The significance of a compliance culture in M&A

published on 23 February 2024 | reading time approx. 4 minutes

Clear values, codes of conduct, and a measurable cultural integration may have a significant impact on the success of M&A transactions. A targeted handling of the compliance culture is therefore crucial for the integration of the target company. This article addresses the role of the compliance culture and its relevance at the meeting point between M&A and Compliance.

Compliance culture and its significance for M&A

Compliance is a business and legal framework designed and implemented to ensure that companies comply with laws, directives, and voluntary codes. Corporate culture and, specifically, a compliance culture plays a vital role here and forms the basis underlying the conduct of all employees.

An M&A process may involve in particular financial, legal, operational, and cultural risks. A strong compliance culture of the target company creates a solid foundation to counter risks before they materialize. A clear message from company management that violations will not be tolerated and will be subject to internal disciplinary measures (zero tolerance policy) is crucial here. If, on the other hand, the target company lacks a strong compliance culture, this reduces the trustworthiness of the company and therefore also the chances of success of the M&A transaction.

In addition, cultural differences between the companies to be "merged” can also pose a challenge during the M&A transaction. Open communication between the two companies is therefore important in order to avoid misunderstandings and create a consensus for the common future. The transparent design of internal processes and anopen feedback culture are particularly relevant here.

Compliance due diligence in M&A

A preliminary analysis of the corporate culture of the target company performed as part of compliance due diligence could yield an immense discrepancy between the image presented to the outside world and the actual corporate culture – and this could kill the planned M&A deal. The due diligence process thus serves as a preventive measure for the buyer in that it helps obtain an overall view of the target company before the M&A transaction is carried out and allows checking the previously made assumptions.

Compliance due diligence is a thorough review of compliance policies and reports, codes of conduct, whistleblowing programmes, internal control systems, training materials, and contracts of the target company. Especially the compliance culture should be intensively analysed during due diligence as it is the basis of a well-functioning compliance management system.

In global M&A transactions, it is becoming increasingly important to take account of regional and national cultural influences. When merging two companies based in different countries, it is particularly important to consider the national legal landscapes, business practices and compliance standards during due diligence and to estimate what impact new or upcoming regulatory changes could possibly have on the compliance culture.

In addition, the industry-specific requirements and common business practices of the companies involved must be analysed. If it is possible to obtain information about compliance performance to date, it could be advantageous to assess the target company's compliance history, including previous violations and how they were dealt with. It is advisable to check what remedial measures the company took in the area of compliance culture, if any, and how effective they were.

As regards the legal aspects of the companies’ merger, it is important to ensure a sustainable and effective integration. For this purpose, measuring the compliance culture can be helpful. So, what should companies pay particular attention to?

Speak-up culture

The recently enacted Whistleblower Protection Act (HinSchG) has drawn German companies’ attention to a speak-up culture. A speak-up culture is about creating an environment where employees can report concerns, possible violations or ethical conflicts without having to fear negative consequences. Clear reporting channels and mechanisms for reporting wrongdoing allow employees to report their concerns safely and confidentially. Establishing an open communication framework not only helps early detect compliance violations, but also strengthens the compliance culture and trust, which is the cornerstone of the company.

Code of conduct

A well-defined code of conduct forms a foundation for a robust compliance culture within a company. It codifies ethical principles and standards of conduct that must be observed by all employees. This not only serves to promote transparency, but also to build trust within the team and with external stakeholders.

By clearly communicating expectations, the code of conduct creates a shared basis for preventing potential misconduct and for safeguarding the integrity of the organisation in the long term. It is a framework for ethical behaviour and thus supports the cultivation of a responsible corporate culture in the long term.

Cultural integration and clear values and standards

A strong corporate culture is also characterised by clearly defined values and standards. In a value statement, companies document how they understand ethics and incorporate its central components into their own organisation. The value statement provides guidance in ethical issues for all employees and makes it easier to identify actions or decisions during an M&A transaction that are not in line with the values of the target company and could therefore represent potential risks.

Thus, for example, the question whether a compliance culture exists within a company can be assessed, among other things, by whether the company has a value statement, a code of conduct and a speak-up culture. In addition, a more specific cultural analysis can be prepared for regions, business areas and employee levels of the company, for example, through employee surveys.

A firmly anchored compliance culture promotes open communication and transparency and has a direct impact on the M&A process. Targets with a strong compliance culture are more resilient and better able to adapt to unexpected changes in M&A situations. Employees are prepared to recognise and report potential risks and challenges at an early stage, enabling a prompt response. Cultural integration plays a key role in the successful integration of teams following M&A transactions. A reliable compliance culture helps teams to grow together harmoniously and establish a stable working environment.