By: Sharda Prashad, Toronto Star

May 22, 2005, The Toronto Star

It's happened to some of the biggest companies in the world, including General Motors and the Ford Motor Co. And now - infamously - it has happened to the Conservative Party of Canada.

What happens when one of your star executives departs to join the competition?

Call it the "Belinda Syndrome" - the political upheaval created when former Conservative MP Belinda Stronach crossed the floor in Parliament to join the competition. Her defection helped save the Liberal government from losing a vote of confidence - and left her former party in crisis.

What happens in the political world isn't all that different from the corporate world where high-profile defections create controversy, crisis, and not a little animosity.

Take the case of Jose Ignacio Lopez de Arriortua. When Lopez left his job as head of purchasing at GM for a similar position at rival Volkswagen in 1993, a firestorm ensued.

Lopez was accused by GM of taking confidential information about plans for new GM models, facilities and suppier lists. He denied any wrongdoing, but GM sued Volkswagen, eventually settling for $100 million (U.S.) and an agreement to buy $1 billion worth of components from GM subsidiaries.

Volkswagen denied it knew anything.

Lopez retired from the German automaker in 1996, and moved to Spain.

While the GM-Lopez case may be an extreme example of what can happen when an employee defects, bolting to a competitor is rarely a smooth process.

When Stronach joined the competition last week, some viewed her act as traitorous - a common reaction to business defections as well.

"Most people would (say) it appears they have been stabbed in the back by one of their cohorts," says Walter Scott, management professor at the Kellogg School of Management at Chicago's Northwestern University. "It's challenging to do it right and retain the respect of those you're leaving behind."

Scott cites the case of Lee Iacocca, president of Ford from 1970 to 1978, as a classic example of an executive joining the competition.

"Lee Iacocca was the heir apparent at the Ford Motor Co.," says Scott. But a conflict with president Henry Ford II led to Iacocca's 1978 departure.

"Sometimes you just don't like somebody," Ford said about Iacocca's firing.

Iacocca didn't sit still for long. An ailing Ford competitor came courting a few months later, and Iacocca accepted the offer.

"After Henry fired me, I went to Chrysler because it was the only game in town," Iacocca told Fortune in 1988.

As the president and chairman of Chrysler Corp., Iacocca poached staff from Ford, used his savvy business skills, knowledge of the industry gained at Ford, and led Chrysler to record profits. Iacocca made Chrysler a rival of his former employer.

"(He) became the saviour of Chrysler," explains Scott.

However, non-compete agreements make it difficult for executives to join a competitor, says Neena Gupta, labour lawyer at Gowling Lafleur Henderson LLP. These agreements often specify what an executive can and can't do after leaving their employer.

Competing with the former employer, directly soliciting customers and clients of the former employer and encouraging former co-workers to leave and join the new firm are usually not allowed, Gupta says. Divulging confidential information is also usually forbidden.

Former Corus Entertainment executive Michael Hirsh paid an undisclosed sum of money to get out of his non-compete agreement before he could buy rival Cinar Corp.

"Non-compete agreements are common," adds John Mastoras, labour and employment lawyer at Ogilvy Renault LLP. "They help ensure fairness, to ensure the employee doesn't compete unfairly against their former employer."

Yet, a non-compete agreement can't prevent executives from joining a rival. And Mastoras and Gupta both say non-compete agreements are not always enforced.

"Courts are loathe to enforce non-competes because they're viewed as impairing a person's ability to earn a living," says Mastoras. "Courts don't like to see these types of restrictive covenants."

Such agreements are also seen as stifling free enterprise by limiting competition, Gupta adds.

The more specific and reasonable a non-compete agreement is, the more likely it is the courts will uphold it, says Mastoras.

"The high-tech market is fairly competitive. If the non-compete says the employee can't work for a competitor for five years, anywhere in the world for any line of business the company is in or will be in the future, the courts will strike it down," Mastoras says.

"If the agreement is more specific, such as you can't work for six months within the province of Ontario, and is limited to a specific product line that's only sold in Ontario," Mastoras says, "that might stick."

Regardless of when an executive joins a competitor, the new company does benefit from the knowledge the executive brings.

"If (the executive) brings the price the competitor pays and other specific facts, then there's a better understanding of the overall strategic sense," says David Collis, senior lecturer at Harvard Business School.

If the industry has a long lead time, like the automotive or pharmaceutical industry, a defecting executive can provide a competitive advantage by confirming what projects are coming down the pipeline, says Collis.

For the executive, joining a competitor has to be done patiently and intelligently if she wants to be successful in her new position.

"If (the new company) views you as traitorous, that will go away in a few months," Collis says.

In order to fit in to the new corporate culture, Scott says, "You have to immediately try to create bonds of loyalty with your new staff. You have to be a powerful listener and observer."

Or executives could do what Iacocca did and fire many Chrysler executives and hire new staff - including Ford defectors.

Collis questions if astute businesses really need the information a defector brings. A strong management team, he says, will already have a solid understanding of rivals.

"Good companies have done a competitive analysis and know what the competitor's strategy is," explains Collis. "A lot of it is predictable. There is a lot of inertia."

The company that loses its star executive must react to the increased knowledge its competitor has gained, recommends Scott.

"It's important to understand what the person is taking with them," Scott explains. "You have to have a counter response.

"It's the old story," says Scott. "Don't look back, because they might have time to gain on you."