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Could A Strong Relationship Be Bad For Business

S.E.C. Demands 6-Month Ban on New Ernst & Young Clients. Federal regulators reiterated their demand yesterday that the accounting firm Ernst & Young be banned from accepting new audit clients for six months. [New York Times: Business]

Your customer has a software product that improves your business processes, it's a direct relationship and improves your abilities as a company. What could be wrong with such a relationship? Well, a lot of things if you're supposed to be an independent auditor.

Impartial relationships between companies and executives has put Ernst & Young in a tight position. Already experiencing a reduction of clients since the last quarter, they are banned from excepting new clients for 6 months. Could you afford such a penalty for a questionable relationship?

Certain industries have rules of independence that govern transactions between organizations, especially the client-vendor relationship. These rules are built around public companies to prevent fraud, secure (public) investors interests, and govern the transaction of banking agencies.

It's great to have strategic partners that improve your business, but they shouldn't be customers too. It is difficult to keep a relationship neutral when you buy from your customers in a substantial way. You must always be aware of the rules in your industry as far as independence is concerned.

Stay abreast of how other perceive your relationships, if you are in the public eye this is ever more important. I'm not going to lecture you on what is right or wrong in a business transaction, but just remember, if it can embarrass you in the paper, you probably shouldn't do it.

Yes, some strong relationships can be bad for business. How should executives protect themselves when developing new business relationships?

  1. Sign only agreements provided to you through your counsel. Even after an agreement is reviewed, only sign an authorized copy received through your counsel. Never receive any contract directly from another party, always have them forwarded to counsel first.
  2. Review all agreements against existing relationships and rules. When your legal counsel reviews an agreement, provide them background about the new relationship encouraging them to check it against other company activities. By pointing out conflicts of interest before binding terms you can reduce your long-term risk.
  3. Allow yourself a few hours before finalizing any decision. Scarcity is a buying motivator often used to encourage people to make decisions at the immediate moment. Nothing is so important it can't wait a few hours. Take a break to discuss the terms with your counsel, even leave the meeting to spend some time getting things right.
  4. Always outline all agreements in writing. Make it company policy to never enter into a verbal agreement. Often those decisions made in a hurry are the ones that hurt the most. Use at least a letter of understanding to document the terms of the agreement, conditions, and how each party will be compensated.
  5. Always attend meetings with another person. As a corporate executive, it is important to provide yourself with a second opinion (a second set of ears) to document any agreements made in conversation. This could be a secretary or even an understudy who is only observing.
  6. Be aware of ongoing business relationships created by managers. Often executives are hurt by the relationships of others inside the organization. Make sure everyone is aware of the types of relationships that are appropriate for your type of business. Hold individuals responsible for mistakes in this area.
  7. Separate yourself from decisions with personal friends. Have a business justification for transactions with friends, family members, and close associates. Never share information of mutual benefit that is of a sensitive or restricted nature. If at all possible have financial exchanges reviewed by your counsel.

/ applying-strategy | strategic-relations /

By Justin Hitt at July 19, 2003 3:15 AM  Subscribe in a reader


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