The Background: I was a vice president at a global bank, responsible for a diverse group of clients in North America.  One of my clients was considering a major reorganization of its business and restructuring of its balance sheet, and it hired my bank as financial advisor.  Since we were a lender to client and a restructuring could have impacted our position, the bank saw the conflict and (with the consent of the client) set up separate teams.  Given the size of the assignment and the large potential fees, the advisory team was led by the bank’s Vice Chairman, and included the head of my department, who was my boss.  My “team” (really just me and an associate) was responsible for the bank’s balance sheet – our counterparty risk and our lending position, including a large syndicated loan for which we were the agent.

The Setup: The advisory assignment went on for several months, during which I could not discuss the client with my boss or anyone else on the advisory team.  This led to some strange situations, like running into people from my bank in the elevator at the client’s headquarters (a very silent ride), or sitting across the table from them in client meetings.

Finally, key elements of the restructuring began to emerge.  To make it work, one large asset of the client had to be quickly and quietly sold.  This is when my boss called me into his office and gave me the term sheet showing our bank buying the asset.  But, since he was on the advisory team, he couldn’t buy it.  It was up to me to make the purchase on behalf of the bank.

But it didn’t look right.  The client (really our advisory team) provided very little information about the asset to be sold.  Depending on your assumptions, it was either wildly over or under priced.  And the company wanted us to buy it right away, without any disclosure to other lenders (including members of our lending syndicate) or to the public.  The advisory team (via my boss) assured me that the price was fair, and that purchasing the asset would enable the rest of the client’s reorganization.

The Conflict: After reviewing all the materials and running the numbers, it still didn’t look right.  I collected my materials and went to see Jim, the senior executive for North America (my boss’s boss).  After running him through the situation, he agreed we shouldn’t do it.  Even if the numbers made sense (which was questionable), the reputation risk was too high – the speed and secrecy wouldn’t look good to other investors or to the public.

Finally, Jim said, “let’s go see Dennis,” and with that, he was on the phone to the office of the Chairman of the bank.  We collected my materials and walked down one flight of stairs to the Chairman’s conference room.   There, we were met by the quickly assembled advisory team, including the Vice Chairman, internal counsel, and my boss.  I remember looking around the room and thinking I was the only one in the room (including the Chairman) without my jacket on.

The Resolution:  Jim presented our case.  The transaction may (or may not) be the right thing for the company to do, but it was not right for us to be on the other side of the deal – the speed and secrecy, combined with our conflicting roles (i.e. advisory, lender, agent), made it too risky.  It did not pass the Wall Street Journal test (would you be happy to see the details of the transaction on the front page of the Journal).

The advisory team presented the other side – the client wanted the transaction and without it, we could not complete our advisory assignment (and thus would not receive an advisory fee).

The Chairman asked some questions, got into some of the detail, and heard from more people in the room.  Finally he said, “This doesn’t sound like something we want to do.  What do you think Roberto?” (looking to the Vice Chairman, the leader of the advisory team).   The Vice Chairman agreed.  The deal was dead.

The Lessons:  Do the right thing.  A firm’s reputation with its clients, investors, regulators and employees takes years to build yet it can be destroyed very quickly.  When something doesn’t look right, raise the red flag – bring the issue to the right people in the organization.

After the decision had been made, the Chairman had one more comment before he let us all go: “Conflicts like this large and small happen in our business every day, and you can’t bring every one of them to my office.   When you get back to your desks, remember the decision we just made.”  And just like that, an ethical corporate culture was reinforced from the top of the house.