Renewing Ethics

Despite broad agreement that businesses can and should according to prescribed moral standards, there are still businesses who perceive integrity as a constraint rather than a motive. As a result, they operate according to moral codes only to the extent that the market or law requires. But what is legally allowed may not be always the right thing to do. While law often merely imposes minimum standards of behavior, ethics set the maximum. Ethics are aspirational.

Such businesses will often tout their actions as a benefit for society under the broad guise of social responsibility. They seek to win moral bona fides, even as these “responsible” actions are merely moral substitutes, or what has become an acceptable kind of business strategy to bolster reputation as one means of many leveraged merely to support the bottom line

But it is not the pursuit of profit that creates injustice. Instead, it is the pursuit of maximum gain; that is, proper profit versus maximum profit.

SOCIAL IMPACT AND RESPONSIBILITY

At a fundamental level, even before ethics, the cooperation between the professional teams in a company plays a crucial role in its chances of success. In order for any productive cooperation to take place, employees must share a similar set of beliefs and values, themselves instilled by the company’s management.

At this point, ethical problems arise from conflicting personal and work values or from values not aligned.

Setting business standards based on core values helps employees play by the same rules. Most people want to work in a company where they feel trusted and where they can trust others; a place where the values and ethics are known, shared, and followed. Working in an organization with people who share the same values and goals makes people feel that they are part of something bigger than themselves and supports commitment, retention of staff, and continuity of business development.

Beyond internal cohesion, ethical standards ultimately provide organizations with a collective ability to resolve ethical dilemmas. Without standards, we restrict our ability to do business effectively. When organizations don’t articulate clear values, individuals are left to their own devices to determine which values should guide them.

THE BEST THING YOU CAN DO IS THE RIGHT THING

The Edelman Trust Barometer defines trust in business as a combination of competence and ethics, with ethics being defined as having a purpose, sharing it transparently, and delivering it with integrity. And integrity itself consists of the actions, values, methods, measures, principles, expectations, and outcomes of a given action.

It is the will and responsibility of a company’s leaders to set the moral tone and to create a day-to-day example of ethical behavior. If the management philosophy is based on ethical practices, it has the ability to inform an employee’s conduct and business decisions, which will not only beneficial to them as individuals, but also to the organization as a whole.

Building a business on a foundation of ethical behavior helps create lasting, positive benefits, including reputation, cultural cohesion, and personal fulfillment. And as newer generations of business stakeholders demand increased transparency and responsible investing, a clearly stated ethical imperative within a business allows them to efficiently respond to stakeholder needs and demands.

As we have seen in the start of 2022 and the unprecedented global economic response to Russia’s invasion of Ukraine, in the modern era of globalization, moral failure cannot be secreted away. The assets and investment vehicles of Russia’s wealthiest oligarchs are being seized, and some of Russia’s largest businesses are being crippled by global sanctions—all the result of a moral failing.

RENEWING ETHICS: A BRIEF STUDY

A real estate investment firm focused on large, commercial assets offers diverse investment opportunities to its investors, executed through an experienced local manager with a deep familiarity with their local markets. The firm’s relationships with local managers include ongoing monitoring and protecting investors’ interests in existing investments.

One of the firm’s local partners is a US real estate company that develops and manages assets. The investment firm participated in several, well-performing investment opportunities offered by this local manager, by raising funds from investors and representing their interests in the different projects.

After several years of collaboration, the local manager offered the investment fi rm an opportunity to raise funds for a new project. The proposed opportunity was located in the same area and had characteristics similar to one of the manager’s previous investments, though that previous investment was so far not performing as expected. Notably, the occupancy rate drastically lower than anticipated in the business plan. The investment fi rm was not involved in this underperforming existing project, but was well aware of its challenges.

The investment firm’s executives believed that the new offer represented an inherent conflict of interest, because the new asset competed with the existing investment for tenant demand and management resources. The firm therefore turned down the offer from the manager.

Unsatisfied with the firm’s decision, the local manager claimed that even though the new offer shares similar characteristics with an existing investment, the new asset would not compete for tenants. The investment firm nonetheless disagreed and added that the new investment would rob management resources, vital for ongoing underperforming investments. The firm urged the local manager to refrain from purchasing the asset and indicated that it will cease to participate in new projects if the manager decides to proceed with the new opportunity.

Facing various pressures, the local manager exited the opportunity to purchase the new asset. And although the investment fi rms’ executives approved of the local manager’s final decision, the manager’s conduct throughout the proposal process left doubts in their minds. As such, they began to more closely moderate the manager’s business, including any new investments publicly announced.

After a few weeks of monitoring, the investment fi rm noticed that the local manager posted a picture of its latest investment: the property that the manager had otherwise indicated that it would exit. The manager’s website showed the same picture and same address for the asset, but under a different project name.
The investment firm felt that it had been misled by the local manager, calling into question the firm’s existing projects with the manager—and the possibility of conducting any further business together.

FOR FURTHER EXPLORATION

1. What responsibility does the investment firm have with its investors related its soured relationship with the local manager?would you share with investors in the project? And when?
2. What are the short- and long-term ramifications of this conflict between the investment firm and the manager? Should the investment firm end the partnership while there are ongoing investments?
3. How should the investment firm’s partners reply when asked by investors and other business partners and peers about the local manager? Are the partners obliged to share this experience?

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ABOUT THE AUTHOR

El Rosenheim is CEO of Profimex, the Israel-based private equity real estate arm of Bamberger-Rosenheim Ltd., founded in 1969. Profimex has co-invested in assets valued at more than $60 billion since its inception in 1997 and specializes in diverse, cross-border investments and serves high-net worth individuals (HNWIs), private and public companies, as well as institutional investors.

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