Ethics, Business Valuation, and Bias—Fourth Quarter 2021
Ethics, Business Valuation, and Bias
Michael A. Gregory
NACVA Ethics Oversight Chair
Having written a previous article on Have You Seen NACVA’s General and Ethical Standards?, I am making an assumption that you have and that you are familiar with the 11 categories found in the NACVA Professional Standards. Today, I want to turn your attention to just one standard and one subsection within that standard. That is: Standard II.A., Integrity and Objectivity. I see this as part of the foundation of what a NACVA designation stands for with the public.
II. General and Ethical Standards: A member shall perform professional services in compliance with the following principles:
A. Integrity and Objectivity: A member shall remain objective, maintain professional integrity, shall not knowingly misrepresent facts, or subrogate judgment to others. The member must not act in a manner that is misleading or fraudulent.
On the surface this sounds straightforward. Let us look at an analogy. If you were asked if you were a bad driver, you would likely indicate that you are not. There are bad drivers out there, but you are not one of them. What makes a bad driver? Might it be someone in a hurry? Someone that is inconsiderate? Someone who normally might be a very good driver, but something happened and as a result, at his moment, they are now an angry driver? Perhaps this is someone in an emergency helping someone else. What this may imply is even an exceptionally good driver may at some point and for some unrelated reason become a bad driver. So, what is the point related to business valuation?
The point is that even an excellent business valuer can have a bad day, a bad moment, a lapse in judgment,and make a mistake. Knowing this, you must recognize this could happen to you and take steps to remain an unbiased professional with any document with your name on it. As a professional, what can you do to remain calm, confident, and competent when faced with a client with a particular point of view who wants you to promote that perspective when you must meet Standard II.A.above? You are required to remain objective, yet you, like everyone else, is human and has biases.
What is bias and how is bias defined? As a noun, bias is defined as “prejudice in favor of or against one thing, person, or group compared with another, usually in a way considered to be unfair.” As a verb, bias is defined as “cause to feel or show inclination or prejudice for or against someone or something.”
When a potential client or current client reaches out to you for an engagement, often that client has a particular perspective. As a business valuer, you in theory are to remain professional with high integrity and be objective. However, whether you may potentially be demonizing the other side, or you may develop a sense of ownership towards your client, you may be making decisions that have bias towards your client whether you are conscious of this or not. So, how do you prevent yourself from becoming the “bad driver”, so to speak, and prevent your personal bias from impacting your professional opinion, and potentially favoring your client?
Different Typesof Bias
Educate yourself on various cognitive biases that you have.
Be aware of confirmation bias for example. That is, you tend to look for and identify results that confirm what you wanted to find. You may reject information that does not conform to what you were expecting to find. If you have worked other similar entities, keep in mind that your expertise may be a great asset, but you may have misjudged the facts in your case.
With anchoring bias, you may accept initial findings and stop. If you were to dig deeper to find out what is behind the initial facts or numbers, you may discover that you jumped to your conclusions too quickly. Recently, upon a review of a valuation case, the valuer indicated that the firm was not profitable. A further review revealed unreasonable expenses that made the firm unprofitable. Slow down and ask yourself why.
Be aware that if you have been litigating and winning, you may develop an overconfident bias. On the other hand, if you have been litigating and losing, you may develop an under-confidence bias. Being aware of your own feelings of discomfort is an excellent peek into your unconscious bias. The result of your last negotiation can set up your attitude towards your next negotiation or valuation for example.
Be aware of attribution error or blame. Avoid the two stinky twins of BO and BS—blaming others or blaming self. If you find yourself blaming anyone, pause. Focus on the problem and not the individual. Be tough on the problem and gentle on the people, including yourself.
Be aware that you have bias. Recognition may allow you to take an opposite view to determine what indeedmay be “reasonable” given the facts. This is one of the key areas of overcoming your bias.
Consider multiple perspectives. What is the best scenario, the worst scenario, and the most likely scenario from your understanding of the facts? Given these three scenarios, what do you see as potential probabilities for each of these scenarios? This may allow you to look at your own analysis from a different perspective.
Reflect on previous work. Why did you choose what you did? How did that work out? What have you learned from that experience that may influence this analysis? Be careful not to be caught in the same trap next time. Be careful not to assume from what you learned last time that it will be the same this time. Be conscious of your bias.
Always be conscious of Standard II.A. regarding integrity and objectivity. Realize that you, just like everyone else, has bias. Recognize your bias and take actions to ensure the reasonableness of your assumptions, the selection of your approaches, and your application of judgment to the facts. Bias will still be there, but by consciously reflecting on your own biases you can minimize the impact. This will enhance your objectivity and present you as a better expert to a third party or the trier of fact.