The subject of corporate culture is increasingly relevant to dealmakers. After all, whether a potential acquisition has a healthy one in place could affect the amount of risk surrounding the target. Dealmakers need to know whether the current management team will conduct itself responsibly. Business experts have also recognized a connection between strong corporate cultures and better performance metrics.
In order to understand the importance of ESG and corporate culture principles as they relate to M&A deals, as well as the challenges of integrating and evaluating such principles, Mergermarket on behalf of Toppan Vintage spoke with six dealmakers with experience in the field.
Toppan Vintage question: In your view, what are some of the most important benefits of a positive corporate culture, including upsides that might not be so obvious? Leading industry experts weigh in...
Melissa Sawyer, Partner, Sullivan & Cromwell says: Better investor, community, and governmental relations are an important byproduct of having a good corporate culture. Meanwhile, on the employee front alone, companies historically viewed as having supportive and respectful environments for their employees tend to have better employee retention, and accordingly, lower costs associated with their human resources functions. We’ve also seen positive corporate cultures lead to the instilling of creative habits in employees, and a space within the company environment for innovation to bloom.
On the opposite side of things, we’ve seen the negative impact of a bad corporate culture through the “Me Too” issues of the past year, as those companies with instances of workplace misconduct—and particularly misconduct targeted at women—have been the first to admit an inability to attract and retain talented women. It certainly does not count as a benefit when 50% of your potential workforce is unable or unwilling to work for you.
Simon Propper, CEO, Context America adds: I agree with Melissa about the benefit to employee retention. If you're in a field where there's a talent shortage, workers know they have their choice of employer and are essentially being courted all the time. In that scenario, once they've looked at location and remuneration packages, they’re thinking, "Now what kind of company is this? Does it do good things and look after people, and make things in a responsible and considerate way? Or is it sort of lacking?" As a differentiator between the types of companies someone would like to devote themselves to, and ones they would feel ambivalent or have concerns about, culture and, specifically, social and environmental sustainability are significant tools. Of course, that plays into the hands of smaller companies, because it's easier to establish a founder culture from day zero-forward.
A second benefit is in sales, particularly in many B2B markets, where there is the need to provide brand customers with confidence that you're not going to embarrass them through behavior. They don’t want to find out about missteps in the supply chain of a product that ends up with their brand on it. They need to know you can be relied upon to conform to social and environmental requirements, and that only a sensible amount of checking and auditing is needed to ensure you do. That's all about culture, trust, and reputation.
There is also a benefit to investors, which is especially applicable in an acquisition situation, in which culture is essentially a risk management tool. After all, you can have all the ethical codes in the world, but if the culture turns a blind eye to them in order to get ahead in the short term, the company will be exposed to bigger risks, whether that's bribery and corruption, cutting corners in regulations, etc. There's an increased risk profile to a company with a poor culture. Two recent and very prominent examples—shocking ones, really—were Volkswagen in Europe, and Wells Fargo in the US. Both featured appalling missteps in corporate behavior, which pointed to rotten cultures in their organizations. They're still dealing with the fines and liabilities from those missteps many years afterwards.
Andrea Bonime-Blanc, CEO, GEC Risk Advisory weighs in: The biggest upside is a focused, purposeful workforce that is not wasting its time—and indirectly, corporate resources and money—back-biting and complaining about the bad culture. Instead, they’re focused on teamwork, hitting targets, and camaraderie. Once a positive cultural attitude becomes the norm for employees, it, in turn, benefits important stakeholders such as shareholders and customers.
The hardest thing to prove with a qualitative matter such as culture is quantitative impact. The intrinsic value of a good culture cannot always be proven via strictly financial or quantifiable measurements. The well-known business adage that you only manage what you can measure works against the generally intangible, qualitative ways in which most businesspeople think about culture. However, there are measurements that boards and C-suites can deploy in order to get a sense of organizational climate, as well as a feel for how employees and other third parties consider their workplaces.
I outlined a few of these in a National Association of Corporate Directors article I recently wrote on the board’s culture oversight responsibilities. In larger companies, these measurements can come from several sources, including talent management and human resources departments, as well as ethics, compliance and/or risk management teams, which as part of their remit are regularly collecting data on risks. They also draw from helpline and hotline statistics, workplace trends, training and communications activities, focus groups, and pulse surveys.
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The New Importance of Corporate Culture and ESG
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