Strategy & Opportunistic Hold-Up

How to Protect Your Company — and You

Source: Bob Mankoff, CartonStock

A client recently raised a concern with me and I framed my answer using the concept of opportunistic hold-up. The client found it helpful, so I thought I would write a Playing to Win/Practitioner Insights piece on the subject called Strategy & Opportunistic Hold-Up: How to Protect Your Company & You. And as always, you can find all the previous PTW/PI here.

The Concept

The concept is that a company can be held up by actors who opportunistically take advantage of it. A classic example is when a company develops an oil field in a foreign country and after all the investment turns the oil reserve into a valuable producing asset, the foreign country expropriates it. The company has its valuable asset held up and there is little that the company can do.

This happens in nature too. When the Welland Canal was built to circumventing Niagara Falls, which connects the lower-elevation Lake Ontario to the higher-elevation Lake Erie, lamprey eels gained access to previously protected Lakes Erie, Huron, Michigan and Superior and opportunistically held up the lake trout population — literally decimating it. Lake trout worked hard to get fat and juicy, and then lamprey eels sucked the life out of them.

Nobel winner (2009) Oliver Williamson is credited with having developed the concept as part of his work in Transactions Costs Economics, which is described in his 1975 book Markets and Hierarchies: Analysis and Antitrust Implications. In a later book (1985), The Economic Institutions of Capitalism, he provides a wonderful definition of opportunism: “self-interest seeking with guile.” I like the use of the highly evocative ‘guile’ descriptor. (For thoroughness, other economic and legal scholars including Victor Goldberg and Ben Klein also contributed to the understanding of opportunistic hold-up.)

The Target

The hold-up target is value. Obviously, it only makes sense to hold up something valuable. In the words of the most famous American bank robber, Wille Sutton, when asked why he robbed banks, his unforgettable answer (at least according to legend) was: “because that’s where the money is.”

You don’t have to worry about opportunistic hold-up if you and/or your organization generate little or no value. People don’t spend time, energy, and resources holding up destitute entities. If you haven’t generated any value, you are safe from the Willie Sutton’s of the world.

However, if you are successful — whether a company, individual or even not-for-profit — you have a target on your back. Trial lawyers target deep pockets. Legislators target deep pockets. Guileful employees target deep pockets. Warren Buffett always exhorted companies to build a deep moat against competition. But competition isn’t the only actor necessitating a moat!

Sometimes the hold-up is quite blatant. The oft-discussed wealth tax is a good example. The simple logic is: you have it; we want it. That sneaky city/municipal hotel tax on your bill at check-out is another example. You need a hotel room, and the hotel can’t pick up and walk out of the city because it doesn’t appreciate its guests being taxed. The assets have been irreversibly invested in a specific jurisdiction, like San Francisco where all the extra taxes combine to be almost as much as the room cost. So, hotels provide a perfect environment for opportunistic hold-up by some guileful policy analyst who figured out a precise way to hold-up the target.

But it also happens in very subtle ways. When I became dean of the Rotman School of Management in 1998, nobody badgered me about getting their son/daughter/niece/employee admitted to our flagship MBA program because we weren’t very good. It was pretty easy to get into the school. Hence a spot in the MBA program didn’t have much value.

But ten years later, when we were the #1 MBA program in the company and Canada’s most recognized globally, I started getting lots of calls from parents (well, it was exclusively fathers) asking to make an exception for their sons (yup, exclusively) who had been rejected but were ‘a really good kid.’

That was self-interest seeking with guile. They wanted me to lower the quality of the overall class — and therefore the value of the Rotman MBA degree — to get the benefit of their sons earning a degree that they didn’t deserve. The father and son would get a really big benefit and the Rotman School would suffer a little bit — if it only happened a bit. Of course, if I would have made wholesale exceptions, they would have stopped asking because it would have no longer provided a narrow benefit to them — I would have torpedoed the value of the degree.

And it gets even more subtle at the personal level at the Rotman School. When I approached my first sabbatical, I called Rob Prichard, the fabulous University of Toronto president who hired me as dean, and told him I thought it was a ridiculous idea for me to take my sabbatical — a sitting CEO-equivalent wishing his team good luck and disappearing for a year. He made a great suggestion — to take a two-month break each summer to accelerate my many writing projects rather than take a year-long sabbatical every seventh year. Those summer breaks helped me write The Opposable Mind(2007), The Design of Business (2009), Fixing the Game (2011), and Playing to Win (2013) while I was dean.

Leading up to one of those summers, the principal of my youngest son’s school asked me to attend a summer offsite of her teaching staff to give a seminar on integrative thinking (the subject of The Opposable Mind). I declined, explaining to her that I didn’t leave my remote Northern Ontario writing location for anything during my writing break. She asked me to make an exception for her. I tried to explain to her that the only reason that she wanted me to attend so desperately was that I wrote the books I did and that if I agreed to requests like hers, I wouldn’t be able write them and that would solve the problem because she wouldn’t ask — a version of the Impossibility Theorem about which I have written before in this series. She didn’t seem to follow the logic because she continued to press me for an exception. I didn’t succumb to the attempted emotional opportunistic hold-up of my time (if you cared about your son’s school, blah, blah, blah).

This kind of thing happens all the time to great companies. Self-interested agents guilefully attempt to extract chunks of the value these companies create — for no benefit to the company — which over time, makes those companies weaker. It can be: hire my mediocre son who could never make it through your recruiting process. It can be: support my favorite cause that has nothing to do with your business. It can be: pay this ‘excess profits tax’ because you are making too much money. There is no end.

Getting Ready

You can’t stop the attempts. The world is chock full of opportunistic actors with plenty of guile. But you can get yourself ready for the attempts because forewarned is forearmed. I suggest the following four ways:

1) Understand your vulnerabilities

In what ways can your strategy be damaged most by opportunistic hold up? Is it the company’s reputation? Or is it the quality of the company’s offering? Is it potential regulatory restrictions? Is it potential tax hikes? What actors have the biggest incentive to deploy guile to opportunistically hold up the company? Trial lawyers? Legislators? Regulators? Suppliers? Employees? Your goal should be that when the inevitable opportunistic hold-up attempt comes, it won’t be a surprise.

2) Establish protective rules

While it might sound bureaucratic and controlling, protective rules are necessary because opportunistic actors with guile often target employees of companies to abet their hold-up plans. That includes convincing an employee to hire an unqualified relative/friend or to give company business to an unworthy supplier. That is why companies need to have rules in place that attempt to keep employees from engaging in this sort of activity, such as rules against accepting supplier gifts or oversight on hiring decisions.

3) Invest in relationships

Depending on the vulnerabilities identified in the first item above, aim to build relationships with allies that could help you fend off opportunists. If legislators/regulators see that your company has no friends and supporters, they will be more likely to hold-up you because there won’t be any pushback. For example, Apple has more customers on its side than Microsoft because Apple has invested more in positive customer relationships. I am sure that some customers like Microsoft — I just haven’t met one. The TikTok takeover is a pure case of opportunistic hold-up and it has been delayed by massive pushback by customers.

4) Tell your story

Explain to the world outside what keeps your company great. Reinforce the same inside. It will help insiders appreciate what hold-up attempts are most important to parry. And it will help some outsiders understand what you will defend most fiercely. Maybe even some of them will demur out of respect.

However, even a combination of the four won’t prevent the most nefarious opportunists from damaging your company. The worst would be delighted to destroy your company’s greatness. In my view, opportunistic hold-up is one of the main reasons why so few organizations stay great over time. In some sense, it is a case of what Australians call “the tall poppy syndrome.”

Practitioner Insights

Opportunistic hold-up is an important concept to understand — both organizationally and personally. Your goal in life should be to make both yourself and the organizations for which you work more valuable over time. That doesn’t imply that you should do it for self-aggrandizement. Once you have created value, you can use it for the benefit of others. But you have few options if you don’t create the value in the first place.

Failing to do so will provide protection from opportunistic hold-up — but the cost you must pay is mediocrity or worse. Succeeding creates a different problem: it attracts self-interest seekers with guile.

At a personal level, I can promise you that opportunistic hold-up is both real and demoralizing. As they say, no good deed goes unpunished! You have undoubtedly worked hard to become a valuable person. One reward — or consequence — is that you will be targeted for hold-up. And you will face plenty of guile. And always remember, as it is with criminals, the smartest opportunists don’t show up wearing an identifying black hat. They make sure to wear their nicest white hat. Ignore their superficial and slimy words. Pay attention to what they do.

The key to fending off the opportunists is to fully understand what makes you above average — what is your personal strategy? How has it made your valuable? If the key to your success is (making it up) creativity, be especially vigilant for an opportunist who (for example) convinces you to hire his non-creative son-in-law to work closely with you. The opportunist gets his son-in-law a cool job while diminishing the creativity of your operation. The opportunist won’t care about the cost to you of the latter because he is getting the benefits of the former.

You can’t protect against everything in life. So, focus on protecting the things that are key to the success of your personal strategy. For me I knew that writing books was a key part of my personal strategy, so I was motivated to protect it against the opportunist school principal.

At a company level, it is similarly important to understand your strategy well enough to determine your strategy’s greatest hold-up vulnerabilities. Don’t strive for perfection. You will never be able to forecast every possible opportunist attack. But in my experience, you can get ready for most of them. Invest in protective rules, develop relationships that could result in support against opportunistic hold-up, and tell your story both inside and outside the company. If you do these things, when the guileful opportunism comes, you will have the best chance to parry it because it won’t be a surprise, employees will be helped by rules and will know why resistance is essential, and friends will help you.

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