Ethics and private equity:
The Qantas bid
by Simon Longstaff
As the seers look for signs and portents amongst the entrails of the stalled APA bid for Qantas, we might hope that some attention will be paid to a range of ethical questions that arise – not just in relation to this bid but more generally when private equity comes a callin’.
In general, I do not think that there is anything intrinsically sinister about takeover bids driven by private equity funds. Nor is it necessarily improper to structure deals in a way that rebalances the ratios of debt and equity in target companies. The merits of such changes depend on a host of variables including: the cost of money, the market’s appetite for risk and the quality of the decision making that informs the process.
So, there is little point in demonising private equity funds. They are just one vehicle driving the cycle of ‘creative destruction’ that is part of markets – and of life in general.
That said, the means employed by private equity funds can give rise to profound, ethical challenges. Just a few can be identified here. First is the problem of conflicts of interest (and duty) – both for directors and managers offered the opportunity to have some ‘skin in the game’ and for their advisers. In some cases, staggering amounts of money are promised to directors and managers if a private equity bid succeeds. Clearly the bidder wants to pay the lowest price possible. However, existing owners expect directors and managers to secure for them the best possible price. The conflict is immediate and obvious.
Faced with this predicament, boards have sought to apply tried and tested principles for managing conflicts – with the inevitable result that those with the conflicts are excluded from access to key information and decisions. Managing conflicts in this manner can be effective – but not in every case. Unfortunately, some boards fix the immediate problem – but then ignore the massive ‘elephant’ standing quietly in the room. It lumbers in at the point where proper and necessary restrictions, required to manage the conflict, effectively neutralise the capacity of directors and managers to do the jobs that they are paid for. At some point you have got to ask, “What’s the point of having directors and managers who cannot discharge their duties to the company?” The cure for the problem of conflicts can be as bad (or worse) than the disease.
Similar issues arise for those who advise companies – especially when an intimate adviser decides to assist a predator. Chinese walls are notoriously thin – and depend less on the integrity of the structure than on those living within the walls. So, integrity is everything. Those whose interests are at stake have to decide whether or not a potentially conflicted adviser may continue to act. Can the adviser be trusted when so much might be at stake? In many cases, the parties will be happy to agree. However, we might all be better off by considering that there may be ‘irreconcilable conflicts’ of a kind that no party should be asked to approve.
A second issue concerns the need to maintain an even playing field for market participants, as a whole. One gets the impression that, in pursuing their interests, private equity participants seek and obtain access to information about the target company that is not otherwise available to the wider market. This matter is further complicated when directors and managers have a personal incentive for the bid to succeed. n any case, it is difficult to reconcile the principle of continuous disclosure to the market with privileged access to information for some.
Two final issues should be considered. In change of control situations, should a distinction be drawn between the rights and interests of long term and short tem shareholders? The first group can be considered (and often behave) like owners of a company. However, the second group are self-confessed, itinerant speculators. It may be that the interests of both groups coincide. But what if they do not? It would be a radical innovation to accord additional rights to long term shareholders, but would it be wrong? It seems to me that this is a debate worth having – and one already being prompted by people like ANZ chief executive, John MacFarlane.
Last, but not least, is the issue of greed. With such astonishing sums of money sloshing around the world, one has to wonder if those involved have the strength of character to resist seduction by the promise of untold riches. We do not need saints running these transactions, only people who have the integrity to say ‘no’, and to recognise when they are turning themselves inside out in order to rationalise unbridled self-interest.
The terrible irony is that the Qantas bid was not undone by a concern for employees, safety standards or sentimental attachment to a national icon. All of these counted for nothing. It was greed – and the miscalculations that it engendered.
discuss this articleDr Simon Longstaff is Executive Director of St James Ethics Centre.
A version of this article was first published in The Sydney Morning Herald on 8 May 2007.
© St James Ethics Centre