The Ethics of Banking: Conclusions from the Financial Crisis (Issues ...

72 5 Ethics of the Market for Corporate Control
Control of the corporation by a majority shareholder implies more power than
mere ownership of shares by minority shareholders, and consequently it also entails
more responsibility. It compels an awareness of the ethical dimension of one’s own
economic conduct. If the right intention – the intentio recta – is important in the
market for company shares, it is even more so in the market for corporate control,
a market in which the degree of freedom to take decisions and power to exert control
over the corporation are far greater than for stock-trading in the normal capital
market.
It is the intention behind the conduct of participants in the market for corporate
control that actually defines what they do. Their intentions define whether they are
just asset-stripping – or cannibalizing – firms, or whether they are attempting to
improve the management of a firm that was previously loss-making by taking it
over.
The intentio recta, or the ethically justifiable motivation to engage in economic
activity, determines which type of strategy is at work in mergers and takeovers. The
intention behind a takeover differentiates the mode of operation into a “friendly” or
a “hostile” takeover of one corporation by another. Mergers by means of a leveraged
buyout are not unethical in themselves. They become unethical when their
sole objective is the cannibalization of the firm. Cannibalization means buying a
firm, splitting and breaking up its assets and selling them off with the sole intention
of making a profit for the purchaser, and without any thought to the firm’s purpose
and its contribution to the overall economy.
Takeover bids and mergers, if their only purpose is to make profit by means
of asset-stripping and selling off the enterprise or its parts, or to gratify a powerhungry
board, violate the overall objectives of the economy. They utterly divorce the
purchaser’s profit motive from the interests of the acquired firm as such. A takeover
for cannibalization alone denies the firm a purpose and a teleology of its own as a
social unit of production.
The example of the leveraged buyout is especially interesting for the theory of
ethical economy because it is not always clear from the outset whether or not a
merger financed by a leveraged buyout is in keeping with the purpose of the economy
and the nature of the domain of the capital market. The threat of a takeover can
wake up a firm, put its management under pressure to improve performance, and
hence serve the interests of both staff and shareholders. Such a takeover can result in
a more efficient reallocation of resources. For this reason, leveraged buyouts cannot
be condemned on ethical grounds. 2
Nevertheless, the leveraged buyout may equally well be seen as a game (of
chance) or a venture that flatters the narcissism of raiders who want to make profits
without making an entrepreneurial contribution to the firm itself. If the firm’s asset
base is broken up and sold off to the highest bidder without regard to its synergies,
2 N.-J. Weickart points out the positive influence of company takeovers on corporate competition.
Cf. N.-J. WEICKART: “Firmenübernahme: Festung Deutschland” [Corporate takeovers: fortress
Germany], in: Manager Magazin, 19 April 1989, pp. 128–139.