Culture Shock

Blog
08 July 2020

Tags: Corporate governance, Communication & Engagement, Supportive Environment

Read the blog by William O’Connor, IBE's Research Assistant.

One element of business ethics policies and programmes we often get asked about at the IBE is developing capacity to evaluate the culture and ethical credentials of other organisations, particularly with a view to onboarding them as suppliers. During our recent webinar to promote the new Embedding Business Ethics: 2020 report on corporate ethics policies and programmes we were asked the following question about rapidly assessing the culture of other companies in the context of lining them up for acquisition or merger; 'have you any ideas for rapidly assessing the ethics of a target company you are looking to acquire? To provide assurance that they are not very different to your firm's culture?'. This is an important and interesting question which tends to get less attention than supplier due diligence, and we felt it merited some further discussion here.

From a risk management point of view, the imperative to get this right is enormous. The degree of responsibility a parent company must assume if something goes wrong at the subsidiary is greater than the culpability of a company who simply purchases components from the organisation where the ethical lapse occurred. Further, poor workplace cultures and instability are typically associated with poor operational performance. A smooth, harmonious integration period is much more likely to create the conditions for sustainable improvements in performance; creating a consistently good culture and maintaining it as an organisation evolves is good for profit and purpose alike.

Unfortunately, however, many organisations don't get it right. Research by McKinsey found that 92% of respondents agreed that past mergers they had been involved with would have benefited from greater cultural understanding prior to integration.

At the risk of stating the obvious, you have to first know your own culture in order to meaningfully compare it to another. What are organisational cultures, and how can we conceptualise the different types? According to Deloitte, culture 'consists of the long-standing, largely implicit shared values, beliefs, and assumptions that influence behaviour, attitudes, and meaning in a company'. Culture is not a tangible phenomenon that you can measure, so we use a range of proxies to build a picture of how an organisation works instead. Some of the most popular metrics used to evaluate organisational culture include staff turnover rate, Speak Up channel usage, and openness with information internally, as well as interviews or surveys to gauge staff engagement, fulfilment and wellbeing.

How to Avoid a Culture Clash

So what practical considerations should companies take when making acquisitions to ensure that the success of the merger isn't derailed by cultural inconsistencies? Firstly, the integration process needs to centre on a spirit of compromise. Mergers involve the blending of different sets of assets; financial assets, brand value, manufacturing capital, and arguably most important of all, human capital. Talent retention is often a casualty of mergers and acquisitions; keeping employees engaged through times of transition is difficult enough, and there's also the possibility they could be incentivised to leave by change in control agreement payouts. 

Communication is important in this regard. When going through periods of change, people can feel understandably concerned and unnerved; the crucial point here is to communicate why change is happening. In order to pull together people from potentially disparate cultures and unite them, the newly formed post-merger organisation needs to be able to demonstrate a cohesive, values-based vision and explain how it will draw on the best aspects of both companies cultures' and their teams' strengths. After all, simply imposing the senior partner organisation's culture and practices on the junior partner can fundamentally change the nature of the junior organisation, potentially undermining the reason for the acquisition. The company being acquired clearly has something the parent does not, or the parent company wouldn't be buying it. Forced assimilation into an incompatible partnership might cause the acquired company to lose whatever strength or feature made it a target for acquisition to begin with. 

Time is of the Essence

Mergers and acquisitions are much more likely to be highly time-sensitive compared to contracting suppliers. This time pressure means warning signs might be missed, or even consciously ignored with a mental note to 'deal with them later'. If the target company occupies a unique position in the market, concerns around culture and ethics may be overlooked, or ethical blindness and unconscious denial might come into play due to the perception that there is no alternative to the deal on the table. As a result, negotiations sometimes rely on 'constructive ambiguity' to get agreements over the line, which can have consequences that are felt long after the merger happens. Deliberate ambiguities must eventually be clarified. If different parties' interpretations are at odds with each other, ambiguities that helped seal the deal can quickly cause problems.

In order to ease time pressure, cultural assessment of a target company from the outside can begin in earnest at an early stage and remain confidential. It is common practice for organisations to use proxies to build an understanding of their culture and values, as well as to diagnose problems. This becomes more difficult when attempting to apply the same proxy measurement techniques to potential suppliers or targets for acquisition, because you almost certainly will not have open access to a wealth of information about them in the way that you would at your own organisation. However, a surprising amount of information about a company's culture and approach to management can be gleaned from things like company literature and websites, speeches by key figures, and recruiting practices. These resources can help identify potential sticking points in management style, objectives, and values at an early stage, allowing the opportunity to acknowledge and address them before the acquisition picks up momentum. 

Another helpful move is to assign a small team with responsibility for integration management. The function responsible for executing the acquisition deal is unlikely to have the bandwidth to focus on cultural issues, and is subject to the aforementioned time pressure to wrap the deal up quickly and end the uncertainty that comes with periods of transition. A separate team dedicated to aiding a smooth integration of cultures is relatively free of this pressure and less likely to take a 'deal with it later' approach. This dedicated team should contain representatives of both constituent companies who can work collaboratively to identify which elements of their respective company cultures can and should be retained, and which areas will require particular change or compromise. 

The integration team should also be cross-disciplinary. According to Baker McKenzie, such a group might be 'comprised of experts from various specialties—such as human resources, legal, tax, finance, IT, real estate and operations—so they are working together to consider all of the issues'. This prevents a situation arising where integration plans made by various functions might contradict one another. It may also be beneficial to include external consultants in this group; they are free of bias and bring a fresh perspective to their evaluation of the strengths and flaws of both cultures, as well as being able to objectively mediate any disputes that might arise between differing perspectives.

The Way Forward

Companies have different cultures and ways of working, from the decision-making process at the top level down to small things like workplace attire. However, if there is a common strategy and set of values, these differences can usually be overcome. As CEO Ludovic Gaude puts it, 'if the two companies coming together recognize their common cause and common values, the logistical discrepancies tend to work themselves out'. Companies pursuing acquisitions should place culture front and centre from the very beginning, identify the relative strengths of both parties and ensure they are preserved effectively through cross-organisational and cross-disciplinary planning. The rationale behind the decision to merge and the approach the two parties take to the merger should be communicated clearly; if people are to remain engaged and enthusiastic, they need to know why things are changing and why they are valued. Merging cultures successfully will unlock the full operational benefits of any merger or acquisition.

It's important to remember that when we make judgments about culture based largely on proxy indicators, we are judging by outcomes. It's often much harder to determine the means of reaching those outcomes. It's not always about 'good' versus 'bad' culture, it might be that two organisations achieve similar results, one through a rules-based, highly structured and proscriptive style of working while the other uses a values-based approach. Both approaches can work for different organisations and achieve outcomes indicative of what we would call a 'good' culture, but they might be totally incompatible with one another. When lining up targets for M&A or onboarding third parties, both means and ends need to be taken into consideration. First of all, using the information available, establish whether an organisation's culture works; does it deliver positive outcomes? Once you have established this, consider the way in which the organisation's culture delivers those results. If my organisation is highly values-based in its culture, I am likely to have trouble integrating my organisation with another that works on a rules-based basis, even if their outcomes are similar. Getting the cultural dimension of integration right or wrong can make or break a new business relationship. 

Author

William O’Connor
William O’Connor

Research Assistant, IBE, W.OConnor@ibe.org.uk

As a Research Assistant at the IBE, I contribute to a wide range of research projects and publications, carry out advisory work for supporter and non-supporter organisations, and assist in the delivery of events and training. 

I joined the IBE in October 2019 as an intern after concluding my studies for an MA in Corruption and Governance at Sussex University. After 3 weeks as an intern, I became a permanent member of staff at the Institute. 

Integrity has no need of rules – Albert Camus

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