One of the most critical leadership tests for senior executives is guiding their company successfully through a major merger or acquisition. Finding a good target to acquire or merge with, doing the due diligence, working with the banks, explaining the deal’s rationale to investors, gaining regulatory approval — these are serious leadership challenges.
Every bit as challenging are the corporate culture issues around M&As, and these are oftentimes the stumbling blocks that lead to failure, both before and after the deal closes. This is especially true as the size and complexity of the deal increases. Why? As deal size and complexity grow, strategy-related success factors exert increasing demands on the CEO’s time and cognitive resources, resulting in less attention given to critically important culture-related success factors.
The scrap heap of business history is piled high with examples of failed M&As, and failure is the norm rather than the exception. Studies show that the M&A failure rate is between 70 and 90 percent. This statistic should give any executive reason to pause and reflect on ways to increase the odds of success well in advance.
What many leaders don’t realize is that culture is key to M&A success. If a business strategy includes growth through mergers or acquisitions, it is critical to focus today on developing an M&A-ready culture to prepare for such opportunities in the future.
The Key Culture Factor For M&As
CEOs must realize that aspects of their corporate culture play a pivotal role in ensuring M&A deals close successfully, and that the deals create economic value in the long run. Moreover, by enhancing corporate culture, CEOs will find their companies have more M&A opportunities because of their reputation and perceived leadership effectiveness.
By focusing on one key aspect of corporate culture, CEOs can dramatically improve the odds of attracting the right deals, closing those deals, and ensuring their ultimate success. While there are a wide variety of cultural factors that could be discussed here, research and experience suggest that developing a culture of trust is especially critical.
Trust At The Top
It’s no secret that “tone at the top” drives behavior, beliefs and cultural norms throughout an organization. For the purposes of developing an M&A-ready culture, CEOs must also consider how “trust at the top” can drive positive cultural change. Organizations with trust-based cultures are better prepared for M&A disruption. They’re more innovative, more collaborative and exhibit greater information sharing among individuals and departments. Each of these characteristics is critical to success before, during and after the merger or acquisition occurs.
How can CEOs considering M&As as strategic growth options best develop a culture of trust? For starters, they must work constantly to earn the trust of their people, and they must have a zero-tolerance policy for leaders in their companies (no matter how senior or successful) who willingly commit a breach of trust.
In addition, they must understand and leverage the drivers of perceptions of trust. Research has found that employees assess the trustworthiness of a leader based upon three perceptions of that individual: the leader’s apparent knowledge, skills and abilities; the extent to which the leader considers the employees’ wellbeing when making decisions; and a congruence in values between the leader and the employees. CEOs must not only focus on embodying these characteristics, but they must also consistently communicate effectively around matters related to trust and trustworthiness.
Trust In The Middle
Moreover, while a culture of trust starts with employee perceptions of the CEO, it doesn’t stop there. Research shows that middle managers play a critically important role in the development of corporate culture, and this role is often overlooked. Employees look to their immediate supervisors to determine the company’s values, what it rewards and what it tolerates. As a result, “trust in the middle” is every bit as important as trust at the top. Therefore, CEOs must ensure that their organization trains managers at all levels to be worthy of trust and to speak the “language of trust” effectively. No matter how trustworthy the CEO may be, a dysfunctional subculture among middle managers will derail even the most well-planned M&As.
Do Well By Doing Good
Another key factor in developing a culture of trust is the way the organization treats each of its stakeholders, and in particular its employees and members of the community. In short, employees look to senior leaders for clues on how the organization views its wider role in society, and they use that information to make inferences about the culture and how the organization views the value of the employees, themselves. As a result, CEOs wishing to strengthen their culture for future M&As must work today to ensure their company has specific strategies related to enhancing employee engagement, volunteerism and community support. They should also consider how strategic philanthropy can be leveraged to improve corporate culture. While this may sound Machiavellian, the fact remains that companies do well by doing good, and improvements in corporate culture are a prime benefit of corporate philanthropy and volunteerism. Such an approach not only signals to employees (and prospective M&A partners) that the organization’s leaders have a concern for others, but it also facilitates the development of a deep, trust-based culture.
Trust In Action
NuStar Energy, L.P., the San Antonio-based pipeline and terminal operator, has a strong culture founded upon trust in leadership and a genuine concern for its people and the communities in which it operates. NuStar’s positive culture is evident in the company’s rankings on Fortune magazine’s “Best Companies to Work For” list each of the past nine years, coming in at number 37 in 2017.
As noted by NuStar’s CEO, Brad Barron, “NuStar’s people and our trust-based culture are truly our greatest assets, especially when handling the challenges and complexities associated with large acquisitions.” NuStar closed in May of this year on its acquisition of Navigator Energy Services, L.L.C., which it purchased for approximately $1.5 billion. According to Barron, “It’s so much easier to get across-the-board stakeholder support and engagement on acquisitions when the culture is based on trust and when everyone involved understands the direction the company is going and the reasons why. Trust in management and knowledge about the direction of the company remove fear from the equation and allow employees to focus on getting the deal done.”
Few events in a company’s evolution pose a greater risk for value destruction than a merger or major acquisition taking place in the toxic environment of a low-trust, dysfunctional culture. However, the odds of success will be greatly improved for those CEOs willing to make the investment of time and resources to build a deep, trust-based culture before, during and after a merger or acquisition. CEOs must work to understand their company’s culture, develop specific tactics to improve that culture and establish and monitor culture-related KPIs to ensure progress. Each of these is simpler than it may seem and provides a solid ROI.
Matthew Gilley, Ph.D. holds the Bill Greehey Endowed Chair in the Department of Management at the Greehey School of Business at St. Mary’s University. His teaching, research and consulting interests include corporate strategy, ethical leadership and strategic philanthropy. firstname.lastname@example.org.