‘Duty of Care, Skill and Diligence’. Part 1 - 2.

 

Caring about the ‘duty of care’

There are four main duties of Australian directors, all of which apply whether they are members of commercial or not-for-profit boards. As illustrated in the header image above, these are the:

• Duty to act with reasonable care, skill and diligence
• Duty to act in good faith in the best interests of the organisation and for a proper purpose
• Duty not to improperly use information or position
• Duty to disclose and manage conflicts of interest.

The focus of this reflection is the first of these duties. While the three elements of care, skill and diligence are really aspects of one duty, before thinking about them in combination, there is nonetheless some benefit in reflecting on each of them separately.

Starting with the concept of ‘reasonable care’ highlights the widely used notion of organisations and responsible persons having a ‘duty of care‘.

This notion can be confusing for non-lawyers in the non-profit sector (of which I am one). The other two aspects of this first duty, relating to ‘skill’ and ‘diligence’, will be explored in later posts.

Duty of care

Those working in childcare, disability care, education, aged care and healthcare, all recognise their primary obligation to place the welfare of their clients above their own, and this is mainly expressed as an obligation to avoid them being harmed.

For teachers, the concept of being ‘in loco parentis‘, requiring equivalent vigilance and responsibility to that of a parent guarding their child’s safety, is a foundational one in their training.

In healthcare, the aphorism ‘no-one cares how much you know until they know how much you care‘ may be a little cliched, but it illustrates use of the word ‘care’ to convey the two distinct concepts of interest or concern on behalf of patients, and beneficence on behalf of the practitioner.

Legal and other definitions 

Words which have common usage meanings can have quite different emphasis when they appear in legislation governing the conduct of not-for-profit entities and corporations. ‘Care’ is a word with a multitude of meanings in common usage (as illustrated in the whimsical header image of an earlier post). As it happens, this is also true to some extent in various legislative instruments.

In civil law, “(A) duty of care is a legal obligation to avoid acts or omissions that could foreseeably lead to harm to another person. A breach of a duty of care that leads to harm to someone amounts to the tort of negligence.“

Duty of Care (Vic)

Established duty of care relationships include:

• Teacher to student;
• Employer to employee;
• Parent to child;
• Occupier of premises to entrants;
• Road user to other road users;
• Manufacturer to consumer.

Directors and officers will also be seen to have a ‘duty of care’ which shares the objective of avoiding harm, however in the governance context, the harms to be avoided go well beyond those inflicted on “another person”. Compliance with laws and regulations is a foundation of good governance, however, so too is compliance with standards of care for the community, the environment, and third party commercial entities, and also with ethical codes.

A balancing act

The Victorian Department of Health acknowledges that when seeking to avoid or limit harm, workers in the health sector are performing a balancing act:

“There are several aspects to duty of care:
Legal – What does the law suggest we do?
Professional/ethical – What do other workers expect us to do?
Organisational – What does our organisation, and its funding body, say we should do?
Community – What do the parents of our clients and other community members expect us to do?
Personal – What do our own beliefs and values suggest we do.“

In offering advice to youth workers, they note:

“We need to balance the safety of the young person against other concerns such as:
the safety of other people/our personal safety
other rights of young people (e.g. the right to privacy)
the aims of the service (e.g. to empower young people)
the limits of our organisation (e.g. money and other resources)“

Similar trade-offs are involved when directors are making governance decisions, and if an adverse outcome occurs, they will be judged according to the court’s application of the Business Judgment Rule (otherwise referred to as the ‘reasonable person test’). See also my earlier posts about cost/risk/benefit trade-offs here and here.

Standard of care

Professionals are familiar with the Law of Negligence (as opposed to the ‘diligence’ referred to in the first director duty) and legal liability. Section 18 of the Law of Negligence and Limitation of Liability Act 2008 addresses the standard of care expected of persons holding themselves out as possessing a particular skill as follows:

“In a case involving an allegation of negligence against a person (the defendant) who holds himself or herself out as possessing a particular skill, the standard to be applied by a court in determining whether the defendant acted with due care is, subject to this Division, to be determined by reference to—
(a) what could reasonably be expected of a person possessing that skill; and
(b) the relevant circumstances as at the date of the alleged negligence and not a later date.“

Directors’ duty of reasonable care and diligence

For directors, the most obvious implication of this legislation is that diligence is required to avoid an accusation of negligence. In their role as a board member, that diligence will chiefly consist of instituting a system of controls (i.e. good governance) by which risks are managed and compliance obligations are met, whilst advancing the constitutional and strategic objectives of the organisation. Relevant standards of care will also be applied to assess whether a director or officer was diligent or negligent in performing their duties.

Section 84 of the Victorian Associations Incorporation Reform Act 2012 is one example of governing legislation which defines the ‘duty of care and diligence’ for association directors and officers.

“Duty of care and diligence
(1) An office holder of an incorporated association must exercise his or her powers and discharge his or her duties with the degree of care and diligence that a reasonable person would if that person—

(a) were an office holder of the association in the circumstances applying at the time of the exercise of the power or the discharge of the duty; and (b) occupied the office held by, and had the same responsibilities within the association as, the office holder.“

Section 180 of the Corporations Act 2001 defines the duty of care and diligence required of Australian company directors and officers (such as the CEO and company secretary), including non-profit entities registered as companies limited by guarantee.

“CORPORATIONS ACT 2001 – SECT 180
Care and diligence–civil obligation only
Care and diligence–directors and other officers

(1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of a corporation in the corporation’s circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

Note: This subsection is a civil penalty provision (see section 1317E).

Business judgment rule

(2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:
(a) make the judgment in good faith for a proper purpose; and
(b) do not have a material personal interest in the subject matter of the judgment; and
(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
(d) rationally believe that the judgment is in the best interests of the corporation

The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.

Note: This subsection only operates in relation to duties under this section and their equivalent duties at common law or in equity (including the duty of care that arises under the common law principles governing liability for negligence)–it does not operate in relation to duties under any other provision of this Act or under any other laws.

(3) In this section:

“business judgment” means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.“

Skill – a common law requirement

The sharp-eyed reader will have noted that neither the State nor the Commonwealth legislation includes the word ‘skill’ in their requirements. That additional requirement arises from common law, where courts have ruled that in performing the ‘duty of care and diligence’, a reasonable person will exercise a level of skill or expertise commensurate with their responsibilities. This in turn leads to such governance activities as preparation of a director skills matrix to inform succession planning, and implementation of director development and training programs.

In commenting on Section 180 of the Corporations Act, Dennis Martin, Director of Snedden Hall & Gallop Lawyers, highlights that while all directors need to share a basic set of skills, where a director is recognised as having a special skill, they are held to a higher standard in exercising that skill (see especially the underlined portion below):

“… requires a director to act with a degree of care and diligence that a reasonable person might be expected to show in the role. Common law places great weight on this duty with respect to approval of financial statements [Centro, 2011] and statements issued by a company [James Hardie, 2012]. Further, risky transactions without the prospect of producing a benefit, or failure to inform board members of significant issues can create a breach of this duty. The extent of this duty is dependent on a range of circumstances. These include the type of organisation, the size and nature of the business and the composition of the board [ASIC v Rich, 2009]. Also, if a particular director holds out to possess certain expertise to obtain the directorship, the director’s exercise of care and diligence will be assessed against that expertise. For example, if a director holds out that she has specialised financial knowledge and she occupies a financial role, her accountability for the organisation’s finances will be higher compared with an ordinary director [ASIC v Adler, 2002]. Moreover, non-executive directors still have a duty to acquire at least a rudimentary understanding of the business of their organisation. Even if it is practice for a non-executive director to be unaware of the organisation’s circumstances, the position of a director comes with the responsibility of a core irreducible standard [Daniels v Anderson, 1995]. There is, however, the business judgment rule which could protect a director in relation to a claim for breach of this duty. This essentially requires directors to make a judgment that they rationally believe is in the best interests of the organisation. A judgment is considered to be rational unless no reasonable person in the director’s position would consider it rational.”

Where a board considers that it does not possess the skill or knowledge required to address a matter internally, it has an obligation to obtain expert advice to aid its decision-making processes.  This was illustrated in my previous post regarding the solvency question, where consideration of a potential restructure or wind up is likely to require external legal and financial advice.

A future post will offer further reflections on the skills required of directors. 

“First do no harm”

We can thank Hippocrates for the ethical injunction to “First do no harm”, and this is a core commitment in all health professional codes. 

Avoiding harm is also the objective of the duty of reasonable care, skill and diligence.

In achieving that objective, directors and officers are expected to be proactive in the performance of their roles, ensuring that strategic and operational activities are subject to suitable systems of control and risk management.  The schematic header image above emphasises that in each of the financial, commercial and legal dimensions, directors need to adopt a risk-based approach, involving governance, technical, and behavioural competencies, and referencing standards of care.

Giving ‘diligence’ its due

The term ‘due diligence’ is most often used to describe a detailed appraisal of a business undertaken by a prospective buyer, with a key focus on confirming its assets and liabilities and evaluating its commercial prospects.

In the context of non-profit directorial duties however, its more generic meaning relates to reasonable steps taken by a person or board to avoid committing a tort or offence.

The antonym of ‘negligence’, ‘diligence’ can also be understood as steps taken to avoid an allegation of negligence, usually involving careful examination or inspection of the matter at hand. The attention to detail involved suggests directorial focus, mindfulness, risk aversion, and effort.  (See also comments on the Law of Negligence here).

Due diligence for a merger or acquisition (M&A) involves looking at numerous matters in each of the legal, financial and commercial dimensions of the other party’s operation. Analysis of key data looks to determine whether the entity is able to add value to the future operations of the merged organisation.

Assessment of the value proposition is of course the central focus of most board decisions – at least, it should be.  The trade-off between benefits, risks, and costs needs to satisfy the directors that ‘on balance‘, adopting the recommendation under consideration will add value. Parallels can therefore be seen between director due diligence and M&A processes.

The chart below uses the three M&A dimensions (legal, financial and commercial) to catalogue some of the considerations non-profit directors will bring to their regular governance deliberations.

Diligent or Negligent?

Directors who fail to read their papers before the meeting, who neglect to ask probing questions during debate, and who defer to the loudest voice in the room because they don’t really have a view of their own, are not being diligent.

Board that spend less time on strategic issues, preferring to probe the details of low priority operational or procedural matters, can also be accused of failing to be diligent.

As with good diary management, the time budget for a meeting needs to be skewed towards strategically significant matters. The ‘Rocks, pebbles, sand‘ metaphor usually applied to personal time management can also usefully be applied to board agenda planning and ‘time governance’ during the meeting, as illustrated below.

Those familiar with this metaphor (popularised by Dr Stephen R Covey’s 7 Habits of Highly Effective People – Habit 3: Put first things first) recognise the importance of putting the rocks in the jar first and the sand last.  If the sand is added first there won’t be sufficient room for the rocks later.

The same principle applies to the time budget for your board meeting.  Don’t let procedural ‘sand’ use up valuable time required for your strategic ‘rocks’, and ensure that your operational ‘pebbles’ are also allocated their due before remaining time is provided for low priority procedural items.  Scheduling more time, early on your agenda for strategic matters, recognises their high priority status, and is one way to improve the diligence of your board.

Part 3 in this series will reflect on the skills aspect of the ‘Duty of care, skill and diligence’.

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Strategic Due Diligence: A Foundation for M&A Success

Understanding the rationale for a merger can help leaders uncover the potential value of a deal.

by Gerald Adolph, Simon Gillies, and Joerg Krings

The art and science of merger execution have made great strides since the late 1990s — a period when stock-market frenzy often led to a rush to judgment, and ultimately to buyer’s remorse. Since then, a more prudent, systematic approach to mergers and acquisitions has emerged, and many companies with an articulated M&A strategy have gone so far as to institutionalize an M&A capability within their walls.

These corporate M&A groups have proven especially good at managing financial and legal due diligence — and at focusing on these critical items early in the integration process. This is all well and good; yet even the best financial and legal due diligence practices do not uncover the whole story for any given prospect, and they certainly do not guarantee success. There is a critical third component to due diligence. We call it “strategic due diligence,” and it is vital to anticipating the problems that can derail a merger. Indeed, strategic due diligence is increasingly being demanded by boards of directors who want to be certain that a merger is the right choice.

What exactly is strategic due diligence? Whereas financial and legal due diligence ascertain the potential value of a deal and concern buying the company “at the right price,” strategic due diligence explores whether that potential — however enticing — is realistic. It tests the strategic rationale behind a proposed transaction with two broad questions. Is the deal commercially attractive? And are we capable of realizing the targeted value? The first question requires external inquiry; the second demands an internal focus. Each question partially informs the other, reinforcing an inquiry that thoroughly plumbs the wisdom of the deal.

Above all, strategic due diligence ensures that no two transactions are treated the same way; each deal has its own value drivers, and thus the composition of each due diligence team must change. Executives should determine which areas of the organization will produce value in the merger, and draw members of the due diligence team from those areas. (See “Building the Diligence Team,” below.) Strategic due diligence counterbalances the danger of institutionalizing and replicating a diligence capability ill-suited for the task at hand. Although some standard due diligence best practices can be adopted wholesale into strategic due diligence (see Exhibit 1), companies must tailor their process to the issues and potential integration challenges of each specific deal.

Strategic due diligence thus adds an important deal-screening filter. After all, executives must be convinced not only that the potential deal value justifies the significant investment being made, but also that the business is truly capable of realizing this value. Indeed, a sober strategic due diligence evaluation should help set the purchase price. The buyer should demand a price that is commensurate with the level of integration risk uncovered and be willing to walk away if that price isn’t met.

Two Big Questions
The first question, testing the commercial attractiveness of a deal, involves validating both the target’s financial projections and any identified synergies using an external lens. Companies can achieve this by assessing overall market attractiveness and the competitive position of the target, and how these might change over time.

Whether the buyer is out-of-market (e.g., a financial buyer) or in-market (e.g., a competitor), this analysis is indispensable. However, for an in-market buyer, the commercial attractiveness issue may be more complex. The due diligence team involved in an in-market deal must gaze into the future and calculate the competitive position of the combined entity, including its impact on customers, competitors, and overall market dynamics. (Will the merger invite new entrants, for instance?) After all, customers and competitors will react to the merger in ways that will benefit them — ways that might threaten the combined businesses’ value-creation assumptions.

As for the second question, a company must make a hard internal examination of whether the targeted value of the deal can be realized by the management team of the combined enterprise, and, if so, whether the projected time frame is realistic. For an in-market merger, it is vital that all the associated risks, in terms of customer and competitive responses, technology issues, and culture challenges, be weighed. When they have been weighed, the salient question becomes, Can these potential risks be managed? If preserving increased market share is a key driver of value, for instance, leaders had better be sure that the executives of the new company know their customers’ needs, can meet them, and can fend off competitors who will surely try to pick off customers and clients during this period of uncertainty.

Although testing whether a company has the capabilities to realize projected synergies is particularly important when it involves an in-market merger, out-of-market purchasers are well served by a similar internal analysis that helps them understand the key drivers of value in the target company (people, technology, specific customers) and what the key management requirements will be in the new organization.

The Deal’s Rationale
To focus strategic due diligence, it’s necessary to pinpoint the value-creation opportunities of each transaction. To assist in this process, we have identified two dimensions that influence the strategic rationale and underlying value-creation focus of a deal. These two drivers are shown in Exhibit 2. On one axis, the degree of integration between acquirer and target drives the size and number of potential synergies. On the other, the relative sizes of the acquirer and target influence whether “best of breed” solutions from either company will be adopted, or whether the target will simply be absorbed into the acquirer’s business model.

Mergers that are intended to strengthen current market position or that seek new growth opportunities by either entering a new market or developing new capabilities all have their own unique “degree of overlap” and “relative size,” but we have found they fall into one of four categories when we perform this analysis. We have named the categories in-market consolidation, in-market absorption, out-of-market transformation, and out-of-market “bolt-on.” Our four categories are broad, but we believe they are useful groupings that can serve as starting points for shaping any strategic due diligence effort.

Let’s take these four M&A categories one by one, recognizing that strategic due diligence always aims to validate the assumptions underpinning the strategic rationale.

The rationale for an out-of-market transformation (large target, low integration) is typically to transform a business by pursuing significant growth and broader capabilities in a new, attractive market. These are often “bet the farm” deals in which a company either extends the reach of its existing products or services into a new geographic market (such as with telephone and cable mergers), or diversifies into a new set of products and services (such as with a private equity group or conglomerate).

In this case, the strategic due diligence process should focus on testing the new market’s attractiveness, assessing the target’s competitive position, identifying critical capabilities and resources that need to be retained, judging potential market responses, and evaluating whether there are best-of-breed management practices or operating models that should be adopted across the organization. Also, those performing strategic due diligence must understand the complexities of governance where there is minimal formal integration; the systems and policies used to run the still distinct businesses should be uniform, and “legacy” people from both former companies should be dealt with consistently. Two distinctive cultures mean that cultural issues will manifest themselves in myriad ways and need to be well understood.

Experienced due diligence and integration managers must be involved in these mergers, and there must be high-profile, executive-level participation from both sides, especially when it is clear that the capture of “best of breed” outcomes requires culture change. A strong analytical team must drive the market and competitive assessment, and the human resources team needs to focus on organizational and cultural issues. If there are areas of consolidation, functional representation is critical to ensure buy-in from management.

The strategic rationale for an in-market consolidation (large target, high integration) is to create a market leader that can realize benefits by improving pricing and marketing, rationalizing operations, and leveraging assets, such as technology and skills. The acquiring company may want to increase market penetration with its products and services, and capture scale benefits within its operations. Most current mergers in the automotive and utility industries fall into this category.

For such a merger, strategic due diligence should focus on assessing potential customer value, including revenue upside and risks; validating synergies and identifying challenges when consolidating areas such as administration, operating infrastructure, and work force; determining which processes and assets are best of breed; and assessing cultural fit and integration risks, such as loss of key people in nonconsolidated areas.

This strategic due diligence team should have strong cross-functional representation from both companies involving managers who will also lead the actual integration. Human resources support is needed to manage the organizational challenges, as is analytical support from corporate headquarters. Ideally, experienced due diligence and integration managers should be involved.

The strategic rationale behind an out-of-market “bolt-on” (small target, low integration) is to create a new platform for growth through a relatively small acquisition. This expansion could be into a new geography — which is common among regional hospitals in the U.S. and mobile telephony — or into entirely new product or service offerings, such as a vertical integration play when a company seeks to broaden its capabilities and leverage its scale.

When geographic diversification is a factor, the rationale for the merger may involve taking advantage of deregulation, “rolling up” small players in a fragmented industry into a more coherent regional or multinational player, or expanding the scope of the business. Most likely, little consolidation will be needed beyond eliminating redundant functions such as corporate staff, information technology, and human resources. Strategic due diligence should include a focus on identifying opportunities to leverage best practices, product development, and infrastructure across the group. Even though these “bolt-ons” may operate fairly independently in the new organization, the purchaser should ask itself about its own “parenting abilities.” What resources can the company use to accelerate growth while preserving the core of what it’s acquiring?

Besides this parenting question, strategic due diligence for an industry buyer should focus on testing the new market’s attractiveness, determining the target’s competitive position, identifying what critical capabilities to retain, and addressing any cultural issues. This due diligence group should include a strong analytical team to drive market and competitive assessment, an HR team to focus on organizational and cross-border cultural issues, and functional representation in areas of coordination.

Likewise, when the out-of-market “bolt-on” involves a financial buyer or conglomerate, the same emphasis should be placed on testing the new market’s attractiveness, ascertaining the target’s competitive position, and retaining key personnel. Cultural differences are unlikely to need addressing beyond creating policy consistency and ensuring the interests of both sides are aligned.

The strategic rationale for an in-market absorption (small target, high integration) is that, by acquiring a competitor in the same market, the buyer can capture operational synergies through leveraging its existing asset base. Markets that often see in-market absorptions are U.S. retail banking, second- and third-tier auto suppliers, and technology acquisitions by the likes of IBM and Cisco Systems.

The buyer is likely to be focused on eliminating excess capacity by closing plants, merging sales, reducing overhead, improving market pricing, boosting utilization rates to increase the return on assets, and absorbing the acquired business as efficiently as possible. Therefore, the strategic due diligence focus should be on validating these assumptions, pursuing ways to accelerate synergies, and assessing potential customer and competitor responses that may impact market upside and risk.

In this case, the due diligence team should be drawn principally from the acquirer to ensure ownership of integration goals. The team should be cross-functional with a strong operational focus. Involvement of senior (or chief) human resources and information technology executives is often critical in managing work-force reduction and system integration.

Realizing Full Potential
Strategic due diligence requires an up-front investment of money as well as the time of some of a company’s most capable managers — even before the deal is certain. Indeed, the team should be carefully structured to guarantee the right skill set and influence; and it should be established early enough to kill the transaction if it determines that the strategic rationale and hoped-for synergies simply are not attainable. But the advantages of strategic due diligence go well beyond the ability to stop an ill-conceived deal. If the deal moves forward, the full benefits of strategic due diligence will manifest themselves.

First, strategic due diligence can help set the value and purchase price of the deal. Second, it can help articulate and buttress the strategic rationale for the deal, instilling greater confidence among stakeholders that the company’s claims about projected benefits are reasonable and attainable. Finally, strategic due diligence provides a strong platform for the actual integration.

All these benefits depend, however, on management’s ability to approach each deal as new. The power of strategic due diligence is its focus on the specifics of the deal. We are not saying companies must reinvent the whole wheel for every deal, but they must not reuse too many old spokes. Strategic due diligence acknowledges the unique nature of every deal and offers a path to realizing each transaction’s full potential.

Building the Diligence Team

The value of strategic due diligence relies heavily on the quality of the team in charge of the process. Building a strong team is important both to ensure proper assessment of the deal and to facilitate the actual integration. We have identified eight best practices for organizing a due diligence team: Choose the right people who have time to lead the project and serve as team members. Time constraints and confidentiality will make it difficult to replace these people later in the process. Dedicate specific team resources for the due diligence period. Diligence will naturally focus on certain functional areas.Human resources, information technology, finance, operations, and even R&D and marketing may all be involved. Be sure to draw team members from all of these areas of the organization. This adds valuable expertise, and it helps the team attain the buy-in from line management that can be hard to get if a key functional area is shut out of the integration process. Ensure that the diligence team is co-located within a secure environment, such as a corporate headquarters. Sometimes it makes more sense to locate the team near the target. Communicate to the due diligence team the strategic and financial rationale behind the acquisition. They should understand enough detail to be able to identify critical diligence issues. Train the team to identify and home in on specific issues, including the analysis and data required. This ongoing checklist keeps the diligence on track and brings it to a conclusion. It thus helps to avoid the “analysis paralysis” that can result from an undirected data search. Develop and communicate rules of engagement between the diligence team and the target company. This avoids cultural conflicts and ensures that the team acts in a manner that reflects the acquirer’s intentions. Make available analytical tools and techniques so the team can rapidly get its arms around potential synergies and integration challenges. This helps the team complete its task within the allotted time and budget. There must be a healthy flow of information from the due diligence team to the integration team. Therefore, include diligence team members in the integration planning team to ensure that diligence rationale and data analysis are properly leveraged. Although many of these best practices apply in all merger cases, there are some differences in focus depending on the nature of the merger. For example, in an out-of-market transformation, it’s important that the team include those with human resources skills who can identify and retain the personnel who will drive value, as well as commercial people who can analyze product and customer profitability in these new markets. For an in-market absorption, on the other hand, human resources skills are critical to planning and coping with the impact of head-count reductions. But the diligence team must also include commercial, operational, and administrative people who can assess the potential value and timing of synergies after the merger.

Three Common Themes of Failure

Strategic due diligence is a challenging task, to put it mildly, and there are any number of ways to veer off course if careful attention is not paid to the work. However, we have identified three “themes of failure” that most often derail due diligence. 1. Failure to Focus on Key Issues Fools Rush In: Time will be tight, but don’t rush through the necessary step of clarifying the rationale for the deal and sources of expected value. This step determines which hypotheses need to be tested and avoids wasting time gathering irrelevant data. Reinventing the Wheel: Don’t be so distracted by the process that the analysis suffers. When possible, use a common diligence methodology, standardized formats, and simple project management software to manage and share relevant diligence data. This will save time, keep the process focused, and thus permit a higher level of analysis. Reluctance to Share: When diligence information is not shared adequately among all diligence teams, it’s impossible to focus effectively on the larger issues at hand. A clear flow of data through the use of regular (as frequent as daily) updates can quickly identify “deal killers”; it can also help the team allocate resources more effectively, and it will lead to a richer and more nuanced view of the diligence issues. Analysis Paralysis: Inevitably, some issues will remain in doubt, but the team must be rigorous about defining an end point for the analysis. Part of being focused is knowing when to check something off the list, when to report it to management, and when to move on. 2. Failure to Identify New Opportunities and Risks The Unquestioned Assumption: Although time constraints prevent any major recasting of a company’s strategy, a quick stress test of management’s key assumptions about its business may show opportunities for growth or a strategic refocus that may create significant value. Being Afraid to Rock the Boat: Even when a deal seems imminent, it is not too late to probe deeply into its merits. Ask the target company’s management both broad and specific questions to gain a deeper understanding of value drivers and key risks. Also, identify and interview customers and the competition. This is all part of reaching sound conclusions on possible trends (such as the emergence of a substitute product or service) and risks (such as the market entry of a new competitor). “It’s Just an Audit”: Due diligence is more than an audit. By validating the assumptions that underpin the business plan and detecting risks or inconsistencies early, diligence aids management’s long-term stewardship of the company. 3. Failure to Allocate Adequate Resources Choosing the Wrong People: The best people for the due diligence team are probably also the company’s most valuable managers. Find a way to put them on the job rather than choosing people who happen to have time available. Also, make sure to choose people with the right expertise; don’t overlook managers from the functional areas of the firm that will be affected by the deal. Insufficient Time: The due diligence process will be a time-crunch affair, but don’t make the problem worse than it is. Give the team as much time as possible, and don’t be trapped by artificial or arbitrary deadlines. Insufficient Resources: Support the due diligence teams with the resources of the firm. This includes space to work, equipment, software, staff, and access to the right data and people. And, as much as possible, relieve them of their daily responsibilities so they can focus on the task at hand.

Author Profiles:

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Gerald Adolph (adolph_gerald@bah.com) is a senior vice president with Booz Allen Hamilton in New York. His work focuses on corporate and business unit strategy, as well as merger and acquisition issues. Click here for additional information on mergers and restructurings from Booz Allen Hamilton.

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Simon Gillies (gillies_simon@bah.com) is a vice president of Booz Allen Hamilton based in Melbourne, Australia. He focuses on assisting Asia Pacific–based clients in corporate strategy development and implementation including mergers and acquisitions.

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Joerg Krings (krings_joerg@bah.com) is a vice president with Booz Allen Hamilton and managing partner of the Munich office. He focuses on turnarounds and profit-improvement programs for automotive OEMs, suppliers, and industrial clients.

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Николаев Игорьфинансовый директор ООО «Арлифт»

После того, как финансовый директор взял под контроль финансовые потоки компании, провел систематизацию краткосрочных обязательств и осуществил мероприятия по привлечению финансирования, самое время детально проанализировать деятельность компании в предыдущих периодах. Это позволит сформировать среднесрочную повестку дня и определиться с тем, какими делами надо заняться в первую очередь, а что можно отложить.

Все компании отличаются друг от друга, поэтому схема работы и приоритеты финансового директора также будут разными в зависимости от того, в какой организации он работает. Чтобы финансовый директор был максимально эффективен и в первую очередь занимался теми вопросами, которые действительно являются ключевыми для компании, необходимо провести финансовый анализ её деятельности. Этот процесс (его можно назвать операционным due diligence) в чем-то схож со стандартной процедурой due diligence, которая проводится при покупке бизнеса, но есть и существенные различия. Главным отличием операционного due diligence является то, что он проводится не с целью определения стоимости компании, а с тем, чтобы выявить наиболее слабые места в её финансовой политике и определить приоритеты деятельности финансового директора на ближайшую (1-2 года) перспективу.

В состав операционного due diligence входят следующие этапы:

1. Анализ денежных потоков
2. Анализ продаж и маржинального дохода
3. Анализ дебиторской и кредиторской задолженности
4. Анализ накладных расходов
5. Анализ товарных потоков
6. Анализ кредитных и заёмных средств

Кратко рассмотрим цель каждого этапа.

Анализ денежных потоков. Этот этап является ключевым, так как денежные потоки, будучи зримым отражением практически всех хозяйственных операций компании, могут очень многое рассказать о выручке, затратах, инвестициях компании, привлечении кредитных ресурсов и т.д. На основе анализа денежных потоков финансовый директор должен выяснить следующие моменты:

• Какие юрлица входят в структуру компании, и как организовано движение денежных средств между ними;
• Какова ситуация с ликвидностью в компании: есть ли у компании подушка безопасности на счетах или все остатки постоянно сливаются в ноль;
• Использует ли компания кредитные ресурсы (овердрафты, кредитные линии и т.д.), если да — как часто и на какие цели;
• Испытывает ли компания колебания выручки в течение года (сезонность) и в течение каждого календарного месяца, если да — насколько сильны эти колебания и как компания с ними справляется;
• Какова структура платежей компании, насколько она стабильна в течение длительного (до 1 года) периода времени.

Анализ продаж и маржинального дохода. Этот этап призван ответить на следующие вопросы:

• Какова структура продаж компании — доля каждой группы товаров/услуг в общем объёме продаж, как эта структура изменилась за последние 6-12 месяцев;
• Какова маржинальность каждой товарной группы, как она меняется с течением времени;
• Как распределена выручка между различными сбытовыми подразделениями (филиалами) компании;
• Какова ценовая политика компании, отличаются ли цены реализации различным категориям клиентов, практикуются ли скидки, ретро-бонусы и т.п.

Анализ дебиторской и кредиторской задолженности производится с целью выяснения следующих моментов:

• На каких условиях компания закупает и продает товары и услуги;
• Как реально исполняются договорные обязательства компании и ее контрагентов (с точки зрения соблюдения сроков оплаты);
• Какова оборачиваемость дебиторки и кредиторки, кто кого реально финансирует — компания контрагентов или контрагенты компанию. Почему сложилась такая ситуация;
• Есть ли у компании проблемная дебиторская задолженность, как она возникла, какие меры принимает компания по её взысканию.

Анализ накладных расходов важен с точки зрения:

• Понимания финансовой устойчивости компании при снижении продаж;
• Выявления структуры и динамики расходов;
• Анализа эффективности осуществляемых расходов и возможностей по их снижению;
• Анализа текущей налоговой политики компании, неиспользованных возможностей по снижению налогового бремени.

Анализ товарных потоков особенно актуален для торговых компаний, у которых значительная часть оборотного капитала инвестирована в товарные остатки. В связи с этим необходимо обратить внимание на следующие моменты:

• Какова величина и структура товарных остатков;
• Какова оборачиваемость склада в целом и по отдельным товарным группам в частности;
• Есть ли на складе неликвидные товарные позиции, какие меры принимаются по их реализации;
• За счёт чего финансируется склад: кредиторской задолженности поставщиков, кредитов банков, собственного капитала компании.

Анализ кредитных и заёмных средств позволяет выяснить:

• Из каких источников компания черпает внешние ресурсы, какие продукты использует (банковские кредитные линии, овердрафты, лизинг, факторинг, целевое финансирование и т.д.);
• Какова стоимость и сроки погашения кредитов и займов;
• Какое обеспечение компания предоставляет под привлеченные кредиты, если ли обеспечение, пока не заложенное в банках, которое можно использовать для получения новых кредитов;
• На какие цели и насколько эффективно были направлены кредитные ресурсы;
• Соответствует ли стоимость кредитных ресурсов рентабельности компании;
• Есть ли возможности по эффективной реструктуризации кредитного портфеля компании.

По итогам финансового due diligence финансовый директор должен определиться с перечнем срочных мероприятий, необходимых для повышения эффективности финансово-хозяйственной деятельности. Это может быть:

• Внедрение жёсткой системы бюджетирования;
• Усиление контроля за расходами;
• Внедрение более адекватной ценовой, кредитной политики;
• Реструктуризация кредитного портфеля;
• Реструктуризация всей компании и т.д.

Таким образом, финансовый due diligence — это важнейший этап процесса адаптации финансового директора в новой компании, после осуществления которого CFO определяет ключевые проблемные точки в деятельности организации и приступает к их устранению.

Read more: http://fd.ru/blogs/221-kak-bystro-i-tochno-provesti-analiz-finansovo-ekonomicheskoy-deyatelnosti-kompanii#ixzz3Q9EmOEHh

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Assessment of workforce

Implementing improvements identified during the assessment phase requires a strategic, technical and tactical understanding of the opportunities, the issues, the culture and the individual behaviours of the workforce. Company META MANAGEMENT has developed our "Front End Focus Process" to do just that and the results are impressive. The ensuing implementation phase features exacting and rigorous project management, making the process predictable, effective and sustainable. Our tool kit, containing leading edge skills such as Lean and 6 Sigma, becomes more powerful when embedded in our process.

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