Background of the Case
In 2007, Peoples Company acquired a large manufacturing plant from Lexington, Inc. The new manufacturing plant was run by one of Peoples' subsidiary companies, Choice Manufacturing LLC. They built upon the acquired management team, diversified the client base and made significant investments in the plan. Choice Manufacturing LLC has consistently exceeded expectations for Peoples Company. Since acquiring the new plant from Lexington, they have been able to attract new non-Lexington types of manufacturing. They also considered taking the company public. Choice Manufacturing was the premier business until they ran into a cash flow crisis two and a half years later. They sought and received a $20 million credit facility deal from Lexington to alleviate the problem. After another three years, Peoples Company decided to sell Choice Manufacturing LLC back to Lexington, Inc. The decision to sell was based on the drop in demand due to the competition and an inability to get additional funding.
The board of directors for Peoples' was informed of the negotiations to sell Choice back to Lexington. They also asked the members of the board for advice when needed. The officers of Peoples would have preferred not to sell Choice and find a way to continue to move forward with Lexington. Management was considering bankruptcy or litigation, but they knew if they took that path, it would affect future business. There were two conditions that needed to be met in order to let the sale go through:
1) Peoples would be protected against all liabilities with respect to Choice
2) Peoples would also be relieved from all Choice debt from Lexington or third parties
Once this was completed, Peoples would be in a better economic position to compete in the market.
While the negotiations for the selling of Choice were taking place, two senior officers from Peoples Company, one of whom was the president of Choice, sought to purchase one of the business units that existed within Choice. This business unit was still profitable, and could help to salvage the investment undertaken by Peoples if Lexington were to allow them to buy it. However, the two officers wished to buy from Lexington, so that the initial deal between Peoples and Choice would go through, thus eliminating Choice's debt responsibility from their hands. Once Lexington fully approved their deal to buy this business unit, the two officers saw fit to inform the CEO of Peoples. The CEO approved of the deal, but the shareholders have been kept in the dark.
Ethical Issues
The primary ethical issue involved within the case study arose when senior officers of Peoples Company, including the president of Choice, confronted Lexington about buying back a business unit within Choice after the finalized sale of Choice to Lexington. The growth potential of this particular business unit was tremendous, which is what prompted the proposal. While all of the senior officers approved of this plan and wholeheartedly supported it, the shareholders were never informed of the deal. The shareholders are some of the most important resources to a company, providing needed financial investment and material resources; they must be kept informed as to the actions of those who have a fiduciary responsibility to them (Ferrell et al., p. 33). The two senior officers only sought their own gain, due to the fact that the deal they engaged in left Lexington with all of the liability and losses, including the accumulated debt of Choice. The conflict of interest lies in the fact that the two senior officers sought to create the best value for themselves, and not necessarily the Peoples shareholders or Lexington.
Alternatives to the Decision
* Informing the shareholders of Peoples of the business plan to buy back the business unit from Choice
* Making the deal to buy the business unit back from Choice before the finalized sale back to Lexington
* Officers could have purchased the profitable business unit for Peoples, running it themselves as another subsidiary
* Do nothing, foregoing the completion of the sale of the business unit, thus preventing any action that the shareholders were made unaware of
Informing shareholders of business plan
In this alternative, the business plan proceeds unabated, but the shareholders are kept in the loop about what is happening on the subject of the purchase of said business unit. This allows the shareholders to be aware of the actions of the company in which they invested, or the officers who run that company. They would, additionally, be aware that the plan to purchase the business unit took place after the finalized sale of Choice to Lexington, thus offloading the remaining debt to Lexington. The plan itself is an advantageous one to Peoples' shareholders in some respects; it gets rid of a property that was not profiting them, while still managing to offload the debt that Choice accumulated. They would also be made aware of the actions of the senior officers, regardless of the lack of value the business unit itself would provide to the company; if anything, the involvement of the two senior officers diminishes the value of the company, as they are dedicated time and energy to a business unit that will not have anything to do with Peoples.
In this case, the senior officers wanted to do best by the shareholders and the success of their company, which required them to take these actions. However, by not telling the shareholders, they would be committing an immoral act - even though the sale is something that would benefit the company (and the shareholders by extension). Moral absolutism involves a principle that should never be violated (Pojman, p. 50). The principle that applies in this instance is the need for transparency and accountability to the shareholders - those who invest in the company. By adhering to the principle of moral absolutism in this alternative, the senior officers would be maintaining that transparency by informing the shareholders of these decisions, regardless of what they were doing. Leaving the shareholders out of the loop betrays the officers' fiduciary responsibility to them, thus making their actions unethical.
Making the deal to buy business unit from Choice before finalized sale to Lexington
In this alternative, the business deal to buy the business unit from Lexington would take place before the finalized sale of Choice to Lexington. This way, all of the parties involved would be aware of the long-term consequences of the deal they were putting forth. Lexington would be told of the plan to purchase that business unit from Choice before its sale to Lexington, thus eliminating the deception on the part of the two senior officers who wanted to purchase it.
Advantages to this alternative include the added transparency of the Lexington and Peoples' officers as to the intended actions of the senior officers who intended to purchase the business unit. Since the plan to purchase the unit was presented before the finalized deal, it places Lexington in a better position to dictate terms, given that Peoples wants something more from them than was acknowledged or expected during the initial deal.
The primary downside to this alternative is the possibility of having to keep some of the debt that Choice accumulated during its time with Peoples. By making the terms of the deal known before the final sale of Choice, positions would likely be renegotiated, as Lexington would trade that business unit for relief from some of Choice's debt. In essence, Peoples would be purchasing that business unit for the asking price as well as some of Choice's debt on top of that. Also, the senior officers would have to make the business unit a subsidiary of Peoples, as opposed to purchasing it themselves. However, this is only a disadvantage to them, as it would benefit Peoples and the shareholders through the acquisition of a potentially profitable business unit.
This alternative follows the principle of act utilitarianism, wherein the correct act is the one that generates the most good for everyone concerned in the purchase. This ethical theory follows the greatest-happiness principle, which states that whatever actions must produce the greatest level of satisfaction by all beings (Mill, 1863). With act utilitarianism, all actions must lead to an ideal final result for as many people as possible; this means that whatever is chosen as an action must create the best cumulative and gross benefit. In the case of this alternative, Lexington, Choice and the shareholders would be given the entirety of the information about the deal before the sale is finalized. Lending Lexington added leverage, while permitting Peoples and Choice to incorporate the business unit into their ownership with the knowledge of the shareholders, would create the greatest possible benefit for everyone involved. While keeping Lexington in the loop would help the two senior officers more in the long run (as well as Peoples for letting go of all Choice's debt), it would leave Lexington with a greater financial burden, as well as a diminished negotiation position in the initial deal.
Personal purchase of business unit by senior officers to run as subsidiary
In this alternative, the two senior officers purchase the business unit not for themselves, but to run as a subsidiary of Peoples. The business unit is still bought from Lexington, but instead of being run as an independent company by the two senior officers, it is merely added to Peoples as part of the deal, contributing to the cumulative growth and profit of Peoples as an organization. This way, the business unit is run under the overall business, thus adding value to the company.
The advantage to this alternative is that the shareholders would directly benefit from the actions of the two senior officers; by acquiring this new business unit that has the potential for growth and profit, the shareholders' own investment would increase and benefit them. The senior officers would also be granted the ability to run the business unit as they always wished to, while still having the corporate support of Peoples. As this support would include financial resources and manpower, it would be easier to stage a takeover of this business unit by these two senior officers.
The biggest disadvantage to this option is that the two senior officers would no longer have the autonomy they desired as a result of the clandestine sale of the unit on their own. However, the shareholders would have not benefited from the sale, as they would not have been investing in that business unit. Peoples would also not benefit from the profit and growth that would be generated.
Do nothing, not going through with sale
In this alternative, the business unit is not purchased by the two senior officers. Lexington merely acquires it as per the terms of the original sale of Choice to Lexington from Peoples. Lexington would then have the potential to utilize that profitable business unit if they so choose. Peoples merely continues on as is, with the two senior officers in question remaining at their respective companies (Peoples and Choice). Business then continues as usual, with Peoples maintaining their existing business model.
The disadvantages to Peoples and the two senior officers would be that they do not benefit from a potentially profitable business unit. Peoples merely offloads the entirety of Choice, which more or less had lost them money, but they still get relief from the debt Choice had accrued. The shareholders would also not benefit from a business unit that was not purchased; then again, they would benefit from investing in a company that does not perform actions that the shareholders are not informed of. Peoples would benefit from the fact that they are an ethically responsible company, and they would not be accused of not acting in their shareholders' best interests by hiding information from them.
Graded absolutism is the ethical theory that is chiefly considered in this alternative. According to graded absolutism, some ethical norms must be adhered to over others (Geisler, 1987). In this instance, it is more important to act with fiduciary responsibility than to alter a deal after the fact (e.g. the deal Peoples made with Lexington). In this instance, the original deal selling Choice to Lexington is sacrosanct; it must not be tampered with or altered in any way. In the original scenario, the private meetings with Lexington betrayed the trust of the Peoples CEO, who did not know what was going on. This led to some parties not being made aware of a deal until after certain conditions were met (the Lexington president signing off on the new deal, etc.); this was an unethical decision, and the option to do nothing honors the original deal, and the company's integrity.
Ideal Alternative - Option 3
Considering the aforementioned alternatives, it is clear that the morally superior one is Option 3 - allowing the two senior officers to purchase the business unit, but instead adding it to the Peoples company as a subsidiary. This would allow the company itself to trim the fat of the Choice subsidiary that they just sold, as well as the debt they accumulated. At the same time, they would also be granted the ability to maintain the one profitable and growth-worthy aspect of the company. The two senior officers would still run the business unit as expected, and still have the economic support and resources of Peoples.
The shareholders themselves would benefit from this decision as well; the purchase of the business unit would add value to the company, due to the fact that the growth and profit of the business unit would be added to Peoples' cumulative success. This can lead to increased prices in shares, and a better investment for the shareholders. The principles of act utilitarianism, in which the actions of the parties involved must be made with the greatest happiness of all in mind, would be upheld, and would lead to the most morally superior decision. The alternative makes sound business sense, and would benefit the stakeholders without the two senior officers betraying Peoples or Choice in any way. While Lexington would lose out on this business unit, and the profit that could come with it, the purchase would happen with their consent (as it had in the original scenario).
In conclusion, the option to acquire the business unit under Peoples would create the most value to the shareholders, which is part and parcel of the company's fudiciary responsibility. In following what is meant to be in the best interests of the shareholders, this alternative is the ideal ethical option for the stakeholders in this situation. In the original scenario, two senior officers of two different companies with insider information took advantage of that to purchase a business unit on their own. With this situation, the two senior officers still buy the company and benefit from it, but now both Peoples and its shareholders benefit as well.
References
Ferrell, O.C., Fraedrich, J., & Farrell, L. (2010). Business ethics: ethical decision making and
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Geisler, N.L., Feinberg, P.D. (1987). Introduction to Philosophy: A Christian Perspective. Baker
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Mills, J.S. (1863). Utilitarianism.
Pojman, L. P. (2004). A Defense of Ethical Objectivism.
Weiss, J. (2008). Business ethics: a stakeholder and issues management approach. Cengage
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