Worldwide: Cultural Compliance Risks In M&A And How To Tackle Them

More than 50% of ventures are able to successfully overcome differences in cultures. But if unaddressed, it's usually a contributing cause in the 50% of joint ventures that fail.

The above striking statement by David Ernst, Managing Director of Waterstreet Partners, featured during a discussion about compliance programme implementation at Compliance Week Europe 2018. Bridging variance in culture can be key to a successful merger or acquisition. However, the degree to which it should be factored in to your compliance assessment is typically commensurate with your level of investment, and the location/s of the company being acquired.

How to assess company culture

Every company has a culture; a set of values and assumptions that governs how employees interact on a daily basis between themselves, stakeholders, clients and competitors.

Ascertaining whether a company is the right cultural fit is ideally carried out before a merger or acquisition deal is done, given the possibility that it can disrupt or damage the future of the merger post-closure. However, it normally doesn't feature in the negotiation phase.

A cultural assessment should take into consideration the methods of communication within the organisation. Observe how people, practices and management interact and the 'tone from the top.' How is training conducted? What is outlined in the Code of Conduct and how is internal ethical compliance implemented and followed up? You can also gain a lot of insight into a company and its values by examining how any reporting about non-compliance is carried out. For example, are there internal investigations? Is there an independent internal audit team within the company group? All of these factors help you to assess how the company you're doing business with addresses these technical and ethical issues, and if they're aligned with those in your own business.

Out of alignment

Examining the Code of Conduct in particular and how it differs between two companies is telling. When you acquire a company, it is recommended that you request a copy of their Code of Conduct and compare it to yours. You may then suggest changes that you deem necessary to close any cultural gap. Their acceptance would indicate that the company is ready and willing to adapt to your view of the world. On the other hand, if the company doesn't have its own Code of Conduct, this might be a red flag.

The starkest differences are often observed in cross-border M&A, where local country culture can play a large part. For example in Nigeria, paying an official may be seen as commonplace to speed up document processing. However it's bribery by definition, and will be a clear breach of a Dutch (and many other countries) company's Code of Conduct, regardless of how accepted the practice may be locally.

The industry you are in also plays a part; a company that sells pharmaceutical products but also beauty and healthcare will have completely different ethical and compliance requirements between divisions. The most accepted solution, although not the simplest one, is to identify the highest demand for compliance, and implement this highest demand across the newly merged or acquired organisation.

How to assess compliance

In the case of an investment where you will be the majority shareholder you should establish a set of compliance assessment guidelines that you want to follow. Implementation of these guidelines enables your corporate culture to spread to the company being acquired. The guidelines should include requirements such as a Code of Conduct, risk assessment and continuous improvement, training and disciplinary measures.

If you have a non-majority stake in a venture, or are only acquiring a small part of the company, you can choose to be flexible in deciding how many of your guidelines you require to be met.

If you're purchasing a stake in a company in a high-risk country, but have a low level of ownership, you may decide that you only require one of the minimum compliance assessment requirements. If your ownership increases, so should your demands for additional requirements.

For example:

  • Tanzania: Sits high on the corruption perceptions index. However, if your ownership is 15%, it's a low-risk joint venture, so you may decide that only one of your compliance assessment requirements is necessary. This might be your Code of Conduct.
  • Germany: Low on the corruption perceptions index. The country is considered a very safe place to do business in. But you have a 70% stake in the company, so you should demand that all of your compliance assessment requirements are implemented to ensure that the venture will be sound.

These demands should be made when your representatives sit on the Board of Directors. It is best to ensure that these points are discussed in the board meetings, and their acceptance or non-acceptance is documented in the minutes of the meeting.

But the work of keeping your company ethically compliant does not stop after the implementation of the compliance programme. It is adamant to have means to assess if the message was understood by the employees, and is being followed through at all times. One of the ways used to assess this is through a "mystery customer" who will try, in different ways, to have your staff succumb to acts of non-compliance. But going around one of your new departments and asking employees at random if they have read the company's Code of Conduct may just as well provide you with a good overview of where your compliance programme stands after implementation.

Your merger or acquisition is not doomed to fail if there are distinct cultural differences. But addressing them early on, establishing where they should sit in your compliance requirements, and keeping track of the implementation of the agreed compliance programme is essential for minimising any risks. And you should not be afraid to revaluate them in the longer term.

Talk to us

With offices in more than 80 jurisdictions worldwide, our corporate secretarial and governance experts can assist with all the administrative aspects of your M&A. This allows you to focus on understanding the cultural compliance landscape, to make sure that the M&A post-closure, will be a success.

Need more information? Get in touch with us today.

Discover the least and most complex jurisdictions for corporate compliance – download your free copy of the Compliance Complexity Index.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Events from this Firm
16 May 2019, Webinar, Rotterdam, Netherlands

Summary:

Executing an acquisition integration plan is one of the most difficult assignments in the M&A life cycle. Every merger involves “negative synergies”, including the departure of key talent, sales losses, incompatible systems, productivity declines, turf battles and cultural friction. The key is limiting the costs and preparing for the unknown challenges that may arise.

 
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