Things They Never Taught You at Harvard Business School — Part 2

Or can we make this work … please?

Rule number 5: Always identify who can make a deal happen and dispense with everyone else.

The biggest problem that I think anyone faces in trying to execute any business — and I don’t care what field of business it is, is how does one identify people who are capable of delivering and how does one weed out and avoid time wasters and fantasists. Unfortunately, the majority of people that one meets in the world of business fall into the latter category.

I have met so many dreamers that cannot deliver. I have met many people who do not really have a deal and are trying to create one by bringing elements that are in other people’s control together. They are then trying to cut themselves in on the transaction. These people are to be avoided at all costs.

So how does one identify people who can actually perform? A famous historical example of this involved the Macedonian King Alexander the Great. There was a group of pirates operating in the Aegean Sea that had been disrupting commerce in the most brazen fashion for a significant length of time. So, Alexander sent his chief Admiral to suppress the pirates with the instructions to capture the pirate chief alive and bring him in chains so that Alexander could see the man for himself.

The captured pirate chief was brought before Alexander and Alexander said to him, “Before I put you to death, do you have anything to say for yourself?”

The pirate said, “Yes. I send my armed retainers against the population and take part of their wealth and you call it piracy, yet you send your armed retainers against the population and take part of their wealth, yet you call it taxation.”

Alexander thought about this and then pardoned the man and made him his chief tax collector. Thus, demonstrating that you always need the right man for the job.

Rule Number 6: It’s generally a mistake to rely on well-heeled, socially connected people for business development.

Well-connected people are not necessarily good at business and family, or political ties are no justification on their own for entering into a transaction with someone. I was once introduced to a well-heeled individual with a name you would probably recognize. My colleague, who provided the introduction, guffawed and said “You have to meet so and so he’s a great chap. He was thrown out of Eton when he was 17 and used to be worth 40 million pounds but now is worth about 15.” I said “Do you hear what you’re saying? This is not a recommendation.”

Yet it is human nature to be ever hopeful and it is easy to get pulled in to and seduced by a good story where there is a rich person involved. You have to be absolutely hardheaded about affairs of commerce. There really is no room for sentiment, and all things need to be weighed and analyzed as professionally as possible. This does not mean that one shouldn’t be honest and straightforward in transactions and in one’s dealings. It is always better to have and maintain a good reputation than to do a deal. All that being said, connections as we all know can be immensely helpful.

The issue is the same though, which connections are worth having and which are not? During the first Gulf war in 1990–91 it was alleged that Prince Sultan bin Abdulaziz Al Sa’ud personally made $2 billion in kickbacks or commissions on Sa’udi arms procurements and that his son, the architect of the Allies’ victory in that war, Prince Khaled bin Sultan made $1 billion. (Oh, didn’t you know that it was his strategy implemented by general Norman Schwarzkopf that won that war!) At the time it was alleged that Mark Thatcher the son of the British Prime Minister Margaret Thatcher made something between 2 and 12 million pounds sterling in commissions on arms sales to the Omani government.

A number of my more liberal friends in Britain were appalled by this. I told them that you’re looking at this the wrong way. If the Sa’udi princes could make $3 billion and the son of the British Prime Minister could only make a paltry 2 million pounds, it doesn’t mean he’s corrupt, it means he’s incompetent. Which brings me to the next rule, which is one that is most often not followed and, as a result, invariably leads to grief.

Rule number 7: A lot of perfectly good deals are often ruined by stupidity, incompetence or both.

This is in some ways a corollary to rule 5 but is another example of how sometimes something that should be simple and straightforward can go wrong in unanticipated and unexpected ways.

Many years ago, I took a transaction to Qatar Islamic Bank fully secured by a letter of credit issued by ABN AMRO Bank. At the time, ABN AMRO had an AAA credit rating. This should have been a fairly straightforward deal, but as it turned out, it went into a kind of financial twilight zone thanks to the unbelievable stupidity of one of the credit analysts at QIB.

The gentleman in question was an Egyptian, and he noticed that the letter of credit was to be issued by ABN AMRO Bank B.V. a wholly owned subsidiary of ABN AMRO Holdings N.V. We had supplied him with the consolidated financial statements of ABN AMRO Holdings N.V. He came to the brilliant conclusion that if there were any financial problems within ABN AMRO Bank that the Holding company could be hiding them within the consolidated accounts and therefore could we obtain either a counter guarantee from ABN AMRO Holdings for the performance of ABN AMRO Bank or could we obtain the separate financial statements of ABN AMRO Bank for his review.

You can imagine the response we got from Amsterdam when we made this request. We then went round in circles for months with this idiot at QIB and were never able to convince him that the security of an ABN AMRO Bank L/C was adequate.

This is one of the more egregious examples of stupidity in business that I have encountered, but unfortunately there are many, many more. It also serves as a salutary example of one of the reasons why Egypt has never performed well economically. When Nasser came to power in Egypt, its GDP was the same as that of South Korea. Today Korea’s economy is five times the size of Egypt’s. Corruption and incompetence are the two major reasons for this disparity. See rule 20 in Part 5 of this article.

Rule number 8: You don’t ever have to do any deal.

This is incredibly important. There is no deal that ever has to be done. The nature of human commerce is that there will always be another deal of some kind, some time, somewhere. If you ever feel pressured to do a deal, don’t. You will make mistakes and you will almost invariably lose money. If anyone ever says to you it’s time to shit or get off the pot or fish or cut bait or any words of this nature, walk away. They are crooks and their only interest is in making money off you and there is a flaw somewhere in the deal which you just haven’t figured out yet.

I was once involved in negotiations that went on for over a year because it took us that long to figure out what was at the bottom of the deal. As it turned out, we would have gotten our shares at 50 cents a share and indirectly subsidized the other side, which would have obtained theirs at 25 cents a share. They then planned immediately to dump theirs on the market through one of the stock exchanges at 50 cents a share, thus doubling their money and leaving us to run the company after paying an inflated price for our shares. We didn’t do the deal and paid no attention to the pressure to do it. When we were told that there was another investor in Germany prepared to do the deal, we told them to take it. It was, of course, a bluff and a hustle intended to get us to put up the money. This is a well-worn tactic. If anyone ever tries it on, you walk away. I can’t emphasize this enough. You never have to do a deal.

A corollary to this and it is the weakness that lies at the heart of the public company is the fact that having to continue to outperform each quarter leads to very short-term horizons for management and creates pressure to put deals together that should not necessarily be done. Any business that is done under pressure will invariably increase the level of risk involved and more than likely go wrong in some way or other.

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