Corporate decision-making involves a careful balancing of risk and return. Whether it is acquisitions, disposals, capex, market entry or any other significant investment decisions, risk and return are at the heart of all big decisions by business.
Companies have over time developed increasingly sophisticated processes to capture, and model, both the potential upside of these investment decisions as well as the key uncertainties and risks that could adversely affect the expected outcome.
But, even with platoons of advisory firms supporting this decision making, are the existing models and frameworks as comprehensive as they should be? With corporate value dominated by intangible assets, do these decision-making frameworks pay enough attention to the role that reputation can play in driving the potential upside or downside to a major decision?
This is particularly important in M&A. Transactions are currently on the rise at an unprecedented rate. Outside of the interest in UK plc from different overseas corporates, it is UK companies who are striking domestic deals at their fastest pace in a decade. But to what extent are the corporate affairs and risk functions actively supporting the decision-making process on these acquisitions?
Look at the typical due diligence process in these situations. The form is usually for there to be: the commercial due diligence undertaken either by an internal strategy function or an external advisor; the financial due diligence conducted by a firm of accountants; the legal due diligence using a firm of lawyers; and some regulatory due diligence looking at potential regulatory threats.
With a combined approach, corporate affairs and risk directors can use their respective insight and data to fix the lack of attention on reputational risk and to assert themselves as part of the transaction process from the outset, rather than being asked to help manage the outcome after the decision.
Key to this is for the two functions to bring together better strategic insight as well as transaction-relevant data and analysis to inform the deal evaluation process – and they need to deliver this within the (often compressed) duration of the deal process, not after the event.
They should work together to deliver a specific reputational risk assessment of the company being acquired to complement the existing commercial and legal due diligence processes. This assessment should answer key questions about the target company: Is it under or over performing on reputational profile relative to its peer group and its sector? Have any potential reputational issues been discovered in other due diligence processes: where is the potential impact on price, margin, growth or brand health?
Legacy environmental, contract or liability issues – are there any ‘skeletons in the closet’ that could materialise and cause financial harm, adverse headlines, social media chatter, or bring extra regulatory intervention? What is the likelihood of political intervention and how could that inhibit margin or growth? In the case of Sainsbury’s acquisition of Argos, where in the process did the due diligence capture how Argos didn’t always pay some staff the national minimum wage?
The opportunity is there for corporate affairs and risk directors to help improve the quality of due diligence and deal evaluation processes. In a challenging economic environment with high uncertainty, it would seem imprudent to leave this risk and / or this value opportunity on the table. Equally from a non-executive director perspective, they should welcome the inclusion of a comprehensive reputational risk analysis as an integral part of the due diligence and business case process. It will allow them to probe further on the true value opportunity that the transaction brings and ask the probing questions that help support the transaction to be truly value-adding.
This article first appeared in Corporate Reputation magazine