Whose Interests Come First, the Workers’ or the Shareholders’?

Case study: Bank mergers have been sweeping the state. Rumors are flying that First Pioneer, a medium-sized, single-state bank, may be next. The local newspaper has reported that First Pioneer is in “serious merger discussions” with a giant regional bank in a neighboring state.

You are the chief executive of First Pioneer, one of the largest employers in a city of 125,000. The city--you were born and raised here--has lost hundreds of manufacturing jobs in recent years; unemployment is much higher than the statewide average. Good-paying, white-collar jobs are scarce.

First Pioneer has been struggling financially, and the bank’s board strongly favors the merger as a way to keep it afloat. The chairman of the big bank that wants to buy you has said he must slash costs by $10 million annually and that it will require 500 job cuts to help accomplish those savings.

The layoffs will mostly come from First Pioneer’s employees because the acquiring bank plans to move all corporate jobs to its headquarters in a Sun Belt state, where costs are cheaper. The chairman has told you that his company will disclose the extent of the job cuts several months after the merger is completed--but that’s about six months from now.

The newspaper report has caused great anxiety among your employees, who are stopping you in the hallway to ask if the bank is being sold and whether layoffs will follow. Just today, a mid-level manager who you went to high school with stopped to ask you: “Is the bank being sold? Is my job safe? You know we just bought a house and our son is off to college next year.” The mayor has phoned and wants to know if the rumors are true.

The chairman of the acquiring bank has insisted that no one from your bank discuss the merger or layoffs. Any premature disclosures could disrupt operations, harm employee morale and prompt top managers to seek other jobs, he has warned. If this happens, the merger deal might be scrapped.

You have a lot at stake personally: The deal will boost the value of your bank stock by hundreds of thousands of dollars and enable you to walk away with a handsome severance package.

Your lawyers have advised you to say nothing about the merger or layoffs. What do you do?

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First Pioneer’s chief executive is faced with a sticky ethical dilemma. Should he tell employees nothing about the merger and the layoffs, as advised by lawyers and his counterpart at the acquiring bank? If he tells them something, what should he tell them--and when? If he fully discloses the extent of the layoffs--or insists that the acquiring company do so--might it do more harm than good?

“This is a case about how you treat people,” says ethicist Barry Stenger, program director at the Markkula Center for Applied Ethics at Santa Clara University.

Executives considering such a situation might take a cue from German philosopher Immanuel Kant, Stenger suggests. Kant wrote that people must always be treated as the end, not as a means to an end.

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University ethicists and public relations executives agree there is no single correct answer about what First Pioneer’s CEO should do in this situation. They also agree that there is one thing he definitely should not do: lie.

It is widely believed that the moral principles of ordinary life need not apply in certain professional settings, such as law, politics and corporate management, notes Arthur I. Applbaum, an associate professor at Harvard University’s Kennedy School of Government. In the business world, it has sometimes been argued that there is a different standard of moral behavior in which coercion and deception are permissible as the “rules of the game.”

But Applbaum, who is a director in the Kennedy School’s program in ethics and the professions, doesn’t buy that argument.

Although some corporate executives might argue that deception is acceptable behavior if it boosts profits and the company’s stock price, “that strikes me as an extremely implausible argument for [ordinary] workers,” Applbaum says. “You can make an argument that the rules of the CEO game are that you can be lied to, but workers didn’t consent to play by those rules,” he says.

So what should First Pioneer’s chief executive tell workers and how should he do it?

Stenger says the First Pioneer CEO lacks sufficient reason not to tell employees about the possibility of layoffs.

“If it’s only the lawyers telling this guy not to tell, it would seem he has more responsibility to his workers than to lawyers,” Stenger says.

In effect, the chairman is arguing that employees should be kept in the dark for the supposedly greater good of the banks and their shareholders. “You’re asking some of the people to sacrifice the security of a job so that those people who don’t get fired can have a decent company after the merger is done,” Stenger says.

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Alan Elias, senior managing director at Hill & Knowlton public relations in Los Angeles, agrees that First Pioneer’s CEO should ignore the advice of lawyers to keep a tight lid on information--except for adhering to any regulatory requirements. The CEO “needs to demonstrate some strength and leadership,” Elias says. “He has to communicate with the employees, at least to some degree, not only for the benefit of his employees, but also for the benefit of the acquiring company.”

Failure to communicate with employees in this situation will only fuel rumors--often inaccurate--among employees and customers, Elias says, and it would probably undermine the loyalty and trust that First Pioneer’s management has built with its workers over many years.

“The acquiring company will end up in a very hostile environment in which it is seen as the outsider that has come in and displaced a lot of local workers,” he says.

Keith Burton, a Hill & Knowlton executive managing director in Chicago, would advise the CEO to be “open and proactive” and to seek to persuade the acquiring company to “let employees know every detail we can when we can. When you tell people the facts, then they can weigh and rationalize out for themselves what their alternatives are,” he says.

Stenger says First Pioneer’s chief could also use his influence to convince the acquiring company to keep layoffs to a minimum. As a condition of the deal, he could insist that workers be given relocation assistance and job retraining.

“He could even look into whether this guy’s [his high school friend’s] mortgage” could be revised in case he is among those laid off, Stenger says.

Gundars Kaupins, a business school professor at Boise State University specializing in business ethics, says the CEO could also insist that the acquiring firm provide more than the federally required 60-day notice of layoffs and push for fair severance packages for workers.

“Once a decision has been made to merge and have layoffs,” Kaupins adds, “you can do things to ease the pain of the community.”