The due diligence process is a critical element in a merger and acquisition transaction. Most companies clearly define the steps and rarely skip them. However, the participants in the process vary widely, and ethics and compliance are often overlooked. In a perfect world, the chief ethics and compliance officer and the ethics and compliance team would be part of the deal team early on, consulted in “go or no-go” decisions, and have a seat at the table throughout the process.
Why is it so important for the ethics and compliance team to have a seat at the table? While you may already know the answer, your leadership may still need some convincing. Here are some significant reasons you can communicate to your executive team:
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Subject matter expert: Compliance officers will bring a set of skills and experience that allows them to look at things from a different perspective and identify red flags that no one else would.
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Increased focus on compliance risks: Global laws and regulations are getting more robust in a variety of areas, including human rights, trade sanctions, and data privacy. Compliance officers will be able to ask the right questions to identify potential risks or even violations.
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Expected by governing authorities: The U.S. Department of Justice, the French anti-corruption law, and others are clear: companies that invest in strong compliance programs and conduct thorough compliance due diligence are better positioned to navigate the complexities of mergers and acquisitions. Who is better placed than compliance officers to lead those efforts?
Assessing the target company
Since few of us live in a perfect world, what might you do if you learn about the deal only after the ink is dry or are given limited information and restricted access to personnel? Regardless of when the ethics and compliance team gets involved, a strategy for post-transaction integration will be needed. So, regardless of your situation, here are things you can do to prepare:
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Scour the internet: An amazing amount of information can be obtained about companies from public sources. Look for and read the annual reports, sustainability and environmental, social, and governance reports, and press releases. Learn what the other company’s industry is, its vision, mission, and values. Search for regulatory violations and lawsuits. Study who makes up the leadership team and board of directors. If you cannot find these things online, this also tells you about the company.
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Assess the potential risk: Based on the industry, products, and geographic areas of operations, you can assess the potential risks of the target and identify how they might require additional or new compliance resources. Interview the executive team to understand what they think are the possible risks.
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Evaluate the ethics and compliance program: Is there a code of conduct? If so, how does it differ? Are any policies and procedures publicly available? What kind of employee reviews are on platforms like Glassdoor? Are employees represented by unions or labor councils? What does their website say about how many positions they currently recruit for?
Done deal; now what?
It’s possible that the “integration” of certain support services, such as ethics and compliance, wasn’t given a lot of thought before or during the transaction phase, but now that it’s a done deal, leadership wants integration to happen quickly. So, what do you do now?
Understand the why
Critical to the integration strategy is understanding why the transaction took place. Was the company acquired because of its unique products, market share, expertise, or customers? Was the reason behind the transaction to enhance current capabilities or gain new ones? What does your organization bring to the table that the other organization might not have? Support services, infrastructure, capital? Interview leadership to understand why the transaction took place from all perspectives.
Build a compliance risk profile
If you had the opportunity to assess the potential risk, build on that assessment to validate your assumptions and create a compliance risk profile. The compliance risk profile should drive the integration strategy and focus on the highest risks. For example, if the other company doesn’t have an ethics and compliance program, then you must consider how the program might need to be modified to fit the new corporate structure and acquired business. If there is an ethics and compliance program in place, you will have to develop an integration plan that determines whether there will be a single program or if there can be variations for different entities based on their compliance risk profile.
Develop an integration plan
Integration of a plan’s purpose is to achieve the intended synergies of the deal and maximize its predicted value. Understanding the deliverables related to ethics and compliance and developing a viable plan is essential to successful integration.
Who gets to stay, and who must go?
Anxiety is often running very high as people are uncertain about whether they get to stay or if they will be asked to go. To the best of your ability, determine this and the new ethics and compliance team structure as quickly as you can.
Culture clash
If you don’t understand the why behind the transaction, you may find that getting along with your new colleagues is a culture clash. It just seems that each side doesn’t understand the other. This can often be the case when one side believes they have acquired the other and the other was told that despite the transaction, things would remain the same. There are numerous examples of transactions that cost millions, and the culture clash destroyed the value proposition. Whether there was a failure to evaluate and understand the cultures before making the “go/no-go” decision, during due diligence, or even after the deal is done, understanding the culture will be critical to any integration strategy.
It was beyond certainly my abilities to figure out how to blend the old media and the new media culture. They were like different species, and in fact, they were species that were inherently at war. – Former Time Warner CEO Richard Parsons
Assessing culture
Often, we focus on the culture of the other organization, but it could be helpful and instructive to first determine your own organization’s culture. How does your organization’s mission, purpose, and values drive action? Do they act as guiding principles, or do they not resonate with the board, leadership, and staff? Is the structure formal or informal? How do executives like to be communicated with? Are meetings held to collaborate or make decisions? Once you have a baseline for your organization’s culture, you can use the same criteria to assess the other organization’s culture and identify similarities and differences.
Alignment or not?
If the purpose of the transaction was to obtain something that the current organization does not have, alignment might not be wise. The other organization has been successful based on its culture, and attempting to create a new wholistic culture could erode value. Consideration should be given to how alignment might or might not enhance value. If it doesn’t enhance value, alignment is probably not the right strategy.
Determining the ethics and compliance organizational structure
Will a centralized compliance structure serve the new corporate structure, or will a decentralized or federated model work better? How are other functions and departments being organized? While it might seem most efficient to have one code of conduct and one set of policies for all with a compliance team that reports to a single chief ethics and compliance officer, if the cultures and the business operations are substantially different, then a centralized organizational structure might contribute to the culture clash. Because it seems inconsistent with our sense of fairness, if a decentralized or federated organizational structure appears to be the best fit, be prepared to be able to explain why the rules are different for some.
Takeaways
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Regardless of when the ethics and compliance team gets involved, a strategy for post-transaction integration will be needed.
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Critical to the integration strategy is understanding why the transaction took place.
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The compliance risk profile should drive the integration strategy, focusing on the highest risks.
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Understanding the deliverables related to ethics and compliance and developing a viable plan is essential to successful integration.
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Assessing the organization’s culture is critical to any integration strategy.
