Who protects the shareholders?

• Author: Kaplan, Gene

These days, financial executives wear plenty of different hats: manager, director, employee, shareholder. And most of the time, you can wear them all at once. But what happens when your company is the subject of a hostile takeover, and each role pulls you in a different direction? In the fourth of a series of case studies in ethics, two financial executives and an ethicist help a hypothetical CFO clear a path through an ethical jungle of conflicting responsibilities.

THE QUANDARY

"Off the record, Wally, what do you think we ought to do?" asked Joe as he and Wally drank coffee in a quiet comer. Both Joe and Wally were directors on the board of durable goods manufacturer ARS, Inc. Wally was CFO of the company, while Joe was an outside director who owned his own firm. They were talking before a meeting on the company's response to yesterday's hostile takeover announcement from The Harris Group, a holding company through which C. Max Harris had led several takeovers in recent years.

ARS was widely considered to be a well-run company, but a series of setbacks beyond management's control - slow recovery from a local recession, the failure of a long-time major customer and residual impact from earlier management problems that the current team was turning around - had led to six quarters of disappointing results. Harris believed ARS would be worth more if it abandoned its long-term business strategy. A typical Harris takeover involved acquiring a vulnerable company; slashing costs in the short term; selling assets for cash in the medium term, which increased share price; and then selling the stock at a substantial gain.

Wally struggled to respond to Joe's question. "Look, the stock price has already jumped 15 percent on his announcement and will increase substantially more if he succeeds. The people we directors represent, the shareholders, are bound to make a lot of money. Not that I like the situation, though. I know as well as anyone we've got an excellent team here with a strong business plan. If we had more time, we'd raise the stock price without cutting jobs or selling businesses. I know that legally it's gray enough that the decision is up to us. I just don't know which decision to make."

Joe mentioned various defenses the company could pursue, such as a poison-pill resolution, a proxy fight or even greenmail. "But," he acknowledged, "I'm a shareholder, too, and maybe we should just bargain for the best price and be done with it." Wally questioned whether he should mention golden...