Company Culture Due Diligence

Michael D. Moberly    January 6, 2014    ‘A blog where attention span matters.

 A company initiating, or even contemplating, a merger or acquisition would be well served today if a company culture analysis was included in their overall due diligence strategy!

The reason, as conveyed here many times, is that increasing percentages, i.e., 80+% of most company’s value and sources of revenue either lie in or directly evolve from intangible assets, which company culture is one.  It’s correct to assume then, that a substantial factor in the rationale if the initiating company’s seeking an M&A evolve around merging or acquiring particular intangible assets which the target firm already has in place and collectively exist in the form of intellectual, structural, and relationship capital.

From an operational perspective, intellectual and structural capital constitutes the knowhow and processes which collectively underlie the revenue, competitive advantages, and efficiencies, etc., being sought.  So, in M&A transactions, acquiring unimpeded use and control of these valuable assets becomes the underlying starting point for achieving the projected (desired) transaction outcomes.

Unfortunately, for the uninitiated, a target company’s culture, as well as other intangible assets, may be overlooked, dismissed, or even deemed irrelevant to a transactions’ projected outcome.  It’s equally unwise to assume, should a proposed transaction, i.e., M&A, strategic alliance, etc., be favorably executed, that the sought after intangibles can be necessarily (individually) separated, extracted, and  exploited apart from a company’s culture. Today, transaction management teams are obliged to understand that are intangible assets quite indivisible from its culture, particularly intellectual, structural, and relationship capital which are generally embedded in various operational processes and integrated throughout an enterprise,.

Transaction management teams again, would be well served to recognize a company’s culture as being an invisible (intangible) temperament and/or attitude that connects and bonds companies, employees, and stakeholders together, says Grant McCracken, one, among several prominent company culture specialists today, specializing in the intersection of commerce and culture, i.e., where company culture sits at the intersection of anthropology and economics.

So, from McCracken and others’ work in this arena, we see perspectives emerging, that company culture is being likened to an ‘internal version of a company’s brand’.  That’s largely attributable to a broader recognition of the reality that company culture generally encompasses a company’s mission, its vision, its values, and its intangible assets.

Clearly McCracken understands how an effective (company) culture can impact a business, e.g., “culture is a company’s last mile” he often emphasizes as he makes a very compelling case that a company’s culture is marketing’s newest version of the proverbial ‘silver bullet’.  Certainly, no disagreement here!

But, before embarking on a company culture analysis, says Monica Mehta a writer for Profit and Profit Online, the target company should be distinguished on several cultural dimensions often conveyed as dimensions between two extremes as Ms. Mehta has portrayed so well here…

So, there should be less resistance to including company culture analysis as an integral component to transaction due diligence.  In my view, each of the dimensions above apply to corporate cultures, and can serve as effective starting points for culture assessment and due diligence. It is important to realize, as Ms. Mehta points out, there may be no, necessarily right or wrong (company) culture at the analysis stage.  The initial key is that due diligence teams are operationally familiar with the characteristics and features of their own company’s culture.
In Ms. Mehta’s example, the following can be observed with respect to Company #1…
  • it is engaged in public manufacturing with a strong western, primarily U.S. oriented, business culture.
  • the nodes confirm the company has an individualized (work ethic) orientation overall wherein employees have the opportunity to work in a meritocracy fashion.
  • is very rules-oriented, i.e., there is a process for most every function or task.
  • due in part to its public nature, the Company #1 has a relatively short-term focus, e.g., new business strategies need to pay off – produce a return on investment within each fiscal year.
  • tends toward a (McGregor) Theory Y perspective, wherein managers assume employees are (self) motivated to perform well providing their efforts are duly and appropriately recognized., i.e., the bonus program, based on over-performing on the goals, can be found on the company’s intranet, next to all other procedural descriptions
  • is relatively internally focused, and plans its business using a traditional – conventional budget scheme.
  • benefits from the best practices of performance management, i.e., a top-down strategy for task implementation, coupled with openly shared feedback with a ranking of the best-scoring people in sales.

On the somewhat opposite extreme, Company #2 would likely not be as successful because Ms. Mehta suggests…

  • it has been a family-owned business for multiple generations with senior management knowing most of the employees, many of whom have worked for the company their entire professional lives.
  • the next generation of ownership is growing up and the company needs to secure their future too.
  • the culture of the company is externally focused which suggests it can only survive in the market by sustaining its extreme customer focus.
  • of the company’s decision-making process, i.e., senior management ask for input only from a few trusted employees, and then the family will make a decision with information eventually being shared with the staff, but usually verbally and in informal meetings.
  • while the company has performance indicators, they are mostly aimed at how the company is performing in the eyes of the customers.
  • rewards are not directly tied to performance during a specific period, rather the family rewards loyalty and provides bonuses when deemed necessary.

In closing, while I am a strong advocate of company culture due diligence, standing alone, culture alignment does not guarantee a successful and profitable transaction, i.e., M&A.

For example, if Company #2 is realizing losses, perhaps some elements of the performance management practices of Company #1 need to be adopted.  Conversely, if Company #1 is experiencing a substantial growth phase, key people (and their respective intellectual, structural, and relationship capital abilities) need to be retained to manage that growth with these individuals becoming part of the company’s inner circle of strategic thinkers and decision makers.

Thus, the insight that a company culture analysis (due diligence) would bring to transaction oversight could ultimately set a strategic path how (culture) performance management should be conceived and implemented. But, transaction management teams should also recognize that (culture) performance management it can work as a measurement mechanism that drives employee behavior.

So, if there are particular aspects of a target company’s culture that appear undesirable or otherwise may impede a transactions projected milestones for success they may warrant change.

Otherwise if there is too much…

  • of a group focus, individual performance indicators may be useful, or
  • of a long-term focus, short-term targets may help, or
  • if relationship (capital) focus turns into nepotism, more uniform reward processes may be needed.

This post was inspired and adapted from work authored by Monica Mehta in a February 2009 piece in Profit and Profit Online.

This blog post has been researched and written by me with the genuine intent it serve as a useful and respectful medium to elevate awareness and appreciation for a wide range of issues related to intangible assets within the global business community.  My posts are not intended to be quick bites of unsubstantiated commentary or information piggy-backed to other sources.

Comments regarding my blog posts are encouraged and respected.  Should a reader elect to utilize all or a portion of my posts, full attribution is expected and appreciated. While visiting my blog readers are encouraged to browse other topics (posts) which may be relevant to their circumstance or business transaction.  I always welcome your inquiry at 314-440-3593 or [email protected].






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