A merger or acquisition can be a tumultuous event for all parties involved in the transaction which can create a climate for unethical behavior. According to the National Business Ethics Survey, companies that are participating in an M&A or any other form of major restructuring experience a 21.5 percent increase in inappropriate conduct on average.
There are numerous factors that can contribute to a spike in misconduct during the M&A process. Employees – especially those who have worked for an organization for many years – are typically fearful of the pending changes. Commonly the rumor mill tends to kick into high gear, leading to speculation about job losses. This can result in a cutthroat work environment where employees feel compelled to take drastic steps to hold onto their position. And workers who believe they are about to be let go may think nothing of committing an unethical act as a form of revenge against their employer.
Employees who witness misconduct during an M&A are sometimes more reluctant to report it, believing that it is the wrong time to make waves or generate adverse publicity. Organizational leadership is also more inclined to put ethics and compliance on the backburner during an M&A event due to being preoccupied with the mechanics of the process and not wanting to deal with ethics issues until the new organizational structure is in place.
The Risk Also Increases During the Due Diligence Process
The typical merger and acquisition process includes a due diligence phase where the parties take a close look at their prospective business partners. However, the risk of misconduct often increases during this time. For example, an organization that is the target of an acquisition may attempt to “fudge” its financial statements to make them more attractive to new owners or prospective buyers. There are also situations where making a good faith response to a request for information – especially confidential or proprietary information may lead to inadvertent compliance violations.
Due Diligence During Pre- and Post-Closing
The Department of Justice offers some general guidelines regarding how companies should approach due diligence when evaluating a prospective partner or acquisition target during the pre- and post-closing M&A phases. Pre-closing activities should focus on:
- Evaluating the environment where the organization conducts business (does it operate in a “high-risk” environment, for instance)
- Examining the current ethics and compliance structure including reporting hotlines, policies, training procedures and audit practices
- Assessing the results of previous ethics and compliance investigations to determine areas that pose the highest risk
- Performing an assessment of the current compliance culture
- Vetting key third parties associated with the organization
Post-closing activities should include:
- Embedding the desired compliance culture within the acquired or newly formed organization
- Conducting ethics and compliance training shortly after closing that addresses all key risk areas
- Establishing clear, concise policies and procedures
- Clearly communicating expectations regarding appropriate/acceptable behavior
- Ensuring that all employees are aware of the mechanisms in place for reporting misconduct
Steps for Minimizing M&A Risk
Specific steps your organization should take to minimize risk during a merger or acquisition include:
- Performing a risk assessment of the change process: Your M&A process should include a basic ethics and compliance risk assessment to identify key areas of concern. Upon identification of any new risk areas, you will need to develop a strategy for mitigating risk in each area, which should include a plan for educating and training all employees who will be impacted by the potential risk. Components of an effective risk assessment methodology include:
- Creating an inventory of organizational and cultural risks that the company, industry and geographic region currently face
- Assessing the likelihood and potential magnitude of each risk
- Evaluating current mitigation strategies
- Providing detailed recommendations for bolstering risk mitigation strategies if needed
- Requiring certification: Employees affected by the risk areas should be required to undergo a certification process to verify that they are aware of and fully understand any new policies that will affect their specific job functions. For example, salespeople who will now be entering an international market where bribery is an “accepted” business practices should be certified on new or updated anti-bribery policies.
- Strictly enforcing confidentiality agreements: Most mergers/acquisitions entail an exchange of proprietary/confidential information such as trade secrets, sensitive customer and employee data, etc. While you may require all employees involved in handling this information to sign a confidentiality agreement, it is possible – even likely – that leaks will occur. A best practice is to supplement the agreement with training to ensure that the employees are aware of their responsibilities, as well as the ramifications of violating the confidentiality agreement.
- Conducting a cultural assessment: Along with a risk assessment, you should perform a cultural assessment to determine the current “ethics temperature” of the organization. Through a combination of methods such as one-on-one interviews, surveys/questionnaires and focus groups, you can identify employee attitudes toward ethics and compliance in areas such as:
- The comfort level for reporting unethical behavior in terms of the expectation of experiencing retaliation
- Whether employees view specific types of behavior as acceptable or out of bounds
- The level of belief that employees who behave inappropriately are held accountable for their actions
- The degree to which employees can act in an ethical manner and still achieve the organization’s business objectives
- Emphasizing the importance of reporting misconduct: Since the reporting of misconduct tends to decline during an M&A, it is imperative to remind all employees about the importance of identifying unethical behavior during this time. Specifically, outline the benefits of stopping potentially damaging actions that could undermine the transaction and possibly place their jobs at risk. Also, emphasize that weeding out “bad actors” at this formative stage of the new entity’s lifecycle will help to create a positive workplace culture that is beneficial to employees, customers and stakeholders.