New publication in Strategic Management Journal
Companies with Similar Mindsets Are More Likely to Use “Incomplete” Contracts in Strategic Alliances, Increasing Legal Risks
In a new study published in the Strategic Management Journal (VHB A+), researchers from TU Dortmund University, the University of Groningen, the University of Passau, and Seoul National University explored why companies sometimes intentionally conclude “incomplete” strategic alliance contracts.
In business, the rule is usually to draft contracts that are as complete as possible, covering all potential scenarios. Such contracts, although complex and costly, provide security in disputes. Companies that opt for incomplete contracts expose themselves to legal risks, as exemplified by SIGA Technologies, which had to file for insolvency in 2015 after losing a legal battle against its former partner, PharmAthene.
The study hypothesized that companies are more likely to intentionally leave an alliance contract incomplete if they believe that both partners share similar cognitive structures. “This means they perceive the world similarly and have similar mindsets, if you will,” explains Professor Lorenz Graf-Vlachy from TU Dortmund University, one of the study’s authors. In such cases, companies often unconsciously trust that they can resolve disputes amicably.
The researchers measured the cognitive similarity of alliance partners by comparing their mission statements. The deliberate incompleteness of contracts was assessed by the frequency of “good faith” provisions—clauses that are particularly open to interpretation and can be understood very differently in court.
Analyzing 1,225 alliances in the biotech and pharmaceutical industries, the authors confirmed a positive correlation between cognitive similarity and contract incompleteness. This effect is more pronounced when the alliance involves high technological uncertainty, as it is generally more challenging to specify complete contracts then. Conversely, the effect is weaker when partners have extensive alliance experience, as they are less reliant on “soft” factors when they draft contracts in this case.
“Alliance partners that ‘tick’ in a similar way systematically conclude different contracts than partners with different worldviews,” summarizes Graf-Vlachy. “This also shows that mission statements are more than just empty words. Their content actually influences how companies approach strategic alliances, i.e., how they make far-reaching decisions.”
Graf-Vlachy adds, “The study enhances our understanding of when and why companies intentionally assume certain legal risks. It also highlights that company characteristics can unconsciously influence contract negotiations.”
Hanisch, M., Graf-Vlachy, L., Häussler, C., König, A., & Cho, T. Kindred Spirits: The Influence of Organizational Cognitive Frame Similarity on Contingency Planning in Strategic Alliances, Strategic Management Journal, online first.
Read the entire study here.