Ethical Principles in a Business Valuation—Third Quarter 2020
Do Ethical Principles Matter in a Business Valuation?
Michael A. Gregory
NACVA Ethics Oversight Board Member
In leadership, having ethical principles is critical to success. What about with your business valuation? In 7 Lenses: Learning the Principles and Practices of Ethical Leadership[i] the author, Linda Fisher Thornton, addresses this directly by providing “seven lenses” for ethical responsibilitythat, together, give us the entire picture of ethical leadership in a global society. Learning about all seven lenses in a cohesive framework gets us away from vague, theoretical approaches to ethics and gives us clear insights that we can apply to real ethical challenges.
The seven lenses of ethical leadership are:
Lens 1: Profit (What is in it for us?)
Lens 2: Law (What do laws and regulations require?)
Lens 3: Character (What demonstrates moral awareness and competence?)
Lens 4: People (What is the impact on the well-being of people?)
Lens 5: Communities (How will we improve the communities we serve?)
Lens 6: Planet (How will we protect life, nature, and ecosystems?)
Lens 7: Greater Good (How will we make life better for future generations?)
Theses seven lenses are written for leaders who want to "do the right thing," and they provide a framework for deeply engaging constituents, and building trust for the long term. She points out the importance of collaboration, in an ever increasing connected and diverse world, is essential to the success of any business relationship. So now the question becomes whether these matter in terms of a business valuation with you and with your firm?
What are Key Elements Related to Ethical Business Valuations?
Trust[ii]—Without trust it is not possible to engage in an ethical business valuation. Trust is key.[iii] By effectively listening[iv] to the client, your standards, your own ethical principles, and your own conscience, you will determine what is appropriate. When involved with a conflict with another party, it is important to explore your interests, your client’s interests, and the other party’s interests. Many times, it may be necessary to help your client understand the situation and assumptions involved with your business valuation. If closure is important, and the differences with the other side are substantial, this may take some effort if you are to resolve differences with the other party.[v] If this can happen without litigation it may be possible to move the negotiation towards an acceptable solution.
Conflict resolution[vi]—Sometimes there can be conflicts within the firm[vii] related to assumptions, technology, personality differences, and other elements.[viii] When conflicts arise between team members, expect leaders to help in resolving these issues. Focusing on the facts, the issues, the emotion and feelings behind those issues, and exploring interests, leaders demonstrate ways to resolve conflict. The key is to ensure that all of the parties are heard. Listening to all parties goes a long way towards promoting understanding. Applying conflict resolution techniques can be very helpful.
Direction—Understanding how the organization states and carries out the mission, vision, and goals of the organization and how this translates to day-to-day activities is key. Does leadership walk-the-walk or only talk-the-talk? Employees are watching. They see what really happens. Behavior by leaders sets the tone for an entire organization. Subsequently, that tone trickles down to employees and translates into how they make decisions when completing their analysis on a business valuation.
Trust, conflict resolution, and direction are critical elements that should be recognized by all parties related to your business valuation.
Two Broad Ethical Approaches
There are two broad ethical approaches that we should consider when conducting a business valuation.
- Do the ends justify the means? Often the answer is yes, if the ends are greater than the moral losses.[ix]
- Do we follow the rules? The answer here is maybe, it depends.
These are two basic questions that broadly state the difference between legal and ethical rules. As a starting point, about half the population, when pushed to the limit, falls into one of these two camps. They believe that either the ends justify the means or they have the need to follow the rules. Understanding these basic elements can sometimes be very insightful for how you or someone else may be looking at the same issue differently.
What about lying, embellishing, omitting facts or stretching the truth? From the Harvard Business Review,[x] research suggests that “people acting on behalf of others can be influenced by the values and perceived expectations of those they are representing—specifically when it comes to acting ethically. Other research has yielded similar findings, that people tend to act unethically when representing others, if they believe they are okay with it or prefer it. ‘Utilitarian’ individuals, or those who typically engage in conscious cost-benefit analyses when making decisions (e.g., What do I or society have to gain or lose as a result of my choices and actions?), are more likely to act unethically if they are acting on behalf of someone else who shares a similar utilitarian approach, verses when working for someone who is more ‘formalist’ (or focused on upholding rules/principles).”
Unethical behavior on others’ behalf can spread from minor misconduct here and there to more consequential actions if norms allow for it. If it is acceptable to cut minor corners on a client deliverable to make sure a consulting team meets a deadline, that could lead one to engage in more drastic misbehavior such as misrepresenting firm capabilities to ensure the consultancy secures a profitable account. Research shows that this slippery slope is not all that uncommon. What does this say about you and your firm?
It is very important to determine how you as a business valuer are incentivized when conducting a business valuation. As leaders and managers, we tend to measure things that are easy to measure. We tend to tie incentives to direct results. These may or may not be what was intended with the overall mission, vision, goals, and ethical principles of the organization. What this tells us is there may be some differences when money, recognition, and rewards are involved and some can be tempted to act unethically with incentives. What do you think? Do ethical principles matter in business valuation?
Michael Gregory, ASA, CVA, NSA, MBA, Qualified Mediator with the Minnesota Supreme Court, is a professional speaker, mediator/negotiator that helps clients resolve issues and be more productive as a conflict resolution expert with business valuation issues. Mr. Gregoryhas written 11 books including, The Servant Manager, Business Valuations and the IRS, and Peaceful Resolutions that you may find helpful.Is conflict blocking your results? You may contact Mr. Gregory at (651) 633-5311 or by e-mail to mg@mikegreg.com.
