In a vacuum, yes, the deal is ethical. Unfortunately, a partnership is
not a vacuum.
Let's start at the beginning:
Not all partnership documents will contain such language, but in
general a partner is expected to run business ideas by the other
partners, if those business ideas are relevant to the partnership, or
fall under the partnership's stated investment strategy. If they don't
like the idea, then in theory, the partner can pursue it himself.
Consider this more specific example:
I work for a money manager. I find a stock I think is available at a
discount to its intrinsic value, and tell the portfolio manager about
it. He doesn't like the company, and chooses not to invest in it. I
can then buy the stock for my personal account. If the portfolio
manager had liked the stock and decided to buy it for managed
accounts, then I'd have to wait until the clients made their purchases
before buying it for myself.
Please keep in mind that for most nonregistered investment advisers,
front-running on purchases is not always illegal. Some people would
not even consider it unethical, particularly those who believe that
"business ethics" is an archaic term. However, I'm assuming you want
to avoid the appearance of evil, and consider the opinions of
businesspeople who consider themselves ethical.
I'm basing my answer on the CFA Institute's "Standards of Practice
Handbook," which requires somewhat greater ethical standards than
current law, but is regarded by many in the investment industry as the
gold standard of business ethics.
In the above context, the purchase is certainly safe and ethical.
However, your theoretical question has two complicating factors.
One, the purchaser is a partner, who may be bound by a partnership
agreement to disclose personal business dealings.
Second, the purchaser has an ethical, and possibly legal, obligation
not to enter into competition with his employer (or partners) without
permission.
The legal issues surrounding the above factors can be assessed through
a reading of any partnership or noncompete agreements signed by the
partner. However, even if the actions are not prohibited by existing
contracts, they may not be ethically sound.
The purchaser should take at least one additional step: Let the other
partners know about the purchase before making it.
If the investment does not put the partner into competition or a
conflict of interest with his partnership group, then notification of
the partners should be enough, even if they don't like the idea of the
partner's purchase.
Returning to my earlier example, I don't need my boss's approval to
purchase a stock he doesn't like. However ...
If the investment would represent either competition or a conflict of
interest, then the partner should not make the investment without the
approval of his partners. This makes intuitive sense, and also avoids
potential legal hassles.
Suppose the partnership is a real-estate development outfit, and the
potential investment is a multifamily residential project. Even if the
partnership washes its hands of the residential project, a partner's
investment in the development on his own could raise questions:
If the investment is so good, why is the partner hogging it to
himself? And why did the other partners allow him to do so?
Are the other partners incompetent, because they did not see the
potential of the investment?
Why is the partner willing to go into competition with his own
partnership? What does that say about his loyalty to the partnership,
and to his investors?
Did the partner go behind the back of his partners? What does that say
about his integrity?
Did the partners purposely tank the investment to give one of their
own a chance to own it outright? What does that say about their
integrity?
Since the partnership failed to take advantage of this opportunity,
how can we be sure it is acting in the best interest of its investors?
Those questions are impossible to answer effectively unless all sides
in the transaction are on the same page.
Bottom line: With notification of the other partners, the transaction
is ethical as long as it does not put one partner into competition
with the group. If the investment does raise competitive questions,
the purchasing partner had better get permission from his partners in
writing before buying, and the partnership should have a defensible
business reason for why it did not make the investment itself.
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Clarification of Answer by
vercingatorix-ga
on
03 Dec 2004 05:49 PST
I've never seen such a guide of business norms, though there are any
number of books written about proper business conduct. The problem is,
those books make contradictory points. I used the CFA Institute ethics
manual in my answer because it is specifically designed to deal with
ethical conundrums in the financial-services market, which tends to be
a hotbed of unethical behavior. The book is also more strict than
most, and in matters of ethics, if you are unsure what is correct,
it's rarely wrong to err on the conservative side.
People differ in matters of ethics. I'm pickier than most, but others
are picker than I. In times like this, I consider two phrases from the
Bible that help me effectively deal with problem areas:
"Let not then your good be evil spoken of" - Romans 14:16
"Thou shalt love thy neighbour as thyself" - Matthew 22:39
If you would want your partners to notify you before they purchased a
business that the partnership itself could have purchased, then you
should notify them if the situation is reversed. And if people you
respect would question your motives or think less of your ethics
because of a business decision, then you're probably better off either
not making that decision, or taking pains to make your motives clear
to everyone involved.
The Bibls is the closest I can come to a guide for business conduct.
That's where I try to take my cues. It has yet to steer me wrong.
V
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