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 in facing a crisis.”5 To use only the law as a basis for ethical thinking is to settle for the lowest common denominator of social norms. As former chairman of the Securities and Exchange Commission (SEC) Richard Breeden said, “It is not an adequate ethical standard to want to get through the day without being indicted.”6
Some might object to this line of thinking by claiming that in a pluralistic society, the law is the only baseline of norms on which society can agree. Therefore, isn’t the law a “good enough” guide to ethical behavior? Lynn Sharpe Paine (1999) argues that this leads to a “compliance” mentality and that ethics takes one farther. She writes, “Attention to law, as an important source of managers’ rights and responsibilities, is integral to, but not a substitute for, the ethical point of view—a point of view that is attentive to rights, responsibilities, relationships, opportunities to improve and enhance human well-being, and virtue and moral excellence.”7
Reputation and Conscience
Motivating ethical behavior by appealing solely to benefits and avoiding costs is inappropriate. After all, the average annual income for a lifetime of car thievery (even counting years spent in prison) is large—so it seems that crime does pay. If income were all that mattered, most of us would switch into this lucrative field. The business world features enough cheats and scoundrels to offer any professional the opportunity to break promises, or worse, for money. Ethical professionals decline these opportunities for reasons having to do with the kind of people they want to be. Amar Bhide and Howard H. Stevenson (1990) write, “The answer lies firmly in the realm of social and moral behavior, not in finance. The businesspeople we interviewed set great store on the regard of their family, friends, and the community at large. They valued their reputations, not for some nebulous financial gain but because they took pride in their good names. Even more important, since outsiders cannot easily judge trustworthiness, businesspeople seem guided by their inner voices, by their consciences…. We keep promises because it is right to do so, not because it is good business.”8
The reflective practitioner will summon more reasons, or more interesting variations on these. Other writers—see, for instance, Carroll (1999) and Kidder (1997)—give explanations generally rooted in the expectations of society and the self-interest of firms.
IN WHOSE INTERESTS ARE YOU WORKING?
Generally, the M&A executive or deal designer is an agent acting on behalf of others. For whom are you the agent? Two classic schools of thought emerge.
1 Stockholders. The U.S. legal framework generally requires directors and managers to operate a company in the interests of its shareholders—Chapter 26 discusses this in more detail. The shareholder focus lends a clear objective: Do what creates wealth for shareholders. This would seem to limit charitable giving, “living wage” programs, voluntary reduction of pollution, and enlargement of pension benefits for retirees—all of these loosely gather under the umbrella of the “social responsibility” movement in business. Milton Friedman (1962), perhaps the most prominent exponent of the stockholder school of thought, argues that the objective of business is to return value to its owners and that to divert the objective to other ends is to expropriate shareholder value and threaten the survival of the enterprise. Also, the stockholder view would argue that if all companies deviated, the price system would cease to function well as a carrier of information