I have been visiting with Eric Feldman, Senior Vice President, Don Stern, Managing Director of Corporate Monitoring & Consulting Services, and Rod Grandon, Managing Director of Government Services, from Affiliated Monitors, Inc., (AMI) who is the sponsor of this series. In it, we explore how to go about assessing ethics and compliance in the mergers and acquisition (M&A) context. In this fourth episode I visit with Grandon about the types of things a monitor would review to determine if a company adequately considered ethics and compliance during the M&A process.
Grandon sees 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, the negotiation and the due diligence. This review goes up to the point at which the transaction is completed. From there is the post-acquisition phase, the integration phase. Grandon sees a distinct role in both the pre and post-acquisition phases for an independent monitoring. During the pre-acquisition transaction phase an “independent monitor can come in without preconceived notions, without shackles, as to any corporate expectations and do that deep dive that is really 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.”
Moving over to what Grandon would expect to see in the integration phase, he noted the type of culture which exists through working with the respective workforces to understand what are their cultures. Are these cultures compatible in terms of bringing together a program to promote ethics and compliance? This requires, in many cases, deep dives, particularly the use of focus groups to get down to the workforce to get a true understanding of what some of the cultural elements that are in play. And in many cases, this is just a critical and complicated piece. From there, Grandon advocates moving 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 Grandon noted that the independent monitor can also provide a key piece to help the integration phase. It can be a critical asset in this process of coming in 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 which already knows it’s been merged or acquired. Also the public already knows so no excuses for not getting in and getting a very good understanding the culture and how the workforce sees the ethics and compliance structure of the company.
Grandon made two interesting observations. The first was 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 was the problem of completely unforeseen events popping up through complaints to lawsuits to further discovery events.
The first area focuses on the unintended consequences of rapid growth. Grandon said, “many times I 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 really never on the people’s side or human element. The acquiring entity never takes the time to get it right in terms of ethics and compliance. A cultural compatibility is absolutely critical for the success of the successor entity. Without that what frequently happens or the workforce is demoralized because they do not feel like they’ve been part of the process.”
Grandon continued, “the fact is no one from the acquiring entity listened to them so they really don’t understand the corporate direction. Suddenly many of the employees find themselves in a much more permissive environment than they had before. Maybe in 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 and that’s what leads to these unintended consequences.”
The second issue is the ‘pop-up problem’, “which is something, 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 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 issues may well have been forestalled. It just simply has never surfaced up to senior management or senior leadership levels.”
We concluded with some warning signs or red flags which may appear at points throughout the M&A process that may show problems exist or are on the horizon. Grandon said one clear such indicator was a “breakdown in transparency”. He expanded on this to note that there are “Suddenly little fiefdoms are permitted to exist within the successor, a 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 work to demoralize a workforce. If unethical or even questionable conduct is tolerated, this can also work to destroy employee morale. Grandon added that if management is disengaged from compliance and ethics and more is rather 100% focused on revenue and finances, this is a problem which needs to be addressed.
Tomorrow, we conclude with how M&A can benefit from an independent assessment.