Is a CEO-Led Buyout Ethical?

Q: I work for a publicly traded company that is struggling, depressing the share price. Now our longtime CEO and several senior executives have joined with a private-equity firm in a bid to take our company private. They're offering shareholders—including me and a lot of my fellow employees—a modest premium over the recent share price. Our board of directors seems inclined to accept it, but I think the whole thing smells. What do you think?

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A: I'm with you. The buyout bid might turn out to be a fair price, but the CEO and other brass have a serious conflict of interest. As employees of your company, they have a duty to fix the problems and boost its value for everyone—even if it takes a while and causes some pain and volatility in share price along the way.

But as participants in the buyout bid, they have a contrary interest in paying as little as they can for the stock. They hope to share in a huge gain from engineering a fast turnaround and, ironically, possibly taking the company public again in an IPO. Key question for the CEO: "If you have a great plan for saving our company, why haven't you done it already?"

An even bigger issue is why your board is going along with this. If the members have any guts—and independence from your CEO—they should demand his resignation (and that of his fellow execs on the buyout team) as a precondition for considering the buyout offer. Then, while interim leadership runs the company, the board should solicit competing bids and also explore a turnaround plan as a public company.

Too many publicly traded companies have been taken private for too low a price in recent years, enriching the new private-equity owners at the expense of the former stockholders, especially small investors. Big institutional shareholders—university endowments, pension funds and mutual funds—should side with the small shareholders and push back against sweetheart deals like this.

Have a money-and-ethics question you'd like answered in this column? Write to editor in chief Knight Kiplinger at ethics@kiplinger.com.