded. This wasnt
the first time the governor had raised the tax on extractors; in fact, there
had been four increases in the past decade. And it wasnt clear where the
extra revenue was going. The territory was still struggling to maintain
roads and meet other basic needs. The new proposal called for a 400%
increase, and, unfortunately for Mariana Ash, it seemed poised to pass.
This might be one of those times we need to play hardball, Gabriella
continued. Threaten to shut down and see what they do. This had been
suggested in past negotiations, but Alan had always managed to
persuade the others that a cooperative stance was better than a
confrontational one.
I agree, Tom said. Were in a good position. Palacios doesnt want us
to shut down. He cant afford to lose thousands of jobs, especially in an
election year. Hell look terrible if he runs us out.
Alan sat down at the table. It had been a long meeting. I think that
depends on how the press covers this, he said. We dont want to look
like another mainland company that screwed the Northern Marianas. All
the media outlets are going to be following the issue closely. We need to
come out looking good.

Not a Bluf
The next morning Alan got to the office early. He wanted to review a
report on the companys economic contributions to the Islands over the
past decade. On his way to the printer, he saw that Rachels office door
was open and peeked in.
Rachel was surprised to see him. Oh, brother, you scared me, she
exclaimed. I thought I was the only one in. She spoke quickly, with a bit
of a Southern lilta holdover from her childhood in Texas. She had a
reputation for taking risks and getting what she wanted, and shed
achieved more growth at Mariana Ash than anyone had expected. Alan
respected her, but he also feared her a bit; when she had a strong
opinion, it was tough to push back. The companys previous CFO had
been good at tempering her aggressive approach, but hed recently left
Los Angeles for a job on the East Coast and hadnt yet been replaced.
There was talk around the company about who would step up and keep
Rachel in check now that he was gone.
We might need to play hardball, Gabriella said. Threaten to shut down
and see what the governor does.

You prepping for the Palacios meeting? Rachel asked. Is he going to


keep it? The governor liked to demonstrate his power by canceling
appointments.
Were set for Tuesday.
Actually, I dont care if he does reschedule, Rachel said. We dont need
to sit down with him. I was thinking about it last night. We should
threaten to shut down right awayshow him that hes the one against
the wall, not us.
Alan nodded, trying to formulate the right response.
He cant afford to lose us. Not now, Rachel added. Not with the
election coming up. He needs to look good. Besides, he went into that
whole song and dance about working on behalf of the people, but are we
sure the people are truly going to benefit from this? That the money will
go toward schools and infrastructure instead of just lining the governors
pockets? We dont really know.
True, Alan said slowly. But Mariana is in our name. All our branding
is based on the purity and quality of the ash from these specific islands.
Well, nothing is set in stone, Rachel said, getting up from behind her
desk and walking around it. She often paced during meetings; people
called her the Energizer Bunny. And if we built this company once, we
can do it again. Im not one to shy away from a challenge.
Shutting down sounded ludicrous to Alan. Would they really just pick up
the business and move it to Tonga? Rachel couldnt be serious. But she
certainly looked it.
I think we can negotiate this thing, Alan said. Weve got some good
points on our side. We need to lay the groundwork for continued
cooperation. But if we give in to this, whats to stop Palacios from doing
the same thing again a few years down the road? she asked. Hell tax
us out of business. Besides, you know as well as I do that this is going to
be decided in the press, not at the negotiating table.
That may not be ideal. We dont want to invite the land-rights protesters
to get involved.
Weve been through all that before, and we survived, Rachel argued.
We know we have the appropriate rights.
Im just concerned about the shut-down option, Alan replied. We cant
be sure that Palacios wont call our bluff.
Its not a bluff.

A Press Release
Alan put his briefcase down to search for his car keys and heard someone
call his name. Roberta Simmons, the head of public relations, was
running across the company parking lot.
Dont ever run in heels, she said, out of breath as she got to his car.
Its excruciating. But Im glad I caught you. Did you get my e-mail?
Alan reached into his pocket for his BlackBerry and found his keys.
I wanted you to review this press release before you left. Its set to go.
She handed him a piece of paper.
But I didnt ask you for a draft release. Were not ready to make a
statement yet. Were still preparing, Alan said.
You-know-who asked me to write it, Roberta said, smiling. She
explained that Rachel had stopped by her office earlier that afternoon
and essentially dictated the release. Id assumed you had agreed on the
messaging, but Im guessing from the look on your face thats not the
case.
Alans stomach lurched at the first line of the draft, which said that
Mariana Ash would shut down operations in the Islands the following
week if the government didnt withdraw its tax proposal.
She told me to get your sign-off before we send it out tomorrow
morning, Roberta said.
Tomorrow morning? Alan asked.
Roberta nodded. And you know I dont like to cross her if I can help it.
None of us do, Alan said. He asked Roberta to hold off on the release.
Ill talk to Rachel tonight.

Gathering His Thoughts


After his kids were asleep, Alan went up to his third-floor office. He took
the draft press release out of his briefcase and opened his e-mail to find
the soft copy. Roberta had done a good job with it. After the first line, it
sounded less threatening. It went on to say how dedicated the company
was to the island community and that its executives had hoped for a lessdrastic solution. Maybe he could save it with some editing.
His BlackBerry rang, but he didnt recognize the number. Thinking it
might be Rachel calling from someone elses phone, he picked up.

Hey, Alan, its Lorenzo. Alan immediately regretted taking the call.
Lorenzo was a reporter for the Saipan Tribune. Alan had worked with
him a lot over the years, and he liked him, but he knew that Lorenzo
could be ruthless when it came to getting a story.
I hear youre sitting on something. Im wondering if we can see it first,
Lorenzo said.
Alan was silent.
So, what have you got? Lorenzo prompted.
Were really not ready toI mean, were still analyzing the situation
taking a look at the numbers
Lorenzo cut him off. Is that a no comment?
Alan tried to gather his thoughts. He knew what Rachel would say; he
almost told Lorenzo to call her instead. But as general counsel, he was
responsible for making sure that Rachel understood the risks of taking
such a hard stance. He wanted more time to figure out their chances of
calmly negotiating an agreement.
Listen, Alan, let me level with you, Lorenzo said. The paper would
gladly lead tomorrow with whatever you all have to say. But if you have
no comment, were going to go with the governors statement about
companies paying their fair share. Lorenzo added that he knew that
wasnt the full story, but the paper didnt have much else to go on.
Alan looked at the release on his screen.
I dont want this decided in the press, he said.
Where else would it be decided? Lorenzo asked. Palacios is ready to
talk. You should be, too.
What Would You Do? Some advice from the HBR.org community
Alan shouldnt miss this opportunity. The newspaper is going with the
story the next day, and unless he provides a comment, the article is likely
to be slanted toward the party who is willing to speak. Alan should give
Lorenzo the statement, emphasizing the companys stand especially
against the backdrop of the four other increases in the past decade.Omkar
Sapre, adviser, Devgad Taluka Mango Growers Co-operative Society
Mariana Ash shouldnt release the statement, but Alan should make it
clear to Lorenzo that the company has found other regions with a similar
quality of ash at a similar cost. This will give Palacios a sense of what it is

prepared
to
do
if
the
negotiation
doesnt
Charokopos, business navigation manager, IKEA

go

well.John

No, Alan should not give the press release to Lorenzo. Let the paper run
the statement that companies need to pay their fair share, because they
do. Mariana Ash can then negotiate with the governor for a fair trade
agreement with a fixed tax rate. For example, a five-year agreement
would give the cosmetics company enough cost stability and time to
formulate a plan B.Karen Corliss, owner and principal, Pack Systems
Engineering
Alan needs to agree with the governors statement that businesses should
pay their fair share, but he should then immediately begin a campaign to
inform people about the value of the company to its employees, its
shareholders, and the territory. He can start by placing a full-page ad in
the newspaper explaining how the company affects the local
economy.Gary Packwood, owner, GPA Project Management
Should Alan give Lorenzo the press release containing the CEOs
ultimatum?
The Experts Respond

Andrzej Klesyk is the CEO of the Polish firm PZU


Group, one of the largest insurance companies in Central Europe.
Governor Palacios has created an unstable environment for Mariana Ash.
If it doesnt know how much it will have to pay in taxes from year to year,
it cant judge whether its operations are sustainable.
There are two scenarios in which Alan should turn over a press release.
One is if Mariana Ash is a leader in the local business community (as it
seems to be), with other firms relying on its advocacy. Although the hike
wouldnt affect others, they may want Mariana Ash to stand up to
Palacios to prevent future hikes. If this is so, Id suggest that the release
come from an association of businesses. We have a few such groups in
Poland, and companies often use them to get a point across. Alan would
need to get back to Lorenzo after consulting with the relevant parties.

The second scenario is if Alan and Rachel think the company could
influence the election and oust Palacios. Mariana Ash can threaten the
governor only if it has more power than he does. Otherwise, Alan needs
to proceed more carefully.
In any case, Alan needs to buy some time and should promise to call
Lorenzo back in 20 minutes. That will give him a window in which to
strategize. He needs to do three things.
First, he should contact Rachel and the other executives. Its obvious that
there isnt a consensus on how to deal with Palacios, and its possible
someone else has already spoken to Lorenzo. If internal divisiveness
were to come out in the press, it would hurt the firms credibility and its
ability to negotiate.
If he thinks an amicable solution is possible, Alan needs to find a way to
help the governor save face.
Second, Alan should try to determine what the companys BATNA (best
alternative to a negotiated agreement) really is. Its not clear whether
Rachel understands the ramifications of pulling up stakes and starting a
new operation elsewhere, or whether thats even a viable option. Nor
have the executives fully explored what it would mean to leave
production levels in the territory where they are and add a second facility
in another location.
Third, if an amicable solution is possible, Alan needs to come up with a
way to present Palacios as a winner. In my experience, politicians always
want a face-saving solution. If the governor were to backtrack on the tax
hike, Mariana Ash should seek to portray him as someone who saved
jobs.
If Alan cant resolve at least the first two issues in time, he needs to tell
Lorenzo that he has no comment. If after having these conversations he
believes he can make a statement that wont hurt his ability to negotiate,
he should explain that the company is evaluating its options and will do
whats best for its business, which might include relocating.
Alan shouldnt put anything in writing, and he should ask to review his
quotes before the story goes to press. Journalists codes of conduct vary
from country to country, but in Poland, for example, people are entitled
by law to make that request, and I regularly do so.
A change of government might be the best outcome for Mariana Ash.
Absent that alternative, the company needs to negotiate in a way that
helps Palacios save face while also ensuring that it can continue to run a
stable, profitable business.

Michael Hartman is the senior vice president of


legal and regulatory affairs at DirecTV Latin America.
Alan absolutely should not give Lorenzo the press release. Issuing it
could put Mariana Ash in a bet the company position, and Alan
shouldnt do that unless he is clear it is the path the firm wants to
pursue. Also, hes not doing his job unless he makes a real effort to fully
consider the pros and cons of every possible course of action with a small
group of key employees and advisers. He was headed in the right
direction with the brainstorming exercise, but he and his team didnt get
very far with it. They didnt think through all their ideas.
Mariana Ash is, in fact, on the verge of breaking several rules of
negotiation. The first is Dont lose sight of the big picture. The chief
dilemma is not how to manage the negotiation with Palacios but how to
ensure the companys continued success regardless of the outcome of
this event. It is a mistake to manage the situation so narrowly. Alan and
his colleagues need to have a range of possibilities in mind.
The second rule is a corollary to the first: Never, ever make a threat
youre not willing to follow through on. Unless Mariana Ash is truly ready
to relocatein other words, unless its executives have analyzed the issue
thoroughly and are committed to moving if the companys position isnt
accommodatedthey shouldnt raise that prospect. Hollow threats
undermine a companys credibility, and thats hard to recover from.
The firm is on the verge of breaking several rules of negotiation. The first
isDont lose sight of the big picture.
The third rule is Always look for a solution both parties can live with,
even if it is not optimal for either one. If Palacios wants to increase the
tax because he genuinely believes the territory needs more revenue, Alan
and his team havent done much to address that concern. Theyve
actively dismissed it, disparaging his motives and focusing on their own
perceived leverage.
The last rule is Dont assume that your counterpart thinks the way you
do or is influenced by the same considerations. Especially when dealing

with government entities, its important to carefully evaluate what


factors are likely to affect their decision making. Will an article in the
newspaper sway the governor? Or is he more apt to be persuaded by
constituents, such as the companys employees? If Mariana Ash is indeed
ready to leave the Islands, is it wise to convey that message in a public
statement that directly challenges Palacios? Alan, Rachel, and the rest of
the management team need to consider the situation from the governors
perspective.
Mariana Ash is not ready to issue any press release, especially this one.
Alan needs to do a lot more prep work before pushing the negotiation
forward. He should do what he can to make sure the company is acting
thoughtfully, not out of bravado.