Ethics in Business – Case Study – What would you do?

turn light on in business owner's brain

turn light on in business owner's brainSometimes in our Business Owners Board mentoring group meetings we work through a case study and discuss what each member would do. This particular case study calls for us to think about ethics in business!

(Figures and identities of the companies and individuals have not been disclosed, but it is a real life case study, what would you do?)

An engineering and construction company with a turnover of $78M was part of a large publicly listed company. The group had a turnover of $480M and SSUR was one of six operating divisions.

The group had expanded over the last 10 years, but as a consequence, it had large amounts of borrowings. This was of great concern to the multitude of banks that supplied working capital to the business and, therefore, they suggested that this particular division be allocated for disposal.

The division consisted of a multitude of products, which were sold into different market segments.  It also had a number of joint ventures, which were part of its overall business operations.  It was, indeed, a typical sunset business.

The CEO and Director of this particular division were directed by the Board to engage in discussions with various potential organisations to dispose of the business.  Whilst price was an issue, it was more important that any monies generated were reverted to the various banking institutions.

Over a 6-9 month period, discussions occurred with many prospective purchasers and the various assets were separated and sold off to a number of entities.  At the end of this process, approximately half of the business had been disposed of and the remaining half was the subject of further discussions with a major public organisation.

The remaining part of the business was perhaps the most complex and difficult entity so the CEO engaged the services of an experienced financial person to assist him in the sale process. A number of negotiation meetings were held over a two-month period, with many of the legal, asset, indemnity and people issues discussed and finalised.

At the end of this period the prospective purchaser commenced a due diligence process to closely analyse all aspects of the business.  The CEO, who had a reputation as a hard and experienced negotiator, was able through the process and his intimate knowledge of the business to maximise the purchase price and minimise the liabilities.

In the final stages of negotiations, errors in calculation were made by the prospective purchaser, which substantially inflated the purchase price.  Whilst the due diligence team were experienced business people, they did not have the intimate knowledge of the business that the CEO and his Financial Director had.  Consequently, they miscalculated a work in progress figure, which enabled the organisation to gain an extra $800K as a result.  Instead of a negative work in progress figure, they had taken it as positive.

At the final meeting in the lawyer’s office on the 45th floor, when all parties were in the room finalising the key issues, the CEO noticed this fundamental error.  He reflected on the last two months and, whilst there had been the normal cut and thrust of negotiations, there had been an openness and honesty throughout the process.  He was, however, aware of the substantial gain that would result from this error and reflected on the old adage of ‘Caveat Emptor – Buyer Beware’.  He determined that it was not his fault that the other party had been less than competent in their due diligence process, but before he made a final decision, he decided to take time out and consult with his Financial Director as to whether to advise the prospective purchaser of their error.

QUESTION: What would you do in these circumstances?

Please add your comments below.

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John Denton

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