Advice for Effective Board Mergers

Among the various studies of post-deal boards, there are some interesting findings on board composition. Among large mergers 34 percent of inside directors and 29 percent of outside directors of the target are retained, according to McLaughlin and Ghosh’s study.

In addition, some 83 percent of directors are retained from the bidder. The boards are often enlarged, and some bidder directors are dismissed to accommodate the addition of target directors. 

Not surprisingly, fewer directors are retained from (proportionately) smaller targets. 

The reasons for retention vary. Local regulators sometimes impose retention of local board seats; for example, the retention of Canadian board seats was a condition of Canada’s approval of the sale of Nexen Energy to Chinese oil giant CNOOC. Board seats may be a matter of a merger negotiation to protect the interests of the target company or may be included at the insistence of major block holders. Finally, it may be of recognized value to the company to retain the best directors from both boards and to have directors with knowledge of both enterprises at the new board table. 

For public companies, these initial appointments are ultimately open to replacement by shareholder election, but the board composition upon deal close is as negotiated or committed in the merger documents approved by the respective boards, shareholders, and regulators, as required. 

The governance committee of the acquiring company, in consultation with the governance committee of the target and with both chairs and CEOs, should plan these appointments in advance of deal close to get the best board possible for the post-deal organization. Appointments should be based on a matrix of skills, modified to include skills and experience relevant to successful post-deal implementation. 

The knowledge and experience of directors from both boards should be mapped against the following: 

• acquirer’s industry or sector knowledge and experience;
• target’s industry or sector knowledge and experience, if different;
• knowledge of the geographies of the combined operations;
• familiarity with the business and organizational issues of the acquirer;
• familiarity with the business and organizational issues of the target;
• existing strategic alliances of the target or the acquirer currently involving board representation;
• anticipated strategic challenges;
• merger and acquisition (M&A) integration experience and expertise;
• the standard functional expertise required for key oversight responsibilities (i.e., strategy and risk) and committees (i.e., audit, nominating and governance, and compensation);
• relevant leadership and governance experience;
• diversity—this is an opportune time to consider objectives for experience, gender, and race; and
• independence. 

The existing skills matrix of the buyer would be a place to start. In any case, this mapping will inform the choice of the directors from among the two boards. Any knowledge or skill gaps for which new directors should be recruited would also be exposed. 

Finally, the preferences of directors and the potential for conflict or chemistry between directors will be a factor. Some directors, especially on the target side, will want to take the opportunity to exit the board. The two board chairs may reach an understanding of the post-merger board structure, informed by discussions with the members of their respective boards. 

Alternatively, the governance committee or a third party can conduct interviews to complete the skills matrix, determine director preferences, consider the potential dynamics, and make a recommendation. In either case, the proposed board composition would ideally be part of the merger proposal put to shareholders and regulators for approval. 

Differences Between Scenarios 

All of the aforementioned applies in concept to board selection considerations in all scenarios, but implementation will vary among the scenarios. 

In Scenario 1, the buyer should make room for several target directors, including independent directors. In some cases, the entire boards of both enterprises are retained, but this typically results in too large a board with many redundant skills. Best practice is to determine what skills and experiences are most needed from both companies, and to create room through a combination of director retirements and some limited expansion of the board. 

In Scenarios 2, 3, and 4, it is likely that fewer seats would be made available for the target directors on the buyer’s board, say, three or fewer. More seats, however, may have been negotiated or may be required by regulators, as noted earlier. 

In Scenario 2, the founder is often retained for his or her institutional memory and employee following, company morale, and corporate culture. The entrepreneurial founder, however, is seldom effective as a (non-CEO) manager within the larger enterprise, so a nonexecutive board position should be considered. 

In Scenario 3, there is an added consideration of support for the deal—directors who have fought the deal to the end are less likely to agree to join or to be constructive in their oversight if they did join. In Scenario 4, one must carefully examine the competence of director candidates from the target and their complicity in the downfall of the company. 

Roles and Dynamics 

Approaching deal close or soon after, the board should: meet, get educated on the combined company and the key opportunities and challenges in the merger, establish committee roles, and begin to develop the relationships they will need with management and with each other to be effective. The appointments to board committees should also consider the knowledge of both the bidder and target organizations, as well as other factors in the board skills matrix. Onboarding sessions for the new members should be scheduled as soon as possible. 

Whether the board composition changes as a result of the merger or acquisition, the board will benefit from holding a special session (or sometimes multiple sessions) to regroup and align before going into the first official board meeting. This session should be designed to: 

• Introduce directors to each other and explore their respective backgrounds, including any new directors and those from the buyer and the target company’s board. 

• Meet the new leadership team and ensure that the executives meet their board members. 

• Level set on the strategy, the goal of the merger, and the key components of value. 

• Transfer knowledge, with a focus on matters most relevant to the deal. This may include discussions with key customers and business partners. 

• Establish the chair’s role. 

• Last, but most important, begin to function as an effective board; that is, establish a board culture and dynamic that will draw from the skills and experience of all directors and reach well-considered decisions for the company. 

It is often beneficial for such a session to be facilitated by a skilled third party that can ensure all voices are heard, that issues (stated and unstated) are tabled and addressed, and that any required follow-up is noted and agreed to. The social issues of personalities, board culture, and group dynamics are critically important, but difficult to see clearly from the inside. Holding one or more such sessions immediately post-closing can be extremely valuable. While this is a busy time for directors, with the pressures of finalizing the deal and launching post-deal implementation, early investment in board dynamics can result in better board effectiveness and save time in the future. 

A similar session should be considered after the first few official board meetings, no later than at the end of the first year, to evaluate how the board has functioned. This session can be informed by a board effectiveness assessment that is conducted and analyzed in advance. 

Differences in Scenarios 

The challenges in board dynamics vary significantly between scenarios. 

In Scenario 1, it is likely that the board has been enlarged or a significant number of new directors have joined the buyer’s board, most from the target’s board. The merger is a big project for the newly combined company, and the board will have an intense agenda with many decisions to make on organization and implementation issues. 

The chair and CEO must be ready to effectively give an impartial voice to the new members—there cannot be a sense of “us” and “them” on the board. Though all board members may have indicated their support, it would be wrong to assume that: 

• There are no misgivings, regrets, or reservations about the deal.

• All feel comfortable with the chair and CEO’s ability to effectively lead the larger board and the new company.

• No one feels individually threatened with respect to their domain expertise.

• There is mutual respect and complementary personalities. 

Care in board composition and committee assignments can help. Nevertheless, the work to merge the boards, including the pre-meeting sessions, is critical to success in this scenario. 

In Scenarios 2, 3, and 4, there are typically only three or fewer directors to integrate. As a result, the integration process may resemble any well-executed introduction of new directors to the buyer’s board, but with the following exceptions: 

• The former directors of the buyer need to show respect for the acquired company and value the new directors.

• If the former CEO of the target becomes a director (especially in Scenario 2, in which the CEO is the founder), the transition to a nonexecutive director is often a huge challenge. The former leader may not be effective or even constructive in letting go; other directors may harbor jealousy or question motives; the large holdings of the former leader (in a stock deal) and possible contingency arrangements may create a conflict or perceived conflict of interest.

• The transition of the acquired company to new management requires careful and sensitive oversight. 

Again, care must be taken with the “soft” issues. Special board sessions to ensure such issues are brought to light and discussed may be critical to the ongoing effectiveness of the board. Even when no new directors are added (which is often the case in Scenario 4), the board will benefit from a session to regroup and align on some of the “hard” and “soft” issues to be tackled post-deal. Many boards surprise themselves with what they didn’t know about each other—skills, experiences, aspirations, biases, etc.—until they put these things on the table in the context of a big challenge such as an acquisition. 

Post-Deal Oversight Imperatives 

It is usually helpful for the post-deal period to be separated into two broad phases: transition and value creation. 

The purpose of the transition phase is to get to a functioning combined structure as quickly as possible. Directors have an oversight role in each of three key components of the transition phase: 

• Definition of the new (interim) organization structure and staffing: Directors should be satisfied that the new structure is aligned with the deal logic and deploys the best talent from both organizations in key positions.

• Joint (detailed) planning of the implementation of the deal logic: Directors should review the adequacy of the plan and be satisfied that management identified metrics and milestones of implementation that will be reported to the board.

• Communications with all stakeholders: Directors should be satisfied that all key stakeholders have been considered and that the communications plan supports the value in the deal and the reputation of the new company. 

Following the transition phase, director oversight of post-deal implementation should continue until all aspects of the plan are implemented. Directors should focus on three key aspects: 

• Alignment with the deal logic: Directors should track the metrics and milestones associated with deal implementation and satisfy themselves that post-deal cost reduction and revenue development are aligned with the deal logic, ambitious, well managed, and adequately resourced. Directors need to take the long view on shared value, encouraging transactions and post-deal actions that will create the most value as opposed to those that will create the most “sizzle.”

• Integration of organizations and corporate cultures: Directors should be satisfied that the desired merged culture is defined and that culture change is being managed, not left to chance. The choices for organization structure and culture should be aligned with the overall strategy and facilitate the deal logic.

• Project management of post-deal implementation: As noted earlier, there should be reportable metrics and milestones relating to the post-deal plan. Post-deal implementation completion audits are a good practice and should be reported to the board. Such an audit comprises a brief report on each item or source of value identified in the deal proposal: Was it completed, and if not, why not? Did it get the expected results, and if not, why not? What are the lessons for the next deal?