Two Ethical Issues in Mergers and Acquisitions

Author(s): Patricia H. Werhane

Source: Journal of Business Ethics, Vol. 7, No. 1/2 (Jan., 1988), pp. 41-45
Published by: Springer
Stable URL: http://www.jstor.org/stable/25071723
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Two Ethical Issues in Mergers and Acquisitions Patricia H. Werhane
ABSTRACT. With the recent rash of mergers and friendly
and unfriendly takeovers, two important issues have not
received sufficient attention as questionable ethical practices.
One has to do with the rights of employees affected in
mergers and acquisitions and the second concerns the
responsibilities of shareholders during these activities.
Although employees are drastically affected by a merger or
an acquisition because in almost every case a number of jobs
are shifted or even eliminated, employees at all levels are
usually the last to find out about a merger transaction and
have no part in the takeover decision. Second, if shareholders
are the fiduciary beneficiaries of mergers and acquisitions,
then it would appear that they have some responsibilities or
obligations attached to these benefits, but little is said about
such responsibilities. In this essay I shall analyze these two
ethical issues, and at the end of the paper I shall suggest how
they are related.
With the recent rash of mergers and friendly and
unfriendly takeovers, questions have been raised
concerning the ethical propriety of these actions.
Some of these have to do with the tactics companies
engage in when trying to acquire a company or
when trying to avoid being acquired. These include
the so-called "poison-pill" tactics, greenmailing, and
the institution of golden parachutes by the corpora
tions that are threatened with acquisition, problems
in good faith bargaining (as illustrated in the Texaco
Pennzoil case), the granting of lock-up options, and
Patricia H. Werhane is Professor of Philosophy at Loyola University
of Chicago. She is one of the founding members of the Society for
Business Ethics. Her publications include Philosophical Issues
in Art, Ethical Issues in Business, coedited with Tom
Donaldson, Persons, Rights and Corporations, Philoso
phical Issues in Human Rights, edited with D. Ozar and A.
R. Gini.
Journal of Business Ethics 7 (1988) 41-45.
? 1988 by D.Reidel Publishing Company.
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the usual anti-trust problems. Other issues include
the rights of bondholders on both sides of a merger
or acquisition, rights that are often considered sec
ondary in light of shareholder interests, and the
question of the rights of individual stockholders who
are usually neglected in face of institutional share
holder power.1
However, two important issues have not surfaced
as questionable practices deriving from mergers and
takeovers, one having to do with the rights of
employees in mergers and the second concerning the
responsibilities of shareholders during these activ
ities. Employees in the acquiring and in the acquired
company are expected to carry out their job respon
sibilities both during the process of the merger or
takeover and after its completion. They are supposed
to carry on as if nothing had happened, despite
rumors, threats of their jobs, or upheavals on all
levels of management. Although employees are dras
tically affected by a merger or an acquisition because
in almost every case a number of jobs are shifted or
even eliminated after a merger, in fact except for top
management, employees at all levels are usually the
last to find out about a merger transaction. Yet few
commentators have thought this was an issue, and
almost nothing has been said about the rights of
employees during and after a merger or acquisition.
It is as if the question of how employees are affected
in these sorts of transactions was unimportant or
incidental to the fiduciary benefits or losses of the
negotiation. Second, although a merger is said to be
for the fiduciary benefit of shareholders of both
parties, and indeed, this is allegedly the primary
justification for a merger or an acquisition, insuffi
cient attention has been paid to the responsibilities of
shareholders in these activities. If shareholders are
the fiduciary beneficiaries of mergers and takeovers
then it would appear that they have some respon
sibilities or obligations attached to these benefits, but
 42 Patricia H. Werhane

little is said about such responsibilities. In this paper mergers and acquisitions provide an opportunity to
I shall analyze these two issues. Although these streamline certain divisions and to "weed out" aging,
appear to be two disparate ethical questions, at the unproductive or superfluous employees. Thus in
end of the paper I shall suggest how they are related. creased productivity, efficiency, and profitability
created by the merger or acquisition allow for
expansion and provide more employment and more
I stable employment in the long run.
Now these arguments are all viable economic
Let us turn first to the question of employee rightsarguments
in based on the more general contention
a merger or acquisition. In any merger or takeover, that a good merger serves economic interests more
whether or not in the end it is financially successful,
fully than not merging and that, from a moral point
of view, in the long run the greatest economic
there is a great deal of employee uneasiness or stress.
This occurs primarily in the corporation tohappinessbe for more persons is served by this sort of
acquired, but employees in the acquiring company, transaction. What, then is at issue? The question is,
too, may have these worries to a lesser extent. These
do economic interests, important economic interests
stresses occur because of the secrecy, ambiguity, which
and affect employees as well as top management,
uncertainty surrounding the merger. No employeetake
is precedent over basic employee rights, at least
sure of his or her job, of his or her status in under
the certain economic conditions?
newly-formed company created out of the merger First, what sorts of rights are entitled in these
or acquisition, or even of the status of the divisioncircumstances,
or and why is it I have called them basic
department in which he or she is employed. Little employee rights? Employees (or at least most em
information is disseminated to any employee.ployees)
In are adults. It has been argued at length
most mergers only the top management is privy elsewhere,2
to that because employees are rational
adults, they have certain rights in the workplace,
the negotiations, and what is occuring is kept secret
to prevent stock fluctuations, competing offers, and
those rights accorded all rational adults equally by
other market changes. Such secrecy seems necessaryour Constitution and Bill of Rights simply because
they are persons. Included in these are the obvious
so that the merger can take place with the smallest
amount of fiscal damage, but the result is ones, the especially the right to freedom or the right not
dissemination of ungrounded rumors which creates to be coerced which includes the right not to be
fear and thus unrest or even psychological trauma forced into some situation not of one's own choice.3
for almost every employee. In many merger situa Freedom, however, is not merely a negative right to
tions preoccupation with the process of the takeover
be left alone, because freedom includes the right to
or the acquisition by top management is such that exercise choice. Part of the exercise of freedom is
sometimes employee interests are neglected or evenillustrated in an employee's right to choose a job and
forgotten. Economic interests supersede any other to quit at any time. But another less emphasized part
concerns. of the exercise of freedom is the control over one's
It is not that top management seeks to abrogate
future. For if I cannot control what happens to me at
employee rights or injure employees. In fact itleast
is within the limits of the kinds of choices and
actions I am capable of, I am thereby coerced,
often the converse when the merger or acquisition
is seen as beneficial to the acquiring or acquired
because I find myself in situations not warranted by
company. Indeed some mergers often preserve jobs
my own behavior. So employees have a second right
when the acquiring or acquired company is? in the right to information which affects their job,
financial or marketing difficulty. Moreover, it is company, and their career. Withholding that
their
often argued, and not without justification, that of information when it is available takes away
kind
mergers and acquisitions protect jobs in the long self-control
run of one's job and future and therefore is
by increasing efficiently through a larger organiza
paramount to restricting an employee's freedom of
tion which can provide more capital for growth,choice.
or Third, because the right to freedom entails
by expanding a market share through a merger itsofexercise, employees, having chosen to work and
where they will work, should be allowed to par
two similar competing enterprises. At the same time,

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 Mergers and Acquisitions 43
ticipate in decisions which affect their employment.4
Notice that none of these rights is an absolute or
unlimited right. Rather, each right is an equal right
in balance with equal rights of others. That is, I have
a right to control my future so long as exercising
that right does not interfere with the equal rights of
another person to do likewise. So an employee's right
to information is both a limited and an equal right.
Every employee has an equal right to employment
information when that information affects her job
and future, but not a right to all company informa
tion when that does not entail letting out a trade
secret (e.g., the recipe for Coca Cola). It is also
often contended that employees do not have rights
to information when such publicity might affect
adversely the market or a proposed merger or
acquisition. What this view shows is that shareholder
rights supersede employee rights. But if rights are
equal rights, one must carefully weigh the some
times conflicting claims of employees to information
and protection of shareholder rights to their fidu
ciary interests. Note that this claim is different from
the right of a company to protect a trade secret. In
the latter case the protection of a trade secret does
not interfere with employee rights. Not revealing the
trade secret does not hurt employees because it is
not their secret, and protecting the secret usually
protects the jobs and interests of employees as well.
But in the former case (protecting merger secrets)
not informing employees can affect their freedom of
choice; so it is important to employee rights. While
some secrecy is justified, an employee should have a
right to at least as much knowledge about such
activities as, any other "outsiders" who often know
far in advance of such affairs, since it is to the express
disadvantage of an employee not to have this infor
mation. Notice, too, that in these instances share
holders, too, often do not have such information and
this is unfair to them as well for the same reasons.
Similarly, the right to participate in management
decisions is an equal employee right, not an un
limited one. The problem is that top management
often does not include middle management or other
employees in its decision-making particularly when
that concerns a merger or acquisition. Yet unless one
can argue conclusively that top management always
represents shareholder interests, shareholders who
are seldom informed or consulted about these deci
sions, just as employees are not consulted, then there
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is no justification for excluding employees from
participation in these decisions just as there is no
excuse for excluding shareholders until the moment
before the actual merger.
Failing to honor these rights in the workplace
creates two fatal problems. First, when a corporation
does not respect the rights of its employees, it is
threatening its own claims to those rights. It is saying
that it has rights or more extensive rights than
people or some people. But this implies that so
called rights are neither equal nor universal, and this
implication undermines the justification for a cor
porate defense of its rights. Second, in not upholding
employee rights the corporation is in contradiction
with itself. It has hired responsible adults whom it
holds liable to act as morally decent persons and to
perform satisfactorily in whatever jobs those persons
are assigned. If employees are accountable for their
performance in the workplace, if they are expected
to be loyal and have other responsibilities to their
employer, that employer has reciprocal responsibil
ities to that employee, responsibilities which are
correlative to what is expected on the employer's
part including respect for the employee as a person.
This has to be a "good faith" employer responsibility,
because although an employer can hold an employee
responsible for his job performance, it is more
difficult in fact for employees to hold an employer
equally liable except by striking. But by not respect
ing the employee as a rational adult, that is, in not
respecting her equal rights, the corporation is asking
more ofthat employee in terms of job responsibility
than it should expect, and the employee-employer
accountability relationship thereby weakens or
breaks down.
In the case of mergers and acquisitions the basic
employee rights that are not always respected in
clude the right to information, the right to partici
pate in the management decision to accept or fight
the merger, and job protection for long-time loyal
"at will" employees. Management argues that even if
such rights are accorded in the workplace under
"normal" circumstances, such rights may need to be
bracketed in merger situations, because economic
interests outweigh respect for these rights in these
economic instances.
But do economic interests supersede rights of
employees in these sorts of cases? If one were
starving, basic needs might supersede rights to
 44 Patricia H. Werhane

information or participation. But the case is much
less clear for mergers. Basic needs are not at stake
here. In general if economic interests override rights,
then one could imagine extreme situations where
one could justify slave labor for example if greater
economic interests are served. It is this sort of
argument that white South Africans use to justify
apartheid ? the contention that under apartheid
black South Africans are economically better off
than any other blacks in Africa. Second, only 50%
of all mergers are economically successful.5 So even
to make an argument that economic interests of
employees will be better protected in the long run
with a merger or any other major corporate reor
ganization which requires setting aside employee
rights is not a very strong argument. Third, even
when the merger is fiscally successful, there is much
data to suggest that employee stress engendered by
such activities translates into lowered productivity,
preoccupation with self-preservation, loss of trust in
top management and thereby in middle manage
ment who by implication must share blame, paro
chialism rather than teamwork, unwarranted power
struggles, loss of efficiency and momentum, and
even resignations of good people who, fearing their
future unemployment, go elsewhere to better and
apparently more secure jobs.6 In nonutilitarian
terms, the lack of respect for employee rights trans
lates into an equal loss of commitment, loyalty,
responsibility, and trust.
A defender of top management's prerogative to
concentrate on fiscal interests in a merger or acqui
sition might counter argue as follows. A merger or
acquisition is carried out only when it is in the best
interests of the shareholders. Shareholders have
rights, one of which is to do what they please with
their shares, in this case shares of a company, so long
as they do not harm others. Therefore a focus on
economic interests in a merger situation merely
respects these rights. However, this point is based on
the premise that such shareholders rights are equal
to or more important than political rights. And that
contention is unjustified for the same reason that
defending the priority of economic interests is un
justified. For if shareholder rights outweigh the right
to freedom which includes the right to information,
Yet while institutions claim they are con
a variety of abhorrent scenarios could be justified
too. do not always see institutional sharehold
Does this mean that mergers are morally wrong ing corporations who use "poison pills"
and should be abolished? No, that is not the argu
ment. Mergers and acquisitions are neither right or
wrong. It is the fiduciary preoccupation of a merger
which negatively affects employees and employee
rights that is at issue. The latter are at least as
important as the former; yet they are seldom taken
into account. Any by not taking employee considera
tions into account both the acquired company and
the acquiring one threaten the viability of their own
rights as well as the success of the merger.
n
Examining briefly the question of sha
sponsibility, particularly as it relates
activity, in any merger, fiduciary respo
shareholders are taken very seriously, f
shareholder who stands to benefit or
stock exchange or acquisition. Sharehold
can force an unfriendly takeover, for
shareholders are thereby to gain a goo
their holdings. Shareholders, then, ha
maximize the earnings or the price of
simply because they own them. Yet along
one also has responsibilities. For exam
owns property on which chemical dumpi
place, dumping for which the owner i
property owner has reponsibilities to
contamination of the chemical so that
damage other properties in the neighbor
larly, shareholders have responsibiliti
with their right to maximize their g
holders. At a minimum, they have a resp
be sure that management is looking
interests. Now most of the time an ind
holder has trouble exercising her resp
since she has few voting shares. But i
shareholders such as universities and pe
can wield a great deal of influence in
decision-making simply because of th
shares they own. This has been seen to a
by those institutional shareholders wh
drawn their interests in companies who
the Sullivan Principles in their South
sidiaries. Such withdrawals have made a

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 Mergers and Acquisitions 45

large "golden parachutes," questionable practices by merger activities. Shareholders or

any account, and certainly not in shareholders' best their own rights, but they seldom
interests. What I am suggesting is that along with fi equal rights of employees. If s
duciary rights shareholders, particularly institutional responsibilities, perhaps one of th
shareholders, have responsibilities, responsibilities whether the rights they expect ar
they need to exercise particularly when mergers and the workplace of which they h
acquisitions are taking place. Otherwise they cannot shareholders, even large instituti
complain when a merger does not take place because of course, will argue that this is t
of a poison pill tactic, when a merger is not a success, of them. Yet not exercising the
or when millions of dollars of profit are syphoned shareholders when such exercise
into golden parachutes. fiduciary losses and employee st
irresponsible, because preventable
occur, harm which is in the shar
m lessen.
Finally, shareholders might take an interest in
Finally, what do employee rights have
employees for to do
more practical with
reasons. If morale is
shareholder responsibilties? There is the obvious
bad and trust is undermined, the resulting loss of
sense that rational persons cannot beefficiency
productivity and heldandrespon
even the loss of good
managersthe
sible without according to them is not in the self-interest
rights which of the share
holder. Sobecause
should be accorded to them just shareholder responsibility
they are is not only a
persons. So if employees have moral
responsibilities,
obligation, it may be a smart
they
business invest
ment as well. rights implied
need to be accorded the correlative
in these responsibilities. Conversely, one cannot
expect to have rights of any sort without assuming
Notes
the entailing responsibility. So if shareholders have
fiduciary rights, by implication they also have re
1 See David
sponsibilities connected with those Pauly, 'Merger Ethics Anyone?' Newsweek,
rights.
December 9, 1985, pp. 45?47 for a litany of these issues.
Secondly, using rights talk again, in addition to
2 See Patricia H. Werhane, Persons, Rights, and Corporations
the relation between rights and responsibilities,
(Englewood Cliffs: Prentice-Hall, Inc., 1985), especially Part
rights have two other characteristics: they are uni
II. See also, Adina Schwartz, 'Meaningful Work', Ethics 92
versal, that is, if X is a human right, X applies to
(1982), pp. 634-46.
everyone, and they are equal,3 Seethat is, X applies to
Eric Mack, 'Natural and Contractual Rights', Ethics 84
everyone equally. Shareholders (1977),
who pp. argue
153-159. that they
have fiduciary rights, also contend that
4 Schwartz, they have the
op. cit.
right to exercise that fiduciary claim
5 See Price Pritchett,freely and,
After the Merger: Managing the Shock
along with that, that they have a right
waves (Homewood, toDow-Jones-Irwin,
Illinois: enough 1985), p. 32.
information about the corporation to
6 Pritchett, exercise that
op. cit.

claim intelligently. This is fair enough, but if rights

are universal and equal claims, and if employees areof Philosophy,
Department
rational adults, they too have a right freely to
Loyoladecide
University of Chicago,
on their job options and a claim to enough informa
820 North Michigan Avenue,
tion to exercise that option intelligently. Those
Chicago, IL 60611,
rights are often not respected by top management in USA.

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