target="_blank" rel="nofollow" href="#ulink_fd2d4130-481c-521a-9e00-5b6d315bd776">2. Joseph Bain, a founder of the field of industrial organization economics, bequeathed the notion that the structure of an industry and conduct of competition within that industry drive investment returns.3 3. How you behave can affect your position in the competitive arena.
4 4. “Newco” designates the new firm that emerges from a merger or acquisition.
CHAPTER 2 Ethics in M&A
INTRODUCTION
Ethics and economics were once tightly interwoven. The patriarch of economics, Adam Smith, was actually a scholar of moral philosophy. Though the linkage between the two fields may have worn thin in the twentieth century, they remain strong complements.1 Morality concerns norms and teachings. Ethics concerns the process of making morally good decisions, or as Andrew Wicks writes, “Ethics has to do with pursuing—and achieving—laudable ends.”2 The Oxford English Dictionary defines “moral” as “Of knowledge, opinions, judgments, etc.; Relating to the nature and application of the distinction between right and wrong.”3 “Ethics,” on the other hand, is defined as “The science of morals.”4
Ethical dilemmas pervade the field of mergers and acquisitions. For instance, consider these five cases:
1 The CEO of a firm sought to prepare the firm for sale. Part of this entailed the use of accounting policies to improve the financial track record of the firm. The practice of “prettying up” a target company for sale may be widespread—is this unethical?
2 A firm pursued an aggressive strategy of growth by acquisition that relied on creating the appearance of high growth, when in fact the companies acquired were mature and growing slowly. The appearance fueled expectations of prolonged growth, granting the firm a high share price, and therefore a strong acquisition currency with which to do more deals. Was this strategy of momentum acquiring unethical? Many companies aim to persuade investors of good growth prospects even when that growth is uncertain. Is such persuasion unethical?
3 The directors of a public corporation approved without much analysis or discussion a leveraged buyout proposal from the CEO at a relatively low price. A number of the directors were friends or affiliates of the CEO. Was the behavior of the directors unethical? Most directors develop a personal or social acquaintance with the CEOs they employ. Is this affiliation unethical?
4 A large investment bank refused to provide acquisition financing for a deal unless it was to be listed as the lead underwriter, ahead of its rival, another firm also in the underwriting syndicate. Is the use of bargaining power unethical?
5 In response to a hostile takeover attempt, a CEO considered paying “green-mail” to make the raider go away. The CEO had a strong self-interest in the outcome of the takeover attempt, as the retention of his position hinged on it. Is the payment of greenmail unethical?
The ethical dilemmas in M&A are rarely clear—or, if they are, they may entail a violation of the law. The field of business ethics offers no easy answers to dilemmas. But a failure to reflect seriously on them easily leads to unhappy outcomes. The long tradition in Western civilization says that ethical behavior promotes sustainable life; unethical behavior does not. The aim in this chapter is to sound a strong cautionary note and stimulate the M&A professional to reflect carefully on the ethical dilemmas embedded in the field.
WHY SHOULD ONE CARE?
The scant attention to ethics in books and articles on M&A is arresting, given the prevalence of ethical dilemmas in the field. One hears numerous explanations for this: We have no training in business ethics; it is embarrassing to discuss these things; we’re too busy making money; it’s a dog-eat-dog world; it’s not in my job description; and so on. If all this is true, why should we pause here at the start of a treatise on M&A to dwell on ethics? Consider these interrelated reasons.
Sustainability
Unethical practices are not a foundation for an enduring sustainable, enterprise. This first consideration focuses on the legacy one creates through one’s M&A deals. What legacy do you want to leave? To incorporate ethics into our M&A mind-set is to think about the kind of world that we would like to live in, and that our children will inherit.
One might object that in a totally anarchic world, unethical behavior might be the only path to life. But this only begs the point: We don’t live in such a world. Instead, our world of norms and laws ensures a corrective process against unethical behavior.
Trust
Ethical behavior builds trust; trust rewards. The branding of products seeks to create a bond between producer and consumer: a signal of purity, performance, or other attributes of quality. This bond is built by trustworthy behavior. As markets reveal, successfully branded products command a premium price. Bonds of trust tend to pay. If the field of M&A were purely a world of one-off transactions, it would seem ripe for opportunistic behavior. But in the case of repeated entry into M&A, for instance by active buyers, intermediaries, and advisers, reputation can count for a great deal in shaping the expectations of counterparties. This implicit bond, trust, or reputation can translate into more effective and economically attractive mergers and acquisitions.
The objection to this line of reasoning is that ethical behavior should be an end in itself. If you are behaving ethically only to get rich, then you are hardly committed to that behavior; being ethical for pay is inauthentic. This is true. But it is a useful encouragement to all of us that ethical behavior need not entail pure sacrifice. Some might even see this as an imperfect means by which justice expresses itself.
Team Building
Ethical behavior builds teams and leadership, which underpin process excellence. This book emphasizes the importance of good process as a driver of good outcomes. Stronger teams and leaders result in more agile and creative responses to problems. Ethical behavior contributes to the strength of teams and leadership by aligning employees around shared values, and building confidence and loyalty.
An objection to this argument is that in some settings promoting ethical behavior is no guarantee of team building. Indeed, teams might blow apart over disagreement about what is ethical or what action is appropriate to take. Yet typically this is not the fault of ethics, but rather of team processes for handling disagreements.
Higher Standard
Ethics sets a higher standard than laws and regulations. Several chapters in this book highlight the boundaries on managerial action set by laws and regulations. But to a large extent, the law is a crude instrument: It tends to trail rather than anticipate behavior; it contains gaps that become recreational exploitation for the aggressive businessperson; justice may be neither swift nor proportional to the crime; and as Andrew Wicks said, it “puts you in an adversarial posture with respect to others, which may be counterproductive to other objectives
