COLUMN

Morals of the money-makers

Diane Francis May 4 1987
COLUMN

Morals of the money-makers

Diane Francis May 4 1987

Morals of the money-makers

COLUMN

Diane Francis

Last April John Shad, wealthy Wall Street investment banker, bequeathed a reported $26.6 million to his alma mater, Harvard University. Shad, who as chairman of Washington’s Securities and Exchange Commission is the head U.S. stock market cop, stipulated that the money be used to fund courses on business leadership and ethics. Of course, ethics should have always been an academic requirement, given that business’s bottom line—to maximize profits—is a goal mostly at odds with the best interests of customers, suppliers, employees or the environment. But Shad’s bequest is only one manifestation of the swing in North America toward a new marketplace morality.

Now, regulators, shareholders—and the courts—seem intent on putting the soul back into corporations. In part, the renewed interest in morality is faddish, a replay of the 1970s when bribery scandals at Gulf Oil and Lockheed rocked corporate America, cost many executives their jobs and led to regulatory reforms. This latest round has been sparked in great measure by the revelations of insider-trading breaches on Wall Street. Seemingly every day another financier is led out of his posh office in handcuffs.

But the stirrings were felt even while Ivan Boesky and his band of Wall Street cheaters continued to be the subjects of fawning cover stories in the financial press. In fact, business and ethics have never been mutually exclusive. In the long run, nice guys eventually finish first. “People who are successful are not people who lie, cheat and steal,” said Toronto financier Michael Blair, president of The Enfield Corp. Ltd., an industrial finance and consulting conglomerate.

Indeed, Blair’s Enfield is itself waging what amounts to an “ethics” lawsuit against developer Robert Campeau. Last August Campeau sold $60 million worth of preference shares in his company to the public. Enfield, which bought $16.25 million worth, claims in its suit that even before the stock offering, Campeau was involved in buying shares of Allied Stores Corp. and planning a takeover of the U.S. retailer —crucial information not shared with prospective buyers. Campeau’s takeover bid, launched last September, led to a merger between Allied and Campeau Corp. and, according to

Enfield, costs of $5.9 billion. That expense, Enfield says, resulted in the downgrading of Campeau Corp. shares. Enfield claims that by not disclosing the impending takeover attempt, Campeau in fact withheld information that would have influenced a prospective share-buyer’s decision.

In its statement of defence, the Campeau Corp. disputes many of Enfield’s claims. Until early September, Campeau says, the company was interested only in acquiring five U.S. shopping centres held by Allied. Only when its offer was rejected on Sept. 3 did Campeau begin discussions about the acquisition of Allied. Campeau also claims that Enfield suffered no real damages because the acquisition of Allied will benefit all Campeau shareholders. But, Blair said, “standards of behavior are far more important than profit. This [lawsuit] is strictly a matter of principle.”

As the excesses multiply, regulators, shareholders and the courts seem intent on putting ethics back into business

In the United States, the fortunes of Texaco Inc., the eighth-largest corporation in the United States, provide the most dramatic example of legal decisions coming down solidly on the side of better ethics. Texaco faces bankruptcy after a 1985 Texas jury ruling that, because Gordon Getty, youngest of the three surviving sons of oil billionaire J. Paul Getty, shook hands and agreed to sell the family company to Pennzoil Co. for $145.13 a share, he had no right to accept a $161.25-ashare bid from Texaco in 1984.

But Getty obtained excellent legal advice. His lawyers got an eager Texaco to agree to legally indemnify him from any consequences. As a result, Pennzoil sued Texaco, and not Getty, in 1984. Now Texaco has been forced to seek bankruptcy protection because of a court decision requiring Texaco to post a $12-billion bond until all court appeals are exhausted, which, the company argues rightly, will take years.

In Canada, the attempted sale of a family business led to a similar court decision reinforcing business ethics. David, Martha and Alfred W. Billes,

owners of 60.9 per cent of the voting shares of Canadian Tire, decided to part company last year. In September they accepted a $160.24-a-share bid from 348 of the 361 independent store dealers. But the dealers only offered to buy the Billeses’ shares. The rest of the shareholders, owners of $1.25 billion worth of “nonvoting” shares, were sidelined, causing their shares to slump to a meagre $11.50 apiece.

Stephen Jarislowsky, a pension fund manager and an outspoken advocate of shareholders’ rights, led the charge against the Billeses. He argued that the manoeuvre abrogated promises made in 1983 when two classes of shares, voting and nonvoting, were created. Then, shareholders let the Billes family have votes on their shares so that they could keep control but, said Jarislowsky, the “quid pro quo was that if there was a takeover, all shareholders would have the same number of votes so everyone’s shares would be bid for.”

The aggrieved investors played hardball. Jarislowsky, for one, stopped dealing with brokers supporting the bid. The result: the Ontario and Quebec Securities Commissions and two courts disallowed the takeover. “Unfortunately, there is no way to stop such tricks,” said Jarislowsky. “Too many of our best brains are engaged as lawyers and accountants hired to get around what is right.”

Cynicism aside, though, such civil victories do reinforce ethical codes. By far the most important case involves Foster Winans, the Wall Street Journal columnist. He was convicted of fraud in 1986 in connection with a scheme to divulge the contents of his influential column before publication to brokers in return for a share of their profits. The courts ruled, in essence, that Winans was guilty of breaching his publication’s written set of ethical rules.

That conviction is now under appeal to the U.S. Supreme Court, which must decide whether an employee who breaches a company’s written set of ethics is also criminally culpable. If Winans goes to jail, the face of U.S. business will be profoundly altered as corporate bylaws would be elevated into the criminal code. In Canada, the large proportion of U.S. ownership and the copycat nature of corporations almost guarantees that such a decision will translate into similar proscriptions. If it does, business will boast a new bottom line: integrity and honesty—at least until the next test case.