HOW TO AUDIT, CHANGE, INTEGRATE, MANAGE, AND LEAD DIFFERENT CULTURES AND CREATE SHARED CULTURE IN ACQUISITIONS AND MERGES PROCESS

Phuoc D. Nguyen

SUMMARY

One of the biggest challenges in the Merges and Acquisitions (M&A) process is different cultures change, integration, management, and leadership. Many of them fail and vice versa. How to integrate, manage, and lead different cultures in M&As successfully? Senior leaders who are responsible for auditing different cultures, changing the culture, and leading culture integration. Their important role is to audit different cultures, manage and lead cultural change, integrate different cultures, build a healthy integrated culture, and create a shared culture and shared value to implement corporate strategy successfully.

M&As around the world increases gradually from 2012 to 2015. However, M&As in 2016 (US dollars 4,734 billion) dropped heavily in comparison to 2015 (US dollars 6,012 billion). The statistic shows the value of mergers and acquisitions (M&A) worldwide from 2011 to 2016. In 2014, the value of global M&A deals amounted to 4.80 trillion U.S. dollars. (Statista, 2017).

M&As arise from different cultures and multi-cultural challenges and the leadership team faces these challenges. Senior leaders play a decisive role in cultural integration success, they implement their responsibility and authority in different cultures’ integration process and the post-M&A stage.

PROBLEMS

According to collated research and a recent Harvard Business Review report, the failure rate for mergers and acquisitions (M&A) sits between 70 percent and 90 percent. (businessrevieweurope, 2015). The main cause of the high M&A failure rate is the failure of cultural integration and cultural conflict resolution. Almost all senior leaders have to ignore or disregard the role of culture in the M&A process. This leads the difficulty in corporate strategy, business strategy, business plans, and functional plans implementation process. When implementing M&As senior leaders based on the current acquired company’s reputation, prestige, management systems, products, services, and brands enforce merged companies to implement their management systems including corporate culture. They have not diagnosed and audited different cultures to find out cultural non-conformities and aim to suggest an appropriate culture to a new company. Furthermore, the failure of cultural integration causes difficulty in appropriate values and beliefs determination; this leads to unsuitable attitudes and behaviors of employees and it causes a lack of employee engagement without shared culture. The M&A process has always occurred in cultural clashes because of cultural differences between cultures. Because merged companies’ management teams and staff had a defensive posture when their companies were merged. They worry about how to lead, manage, and work with a new management system; leadership style, management style, and working style that suits new culture, values, and beliefs; they are afraid about their job and position loss; how do their attitude, behavior, personal culture suit a new company. The inevitable thing is cultural differences in the M&A process.

Lack of awareness and understanding about the cultural integration of the leadership team because culture is abstract and hard to imagine. They also do not understand cultural elements that affect corporate strategy, business strategy, business plans, functional plans, and performance and operational outcomes because without implemented to assess cultural elements. Their culture integration management, cross-cultural leadership, and cultural conflict management skills are limited because of a lack of corporate culture, culture integration, and change management training. Further, leaders’ behavior, attitudes, and beliefs are not suited new culture. For merged companies, at the beginning of M&As, they receive psychological shock about the new working environment, cultural climate, beliefs, values, management systems, leadership style, management style, superior, peers, subordinates, policies, strategies, and plans. Moreover, they do not know what their ‘fate’ will be.

SOLUTIONS

To integrate, manage, and lead different cultures in the M&A process. In the stage of the early M&A process, senior leaders of the acquired company should implement a cultural assessment/auditing to find out the strong culture and weak culture, cultural gaps, and cultural non-conformities. To assess and audit the culture, we should use the combination of extended cultural assessment and auditing methods of Terranova (2007) and Wilkof & Ziegenfuss (1995) as follows:

The acquired company signed a contract with a cultural integration consulting firm to coordinate with the team of leadership and internal management consultants, members of the board of directors, and the management team to establish a cultural integration committee including a cultural auditing team.

Pre-merge and pre-planning

Establish interaction matrixes to organize the interaction between members of both companies. The acquired company organizes seminars, workshops, and training programs about cultural change management, organizational culture, cultural auditing, and team building. “The use of job rotation in an attempt to identify: (1) Structural/physical characteristics of each business. (2) Beliefs and values behind these practices. (3) Decision-making processes and communication lines.” (Lodorfos & Boateng, 2006, p. 1415). Compare the organizational structures of both companies to integrate into an appropriate integrated organizational structure. Beliefs and values identification for both companies are a base to identify cross-culture to assess cultures and identify cultural differences. Decision-making processes and communication lines are very important in the cultural change and integration process.

The acquired company gathers information from the merged company through the merged company’s management information systems, database, documents, records, and public information. Acquired company leaders develop their trust in merged company leaders, managers, supervisors, and employees.

The cultural assessment process of extended cultural assessment and auditing methods of Terranova (2007) and Wilkof & Ziegenfuss (1995) combines to extend Lodorfo and Boateng’s (2006) Framework for Managing Cultural Integration and Weber and Tarbau’s (2012) Uses for the Measurement of Differences in Management/ Organizational Culture in Management of Mergers/Acquisitions are including phases as follows:

Phase 1: Needs Awareness

The cultural audit team conducts to survey of the needs of cultural integration.

Develop audit objective. “The audit objective is to help leaders better understand the current culture and adapt the culture to enhance organizational performance. Leaders must articulate clear performance goals at the outset so progress can be measured and monitored.  A plan to facilitate the process and to gain knowledge about the methods used in culture audits.” (Wilkof & Ziegenfuss, 1995, p. 35).

Phase 2: Cultural Assessment and Diagnosis

Step 1: Initial assessment: Based on the established cultural assessment criteria to assess cultural traits. Conduct interviews based on the cultural audit questionnaire and cultural audit criteria with members of the board of directors, management team, and employees from the acquired company and from the merged company. Implement observations of all activities within the acquired company and merged company.

Step 2: Gather data during the audit; analyze data from interviews, audit, observations results, and management information systems. Collate interviews, observations, and audit results from the acquired company in comparison to the merged company.

Step 3: Development of a Model

“By identifying, describing, analyzing, and connecting the major themes in a network, culture analysts can build a model of the organization’s culture.” (Wilkof & Ziegenfuss, 1995, p. 36). The committee based on the desired cultural criteria, vision, corporate policies, business policies, functional policies, corporate strategy goals, business strategy objectives, business plans objectives, functional strategy objectives, functional plans targets, corporate structure, management systems, and business processes; refer to models of organizational culture to establish acquired company’s model of organizational culture. The committee integrates an established model of organizational culture into the leadership model, management systems model, and management information systems.

Step 4: Cultural assessment evaluation

Cultural auditors collate interview and observation results between the acquired and merged companies. They report cultural traits auditing and cultural auditing results to lead auditors to brainstorm and analyze causes of cultural gaps, cultural clarifications, and cultural non-conformities. Indicate cultural gaps and cultural non-conformities in areas, divisions, departments, and subsidiaries to suggest recommendations for cultural improvement, change, and integration opportunities to fill cultural gaps; implement corrective action requests to correct cultural non-conformities. Find out cultural strengths and weaknesses Additionally, the audit team projects a plan for cultural improvement, change, integration opportunities, and corrective action implementation.

Step 5: Follow-up

The audit team instructs, and follow-ups cultural improvement, change, integration opportunities, and corrective action implementation.

Step 6: “Develop action plans for the acquiring business unit’s leadership team in order to address areas most critical to the success of the acquisition.” (Terranova, 2007, p. 44).

Phase 3: Planning

Based on cultural traits and cultural audit, interview, and observation results; the committee uses the Hofstede questionnaire to identify, analyze, and measure organizational culture for both companies; and to analyze cultural elements for both companies. Indicate and analyze cultural differences, and identify and analyze cultural strengths and weaknesses from the results of cultural elements, strengths, and weaknesses analysis to project cultural change and integration plans. Furthermore, the committee finds and analyzes cultural differences to indicate areas, subsidiaries, divisions, departments, strengths, and limitations of cultural differences. Establish and regulate the committee as a steering committee including senior leaders and senior managers; the cultural change and integration planning team included middle managers; the task force teams who implement cultural change and integration included first-line managers, supervisors, and professional staff. The steering committee decides the level of cultural integration and categories of cultural change; selects, applies, and uses appropriate cultural change management methods and techniques; suggests reasonable cultural integration approaches; establishes and complements appropriate cultural norms including national and regional cultural norms; project cultural change and integration plans and programs included 5W+1H (What, When, Where, Who, Why + How) method, resources, timeframe, and budget. Identify cultural change and integration challenges and indicate how to overcome these challenges; identify, analyze, manage, and take risks in the cultural change and integration process; establish cultural change and integration goals, objectives, key performance indicators (KPIs), targets, and cultural measurement parameters. The cultural change and integration planning team coordinates with the human resource (HR) department to plan, implement, and monitor appropriate training programs for every level of senior leaders, senior managers, middle managers, first-line managers, supervisors, professional staff, and operators; and assess training programs effectiveness.

The committee defines the desired cultural future – “Having analyzed the fit between the organization’s culture and other characteristics, leaders must determine which characteristics should be adapted to the organization’s culture and which aspects of the culture should be modified to fit specific organizational characteristics. Choosing the Interventions – After generating options, the organization’s current culture, and its desired future… Matching the culture audit against the change pressures from the environment provides some insights on how to proceed with the adaptive action.” (Wilkof & Ziegenfuss, 1995, pp. 37 – 38). Based on cultural traits and cultural audit, interview, observations results, organizational cultural measurement results, cultural elements analysis results, cultural strengths and weaknesses analysis results, and cultural differences analysis results leaders identify other characteristics and aspects of the culture to plan, change, and integrate the new integrated organizational culture into the desired culture. The steering committee projects an action plan for cultural change and integration and shared culture creation.

Phase 4: Cultural Change and Integration and Shared Culture Creation Implementation

The steering committee leads the implementation of cultural change, integration, and shared culture creation implementation; the cultural change and integration planning team manages the implementation of cultural change and integration and shared culture creation implementation; the task force coordinates with cross-functional teams, subsidiaries, divisions, departments, and sections to implement cultural change, integration, and shared culture creation. The committee creates a great cultural climate in which they create excitement, stay calm, and relaxed; and facilitate and provide necessary resources to change and integrate culture successfully. Establish effective internal communication channels to communicate the urgency and necessity for cultural change and integration. The HR department plans and organizes necessary and related training programs and assesses training effectiveness periodically; plans and implements leadership and staff development programs. Senior leaders establish a shared culture, shared vision, mission, core values, Critical success factors (CFSs), (KPIs), key areas indicators (KARs), and cultural measurement indicators; based on shared culture, shared vision, mission, core values, Critical success factors (CFSs) to establish an integrated organizational chart and structure, leadership and management systems models, integrated management systems, and management information system. Adjust leaders, managers, supervisors, professional staff, and operators’ attitudes, characteristics, beliefs, values, and personal cultures that suit shared culture.

Phase 5: Process of Change and Integration of the Organizations and Shared Culture Creation

The committee chooses subsidiaries, divisions, departments, and branches for integration with a focus on identifying which subsidiaries, divisions, departments, and branches of different. Define desired shared culture.

“During the integration stage, correct analysis of cultural differences can determine the choice of units that are to be integrated during the early or late stages of the process, according to the types and strength of the differences. When the cultural differences between the organizations become clear, it will be possible to define a desired shared culture. This will make it easier to cope with the challenges raised by the human factor, prevent the leaving of managers and key personnel, and preserve commitment, cooperation, and motivation, all of which are important factors in the post-agreement period.” (Weber & Tarba, 2012, p. 299). Based on the types and strengths of cultural differences, filled out cultural gaps, established cultural norms, and desired cultural future; senior leaders create a desired shared culture; a desired shared culture creates appropriate HR management and development policies to implement talented and ethical leaders, managers, key personnel retention, and motivation. These policies attract new talented and ethical staff.

Great cultural norms, desired cultural future, shared values, and shared beliefs have a close connection to staff moral responsibility, attitudes, and behavior. Great cultural norms and desired cultural future create cultural values, which impact and direct leaders, managers, and staff’s moral responsibility, attitudes, and behavior; leaders, managers, and staff act and implement policies, procedures, and business processes related to organization’s inside activities and operations and outside activities to communities, areas, regions, and nations, and international based on cultural values. “All members of an organization that participates in a corporate culture acquire a degree of individual moral responsibility for the actions of all other participants in that culture, where those actions promote cultural values. This is because, by sharing a culture together organization members support and facilitate each other’s actions, so making each complicit in what the other does.” (Dempsey, 2015, p. 319).

“Account of how values are typically shared within business organizations is the first step towards establishing the implications of such value sharing—and the culture so created—for the responsibility organization members bear for organizational outcomes. An organization’s culture has a practical impact on the outputs the organization occasions, and each individual member of the organization who engages in a joint commitment to espousing the organization’s values participates in creating that culture.” (Dempsey, 2015, pp. 330 – 337). Beliefs are shared within the organization that orient leaders, managers, and staff’s attitudes. Attitudes combined with vision, mission, core values, CSFs, great cultural norms, and desired cultural future together create shared values, when shared values inside and outside are spread throughout the organization it stimulates staff engagement and creates positive productivity and performance. This impaction sequence that the culture is shared automatically within the organization. When the culture has shared that it positively impacts reaching vision, completing mission, achieving goals, enhancing values, improve attitudes and behavior.

When a company acquires and merges a company overseas. There are cultural differences between the two countries. Every country has cultural differences between regions, areas, organizations, and companies. Cultural differences have originated from different national, and regional customs, religions, beliefs, regimes, and values. It is challenging for leaders who understand the cultural values of another country. Because of a country which has different cultures and cultural differences between regions. For example, Vietnam has three primary regions northern Vietnam, central Vietnam, and southern Vietnam. Within a region that has different areas including different cultures. Northern Vietnam people themselves have difficulty understanding other regional cultures that belong to northern Vietnam. People in various nations have different cultural norms. Therefore, leaders should understand subordinates’ cultural backgrounds, cultural values, cultural norms, religious, customs, beliefs, attitudes, and behaviors to apply to appropriate leadership models and styles. Social, economic, technological, legal, scientific, and political conditions and changes that occur over decades make a change to cultural values and norms. “People in various nations have different perceptions of cultural values, cultural practices, and leadership preferences. People in various countries are different and have values that vary depending on their cultural background. Leaders must be aware of these differences when leading people from different cultural backgrounds. Additionally, leaders must consider that cultural values vary from one culture to the next… cultural differences require leaders to be adaptable and flexible to different situations, people, and cultures. These changes may also continue to occur with social, economic, and political conditions and changes that occur over time. Therefore, leaders must continue to adapt to different generations and cultures with these continual changes. Leaders should consider the prevailing social, economic, and political conditions when leading people from different age groups and cultures during different time periods and in various countries.” (McDermott, 2008, p. 235)

CONCLUSION

One of the biggest challenges in the M&A process is cultural change, cultural integration, and shared culture creation. The failure of cultural change, cultural integration, and shared culture creation is the main cause that leads to the failure of the M&A process with a very high percentage in the world. Leaders’ awareness and understanding of cultural differences, cultural elements, cultural integration, cultural management, and cross-cultural leadership which is very limited. They take lightly the role of culture and ignore it in the M&A process. But their primary role in the M&A process, cultural change, cultural integration, cross-cultural management, and leadership is indisputable. “Cultural consistency in each country thus occurs and observation of these and the associated meanings makes possible the development of ideal types and moderatum generalization. Cultural consistency for us means the same thing as shared culture.… Because culture has been established as shared, it is then possible to establish the particular character of the common patterns and express these as ideal types.” (Fairweather & Rinne, 2012, pp. 476 – 481). For an acquired company to acquire and merge a merged company overseas; leaders create cultural consistency between two companies through strengths of cultural differences analysis, and cultural integration that adapt national, and regional cultural norms, and cultural practices; complement these cultural elements to the desired shared culture future to create cultural consistency and develop and update desired shared culture through next generations of the integrated company. The shared culture is the launch of vision, mission, core values, CSFs, corporate policies, business policies, functional policies, corporate strategy, business strategy, business plans, and functional plans. It has also created sustainable development for the integrated company, to improve productivity and enhance performance, ethical leadership, value-based leadership, and cross-cultural leadership. Furthermore, it develops leaders, managers, supervisors, and professional staff’s moral responsibility. Maintaining shared culture in the stage of post-emerged is the most challenge to senior leaders.

References

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Dempsey, J. (2015). Moral Responsibility, Shared Values, and Corporate Culture. Business Ethics Quarterly, 25 (3), 319-340.

Fairweather, J. & Rinne, T. (2012). Clarifying a Basis for Qualitative Generalization Using Approaches that Identify Shared Culture. Qualitative Research, 12 (4), 473 – 485).

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McDermott, M. H. (2008). Culture and Leadership in Transition: Comparing Perceptions of Cultural Values, Cultural Practices, and Leadership Preferences across Generations in Israel, South Africa, and the United States. (Published Level Dissertation). Regent University. Virginia Beach, Virginia, USA.

Roberto A. Weber, R. A. & Camerer, C. F. (2003). Cultural Conflict and Merger Failure: An Experimental Approach. Management Science, 49 (4), 400 –  415.

Statista (2017). Value of mergers and acquisitions (M&A) worldwide from 2011 to 2016 (in billion U.S. dollars). Retrieved from https://www.statista.com/statistics/267369/volume-of-mergers-and-acquisitions-worldwide/

Terranova, C. (2007). Assessing Culture During an Acquisition. Organization Development Journal, 25 (2), 43-48.

Weber, Y. & Tarba, S. Y. (2012). Mergers and acquisitions process: the use of corporate culture analysis. Cross Cultural Management: An International Journal, 19 (3), 288 – 303.

Wilkof, M. & Ziegenfuss, J. T. (1995). Culture Audits: A Tool for Change – A Step-by-Step Process to Analyze the Organization and Adapt to Change. Retrieved from https://www.chausa.org/docs/default-source/health-progress/culture-audits—a-tool-for-change-pdf.pdf?sfvrsn=0