Jay Rosen considers what a monitor would review to determine if a company adequately considered ethics and compliance during the M&A process.
There are two distinct phases in the M&A process: pre- and post-acquisition. In each phase, an independent monitor would look at different aspects of it. The first is the planning, negotiation and due diligence. This review goes up to the point at which the transaction is completed.
From there, it becomes the post-acquisition phase – the integration phase. Independent monitoring can play a distinct role in both the pre- and post-acquisition phases. During the pre-acquisition transaction phase, an independent monitor can come in without preconceived notions, without shackles as to any corporate expectations, and perform the deep dive necessary for the parties if that information is shared or at least one of the parties to gain an understanding of what is being purchased or what is missing.
What we would expect to see in the integration phase is the type of culture that exists through working with the respective workforces to understand what the combined entities’ culture will be. Are the individual cultures compatible in terms of bringing together a program to promote ethics and compliance? This requires, in many cases, deep dives, and particularly the use of focus groups to interact with the workforce to gain a true understanding of some of the cultural elements that are in play. And in many cases, this is just a critical and complicated piece.
From there, we would move into the controls area to literally put an independent set of eyes on the internal compliance controls. This is to help the parties understand the risk environment they find themselves in and the culture that is in play for the post-acquisition phase.
Moving to the post-acquisition phase, an independent monitor can add value by providing a key piece to help to combine these differing cultures in the integration phase. It can be a critical asset in this process of coming in and helping management understand what it has acquired. This is the point there are no limitations on getting in and doing that deep dive with the workforce that already knows it’s been merged or acquired. As the transaction has been publicly announced, there are no excuses for not rolling up your sleeves and getting a deep understanding of the culture and how the workforce sees the ethics and compliance structure of the company.
This brings up two interesting observations. The first is the unintended consequences of rapid growth, not taking the time to digest and integrate, leaving a gap and lack of understanding of what was expected of the workforce. The second is the problem of completely unforeseen events popping up, from complaints to lawsuits to further discovery events.
The first area focuses on the unintended consequences of rapid growth. Many times, we have seen companies, particularly smaller companies, that have tried to grow very rapidly through acquisitions and mergers. In doing so, the focus was always on the finance and never really concentrated on the people side or the human element. The acquiring entity never takes the time to get it right in terms of ethics and compliance.
A cultural compatibility is critical for the success of the successor entity.
Without that, what frequently happens is that the workforce becomes demoralized because they do not feel like they’ve been part of the process. As no one from the acquiring entity has listened to them, they really don’t understand the corporate direction. Suddenly many of the employees find themselves in a much more permissive environment than they were in before. Maybe it’s the lack of appropriate leadership and guidance. The risk factors really tend to spin out of control very quickly if there’s not a good plan and a good understanding of what is going on in that transaction; that’s what leads to these unintended consequences.
The second issue is the “pop-up problem,” an issue that, even with reasonably effective diligence, the parties missed. Now you are months down the road post-transaction, or perhaps even years down the road, and a lawsuit pops up.
These pop-up problems in many cases could have been identified if the companies would have taken the time to do that deeper dive into that ethics and compliance realm and to understand what the workforce has seen and experienced.
These pop-up problems may well have been forestalled – they just simply never surfaced up to senior management or senior leadership levels.
Let’s conclude with some warning signs or red flags that may appear at points throughout the M&A process and show problems that already exist or are on the horizon. One clear such indicator is a “breakdown in transparency.” Imagine if, suddenly, little fiefdoms are permitted to exist within the successor company’s corporate structure and there’s really no way of knowing what’s going on. This can lead to small-ish problems becoming much bigger ones. Another key indicator is favoritism to certain people or groups within an organization. This can easily demoralize a workforce. If unethical or even questionable conduct is tolerated, this can destroy employee morale.
If management is disengaged from compliance and ethics is 100 percent focused on revenue and finances, this is a problem that needs to be addressed.
Please join me next week for the concluding blog post in this series, in which we will address how an independent integrity monitor can benefit the entire M&A process.
In case you missed the earlier installments of this ongoing series, please see the links below.
Everything You Always Wanted to Know About Monitors But Were Afraid to Ask
Part 1, Part 2, Part 3, Part 4 and Part 5
Potential Issues in Corporate Monitorships
Part 1, Part 2, Part 3, Part 4 and Part 5
Suspension and Debarment in Monitoring
Part 1, Part 2, Part 3, Part 4 and Part 5
Monitoring in the Health Care Sector
Part 1, Part 2, Part 3, Part 4 and Part 5
The Basics of Corporate Culture
Part 1, Part 2, Part 3, Part 4 and Part 5
