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Cerberus Capital, Trust and the Ethics of Leaders

Thu, December 20, 2012 1:30 PM | Deleted user

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      Private equity firm Cerberus Capital, after getting a call from an official at a California state teachers pension fund, decided to sell its interest in Freedom Group, the maker of the Bushmaster gun that was used in the senseless killing of 20 sixth graders. A close examination of Cerberus Capital’s statement is warranted by all corporate leaders and citizens (bold type added).

“As a Firm, we are investors, not statesmen or policy makers. Our role is to make investments on behalf of our clients who are comprised of the pension plans of firemen, teachers, policemen and other municipal workers and unions, endowments, and other institutions and individuals. It is not our role to take positions, or attempt to shape or influence the gun control policy debate. That is the job of our federal and state legislators. There are, however, actions that we as a firm can take. Accordingly, we have determined to immediately engage in a formal process to sell our investment in Freedom Group. We will retain a financial advisor to design and execute a process to sell our interests in Freedom Group, and we will then return that capital to our investors. We believe that this decision allows us to meet our obligations to the investors whose interests we are entrusted to protect without being drawn into the national debate that is more properly pursued by those with the formal charter and public responsibility to do so.

While I applaud the bold and unusual action by Cerberus Capital, I find many problems and vexing questions concerning this statement. First, everyone employed at Cerberus Capital is first a human being before he is an investor. Suggesting that we are “investors” who should not “take positions” on moral issues dehumanizes business people and justifies all sorts of morally questionable actions. Phrases like “it’s a business decision,” “it's business not personal” are similar expressions used to justify decisions that feel wrong. As human beings we have an obligation to consider the rest of humanity when we act and this INCLUDES how we invest and spend our money. While we can argue over the morality of investing in a cigarette company or a gun manufacturer that allows its assault weapons to be sold to non-military personnel, we should be clear that investing in companies that consistently engage in immoral activity cannot be justified by hiding behind economics.

Second, Cerberus Capital seems to feel that they are “entrusted” to protect their investors. But do they have NO role in protecting other stakeholders? Is every decision they make designed to maximally benefit investors? What if maximum benefit to investors comes at the expense of society? Six year olds? The Newtown, Connecticut shooting marked the fourth time a Bushmaster has been implicated in a mass shooting since 1999. Does Cerberus Capital have some obligation to the wider group of stakeholders and shouldn’t this obligation inform everything they do including their decisions about which companies they invest in?

I raise these issues because of a larger fear concerning trust and the financial services industry. Cerberus has gone a good thing but they and other investors (including all public pension funds) need to go further. My fear is that the Cerberus Capital statement reflects the wider philosophy among hedge funds, investment banks and private equity companies, and that they have yet to internalize the lessons of the global financial crisis. Taking actions that optimize earnings, stock price, or bonuses, while betraying other legitimate stakeholder interests, leads to an erosion of public trust. This will result in the loss of reputational capital and a call for more regulation to monitor companies that the public sees as opportunistic and untrustworthy. Rationalizing decisions by suggesting that it is good for investors is not sufficient today. Firms that operate in this way are inherently untrustworthy beyond the narrow set of stakeholders they care about. As more and more pension funds and citizens wake up to this fact, these firms will be increasingly at risk. We need companies that can earn the trust of all stakeholders. This can only happen when leaders accept that they are humans before they are investors and that ethical leadership requires taking principled positions not hiding behind economics. 

Comments

  • Fri, December 21, 2012 9:29 AM | Charles H. Green
    Bob,

    Well seen and well said.

    I'd like to add a bit as well, based on Cerberus' pronouncement that their role is limited to that of investor. I find that only one small step away from the suggestion that the proper role of a business is simply to make a profit, i.e. the mantra of shareholder capitalism.

    While this view informed much of private equity and was a valuable contribution at the time, I think the pendulum swung too far. Business is far too intertwined in society for us to let it continue the self-satisfied smug view that it stands apart. Business needs a seat at the societal table, and society needs it there.

    Not every company has to take a stand on every issue; but neither should a company withdraw itself from a critical social debate based on general principles alone.
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