The New Normal
Why cling to well-intentioned rules and practices that don’t actually work?
Posted Jun 6, 2013 1:28 PM CDT
By Paul Lippe
Before law school, I worked for Sen. Daniel P. Moynihan. Moynihan had been a social science professor at Harvard and, in the best progressive reform tradition, was intensely interested in whether government programs really worked as intended. The popular term for that is “the law of unintended consequences,” that government programs often don’t produce the intended results.
An iconic example is rent control, where rules intended to protect tenants have the “perverse” effect of reducing the supply of rental apartments, according to The New York Times.
As an exceedingly broad generalization, liberals are proponents of government spending and regulation, and optimistic about their outcomes; conservatives (including libertarians) are skeptics of government spending and regulation, and inclined to point out unintended consequences. But hopefully we’ve reached the point where both liberals and conservatives only want government programs that work, delivering the desired outcome and a reasonable bang for the buck.
In law school and at law firms, I didn’t encounter as much attunement to the law of unintended consequences. There was generally a sense that a rule was the expression of the values (and therefore virtue) of the person advocating it and would necessarily achieve the intended outcome.
But I think Moynihan was mostly right—rules have lots of unintended consequences. Let’s look at a “simple” rule set within a company: the sales force’s compensation plan. If you’re a business-to-business technology company (e.g., Oracle), you run off your sales efforts to customers, and your sales people run off their “comp plan,” i.e., the rules (not made by lawyers, but by sales execs) for how much they’ll get paid based on their level of sales. Even within a company where in theory everyone’s incentives are pretty well-aligned, people struggle with questions like whether commission is paid on overall revenues or margin, on bookings, revenues or cash received. Well-documented phenomena like the innovators’ dilemma or the difficulty of integrating mergers are rooted in the problem that salespeople are optimizing under this year’s comp plan and don’t necessarily want to take “risks” (even if those risks are theoretically in the company’s interest) to push innovative new products that may not benefit them till future years. All the complaints my libertarian friends have about ineffectual rules and the law of unintended consequences can apply even to the purist capitalist’s effort to manage a sales organization. But the fact that a set of practices are imperfect doesn’t prove that adding more rules and complexity will make them better.
If you take that up a level into more legal rules, Sarbanes-Oxley, Dodd-Frank and other laws now provide a lot of oversight into the CEO’s compensation plan. But again we see the law of unintended consequences at work—governance gurus advocate for compensation consultants to assess the appropriateness of CEOs' comp plans, yet somehow the consequences of those consultants’ work is ever-higher CEO pay with only limited ties to performance. Has Sarbanes-Oxley achieved its intended outcome, or is it dominated by unintended consequences?
If you look at the latest kerfuffle over Apple’s (and other tech companies’) startlingly low tax rates, again we see the law of unintended consequences at work, where a series of local rules and choices result in some of the largest and richest companies in the world paying a much lower income tax rate than the notional rate.
Or look at the banking industry. There’s a widespread view that repealing Glass-Steagall was (at least in part) a mistake, but there’s no easy way to put that genie back in the bottle, so now we’re moving to an aggressive regulatory regime to govern practices across the banks. Would Oracle be better off if the Obama administration established a set of rules for sales comp plans? Why do we think the banks will be better off if we do the same for them? Will those regulations achieve their intended consequences? We’ll see.
So what does this have to do with the New Normal? Everything, I think. A lot of the New Normal discussion got kicked off in complaints about costs, but I’ve always maintained the real issue is effectiveness and complexity (next time I will discuss the book AntiFragile), which “presents” as cost but is really more fundamental. It’s easy to see the law of unintended consequences when it’s someone else (government) making the rules, not so easy to see it when we make the rules ourselves. So while much of the New Normal discussion should stay on the mechanics (the how) of service delivery, perhaps we should focus as much on the goal (the what) of service delivery, and rigorously assess what really works, and whether adding more complexity (more rules) achieves the intended consequence.
In the Old Normal law, we’d argue about our values, create rules that we assumed worked (and dismiss efforts to manage or really understand the rules as “commodity” work), and ignore unintended consequences, or get annoyed when unintended consequences created complexity that led to excessive costs. In the New Normal, I’d argue that the primary job of lawyers is to manage all kinds of rules to make sure they work, and achieve their intended consequences as efficiently and elegantly as possible. Like a lot of what we write about here at the New Normal, this is a work in progress, where the in-house lawyers are overall pretty far ahead of the firm lawyers.
So while we don’t have the answers, we hope we can engage the ABA Journal’s readers in moving the conversation forward and identifying current areas of excellence and ideas for improvement.
Paul Lippe is the CEO of the Legal OnRamp, a Silicon Valley-based initiative founded in cooperation with Cisco Systems to improve legal quality and efficiency through collaboration, automation and process re-engineering.
Updated on June 7 to insert tweaks from Paul Lippe.