Note: This is the second in VBM Consulting´s series on the interrelationship between business ethics and pursuit of maximum shareholder value. The initial column and article, “Setting the Record Straight” (© VBMCL 2003-4, all rights reserved) first appeared in September 2002 and can be viewed on the VBM Resource Ctr. Article Archives.

The examination of ethical issues related to MFV that follows is intended to provoke constructive discussion, and does not necessarily reflect the opinion of VBM Consulting or its staff, operators of this website, or anyone else associated with the firm. Other perspectives on the issue of business ethics and pursuit of maximum shareholder value are welcome. For consideration, submissions should be sent to: outperform@vbm-consulting.com including full contact details. 1

There are few sure things following the multiple shocks of corporate scandals such as those experienced in 2000-2, but one is that self-appointed protectors emerge to remind us the importance of business ethics. Or at least, their own highly individualistic interpretation of what “ethics” means to them.

While absolutely no one opposes the notion that Managing for Maximum Value (MFMV) must be pursued in an “ethical” manner, reasonable people have considerable differences of opinion about what the “e” word means in daily business practice.

One working definition for ethical business behavior is that the company does not partake of any action which is illegal, nor does it have any dealings with customers or suppliers who are known to be operating in such a manner (Admittedly, this is a very limited interpretation of the word. Your own interpretation is probably far more expansive, if you´re anything like us).

But starting with this narrow definition, we suggest that the imperative for “ethical” MFMV can be viewed as self-correcting. Stated another way, the company that violates “ethical behavior” is severely and almost immediately penalized in the financial marketplace in terms of valuation, assuming that full information is available.

Assume that management at hypothetical ‘Brinkmanship, Inc.´, a waste management company, decide that they want to grab the extra profits that appear to be available by selling used radioactive waste to North Korea, through middlemen.

Brinkmanship´s managers might try to pretend that they don´t know where the intermediaries are shipping the potentially hazardous materials. However, that is why management at Brinkmanship Inc. were interested in the maverick side deal in the first place.

Assuming full disclosure of the true situation (a very, very important assumption), Efficient Market Theory takes over and the borderline illegal company´s share price and valuation plunge. 2

Why? Because the Value-Setters adjust management´s future cash flow projections (upon which all valuations are based, See Clark & Neill´s Net Value, Figure 1.5a-b) for anticipated additional litigation costs and perhaps even the possible loss of an executive who could be by prosecutors to take up new residence in prison.

Think that such automatic market valuation adjustments are unlikely? Think again.

A similar situation (remove the illegality) occurs, say, when a company is found to have new liability for asbestos liability (Halliburton, ABB). Or when certain manufacturing processes that sometimes causes more than the average level of injuries become a favored targets of compensation-chasing attorneys eager to take advantage of today´s victim culture.

But one of the key problems associated with the word “ethical” is when it becomes an umbrella theme by various groups of unemployables as a cover for their resentful anti-business rantings. Let´s face it—losers whose best job ever will involve saying “Would you like fries with that order, sir” will rarely accept the notion that someone else earns a thousand times what they do because they create more value.

Instead of blaming themselves for their self-imposed underperformance, it is so much easier to label anyone and everyone doing better as “unethical”.

Understandably, Nike´s alleged employment of under aged Asian labor for a pittance has emerged as one of the recurring targets in recent years of activists rallying against alleged “unethical” behavior: both reasonable adults and the maggots referred to in the paragraph above.

The protesters tend to forget that the market mechanism referred to above severely penalized Nike directly and its shareholders indirectly.

Certainly, the prospect of taking advantage of child labor in countries where it is still allowed in order to reduce costs is an anathema, especially when one considers that the result of such possible exploitation is to produce sneakers for some rich couch-potato of a kid in East Armpit, New Jersey for $150 of Daddy´s money per pair.

But even with a case such as this, there are other considerations. Imposing new rules and restrictions to reduce child labor sometimes removes the only source of income for those families. Again, our point is only that the business ethics issue is far more complex than initially thought. Especially since the word ethics means something different to almost everyone.

When a company has an opportunity to Manage for Maximum Value but blows it, is that ethical business behavior? Some of the shareholders who believe they have had their pockets picked by leaders who have deliberately underperformed consider such neglect as “unethical”.

Notes:

1

All of the VBMC series on ethics and shareholder value (as well as all other materials on this website) are copyrighted property of VBM Consulting Limited, all rights reserved. No duplication, copying, printing or retention of any of these materials in any device whatsoever is permitted, under any circumstances.

The columns editor will have sole discretion on which articles may or may not be selected. There will be no payment and there is no assurance that by-lines will be used for any submitted article that is used, in whole or part. The article editor may select excerpts from any submission, or combine comments.

2

VBM Consulting partners Peter J. Clark and Stephen Neill, The Value Mandate: Maximizing Shareholder Value Across the Corporation (New York, 2000, Amacom), p. 18.
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