Cultural compliance risks in M&A and how to tackle them
Article 5 minute read

Cultural compliance risks in M&A and how to tackle them

14 October 2021

Bridging variance in culture can be key to a successful merger, acquisition or carve-out. However, the degree to which it should be factored into your compliance assessment is typically commensurate with your level of investment, and the location(s) of the company being acquired or merged with.

How to assess company culture

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

Ascertaining whether a company is the right cultural fit is ideally carried out before an merger and acquisition (M&A) or carve-out deal is done, given the possibility that it can disrupt or damage the future of the deal post-closure. However, it normally does not 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 these factors help you to assess how the company you are about to deal with addresses these technical and ethical issues, and if they are 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 its code of conduct and compare it with 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 does not have its own code of conduct, this could be a red flag.

The starkest differences are often observed in cross-border M&As and carve-outs, 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 is 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 not only pharmaceutical but also beauty and healthcare products will have completely different ethical and compliance requirements between divisions. The most accepted solution, although not the simplest, is to identify the highest demand for compliance, and implement this standard 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 are 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 per cent, it is a low-risk joint venture, so you may decide that only one of your compliance assessment requirements is necessary. This could be your code of conduct.

By contrast, Germany is low on the corruption perceptions index. The country is considered a very safe place to do business in. But you have a 70 per cent stake in the company, so you should demand that all 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 board meetings, and their acceptance or non-acceptance is documented in the minutes.

But the work of keeping your company ethically compliant does not stop after the implementation of the compliance programme. It is essential to have means to assess if the message was understood by the employees, and is being followed through at all times. One way 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, acquisition or carve-out deal 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.

M&A and carve-out support

Working with a partner that provides administrative support services can help relieve some of the pressures faced by your deal and integration teams. Once the deal closes, you will need to move quickly.

It is time to give a seat at the table to the only company that can conquer cross-border compliance complexity from our base of 125 offices covering more than 85 jurisdictions. About 9,100 experts are dedicated to unlocking access to some of the world’s most attractive markets – no matter how complex – swiftly, safely and efficiently.

You do not need to handle these challenges on your own. Talk to TMF Group today for help with your M&A or carve-out.

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