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Question 111: May a major stockholder dump his holdings in a troubled firm?

I have a problem of conscience with which I would like help, but I am not free to divulge the facts of the situation, and I have constructed a fictional case instead. If it is the sort of moral question you are interested in treating, feel free to publish it, provided you keep its source confidential.

G–G, Inc., a manufacturer of small appliances, was formerly a partnership of two men, Goetz and Graham, but went public about ten years ago. The former partners still control the business, each owning twenty-six percent of the stock and holding seats on the board. The firm, which has conducted its morally sound business in a morally upright fashion, did well until two years ago. Then a downturn in business began. That happened just as its largest plant was severely damaged by flooding that closed it down and required costly repairs, not covered by insurance. Since then, the company’s quarterly accounts have been deep in the red, its credit has been restricted, and it is failing to maintain adequate cash flow. Goetz and Graham are talking with the company’s lawyers about going into bankruptcy, in hopes of reorganizing the business and restoring profitability.

The chances of succeeding and saving the business are perhaps fifty-fifty. Up to now, however, the company’s stock has not declined as drastically as one might expect, and the quarterly report to be issued next week will be less bleak than the previous eight. But new problems are emerging, and the next report is sure to be the worst thus far. Graham is considering his options. He can sit tight through the bankruptcy, as he is sure Goetz will, and hope the reorganization succeeds. Or he can tell his broker to sell his stock piecemeal but as soon as possible after next week’s quarterly report appears. If Graham sits tight, his chances are one in two of preserving and enhancing his investment, and the same that he will lose everything. If he sells, he can be sure of salvaging a large part of his investment. Thinking a bird in hand is worth two in the bush, he calls his broker.

He does this fully expecting that the investment community will take it as a sign the business is doomed, and that will drive down the price of its stock, ruin its credit, force it at once into bankruptcy, and greatly reduce chances of a successful reorganization. But, he reasons, I have the right to sell my stock any day I choose.

Is Graham being fair to Goetz and the other stockholders?


This question calls for the application of the norm regarding promise keeping and judgment in accord with the Golden Rule. Graham plainly is not being fair to Goetz and the other shareholders. First, Graham is betraying Goetz’s trust. Second, as a director of the business, Graham shares fiduciary responsibility for it; preferring his personal interests to its common good is a grave betrayal of trust. Third, taking advantage of inside information unavailable to those who rely entirely on the company’s quarterly reports, Graham is unfair to those who purchase his stock. Fourth, even if he neither shared fiduciary responsibilities nor took advantage of inside information, he would have a moral duty to other participants in the company to protect its common good at some risk to his own interests, and his motive for selling appears to disregard that duty.

The reply could be along the following lines:

The answer clearly is no. Graham is sure Goetz will sit tight through the bankruptcy, doing his best to save the business. Instead of dumping his holdings, he should cooperate in Goetz’s effort. As former partners and now colleagues in the business, the two have undertaken and built up a relationship of trust that Graham’s betrayal will destroy.

Moreover, along with Goetz, Graham is in control of the company and has a fiduciary responsibility for it. As the captain of a sinking ship should be the last to save himself, so a person who controls a business may not prefer his or her personal interests to its common good; and in his role as a director, Graham is responsible for that common good, which includes the just interests of all shareholders, employees, and other participants who will be adversely affected if the company does not survive and flourish. Let Graham put himself in the position of any of these people, especially the shareholders who purchased stock since the company went public, and he will easily see what he is doing as they will: a betrayal of trust. In saying, “I have the right to sell my stock any day I choose,” he ignores his fiduciary responsibility and focuses exclusively on his self-interest. The argument is fallacious, a mere rationalization.

Even if Graham did not share in the control of the business and in fiduciary responsibility for it, his sale of his stock would remain unjust. If, before calling his broker, he let it be known publicly that he was about to sell all his stock and explained why, it either would not sell or would sell for very little. But he makes no such announcement and acts instead on his inside information about the company’s condition and prospects, and about his intention to sell all his stock. Lacking access to this information, those who buy the stock, especially in the early stages of the sale, act on a false assumption they could do nothing to correct. Graham makes his profit by taking advantage of them; and morally speaking, at least, for him to sell in this way is fraud. He may have the right to sell his stock any day he chooses, but he does not have the moral right to sell it on the basis of inside information. (I believe doing so also would violate the law, but I leave that to legal counsel.)

Furthermore, even if Graham were neither managing the company nor acting on inside information, it would remain morally questionable and, I believe, probably unjust for him to sell the stock. Owning something does not carry with it a moral right to do with it whatever one wishes. Rather, ownership entails moral responsibility to care for property, administer its good use, and avoid wasting it, so that it will help meet not only the needs of the owner and his or her dependents but others’ needs as well (see LCL, 800–806, 811–14). Accordingly, even if Graham had no established association with Goetz, no share in control of the business, and no inside information, he would not be justified in acting solely out of a desire to salvage as much of his investment as he can. He also would be obliged to take into account the interests of other shareholders (who hold seventy-four percent of the stock), the company’s employees (probably not so well off as he is), and so on. All these interests considered, it seems clear to me that he is prepared to accept such great harm to others only because selling his stock suits his self-interest, which he considers overriding only because it is his.

Graham might object: If I urgently needed money, I would be justified in selling some stock, even if I foresaw it would hurt the business and others with interests in it; so, what I am doing now can be justified, provided I put the investment I salvage to good use. However, Graham’s sale of his stock does not seem to meet the conditions specified by this objection. And even if the conditions were met, the argument shows no more than that Graham may not be violating his general responsibility as an investor in the business. Still, it remains the case that he is betraying Goetz, violating his fiduciary responsibility, and taking unfair advantage of inside information.