For further information: Frank Tortorici
The Conference Board
(212) 339-0231
For Immediate Release
Release #4579A
CORPORATE GOVERNANCE ISSUES SIGNIFICANTLY IMPACT CROSS-BORDER MERGERS
July 24, 2000 -- Corporate governance issues can have a significant influence on cross-border mergers, according to a report released today by The Conference Board.
The report, Corporate Governance and Cross-Border Mergers, examines directorship issues in the face of the rise in mergers and acquisitions.
Since the beginning of last year, Europe alone has been the scene of more than $400 billion worth of hostile deals. The introduction of the euro can take much of the credit for having encouraged the deal making. By creating a single, liquid capital market similar to the U.S., companies have increasingly come under pressure to expand across the continent to find cost advantages.
The report also explores the impact of corporate governance on new mergers.
Questions to be considered include: who will be the chief executive and/or chairman, who will sit on the board, what will the balance of power be between the directors and the CEO.
A chief recommendation for prospective merging CEOs and boards of directors is to clearly lay out board functions before sitting down to negotiate. Other issues to be examined pre-merger are the desired composition, size, and structure of the new board, as well as top executive compensation issues.
"Key corporate governance decisions in M&A transactions are not necessarily about corporate governance," says Lucy Alexander, a research associate at The Conference Board's Corporate Governance Research Center and author of the report. "They are consequences of other decisions, such as where the company will be headquartered, and are influenced by other issues such as tax, politics and the relative strength of organizations. However for those who believe that good governance improves value, corporate governance issues may have a direct impact on whether deals happen or not and certainly on the price at which they occur."
ECONOMICS IS KEY FACTOR FOR SHAREHOLDERS
The economics of an M&A deal is the key factor in shareholders' determining whether or not to lend their support. Many institutional investors are predisposed to support existing management in hostile bids, but their support is conditional. It does not apply where investor confidence in management has been lost or where synergistic or strategic benefits clearly justify a bid premium. Unreasonable or unjustifiably expensive defense tactics will not be supported. The situation becomes more complicated where institutional investors have holdings in both sides of a hostile bid, as is often the case with large index trackers.
M&A transactions need to be structured to be credible, value enhancing, with assured protection of minority shareholder rights and with no hint of self-dealing on the part of directors or management. Historical efforts to work with investors can pay dividends in M&As in terms of gaining investor support. Investors emphasize the need for board independence to keep a check on the desirability of the M&A, and non-executive directors must stay informed of the integration process.
BALANCING THE POWER BETWEEN BOARD AND CEO
While all boards must exercise their fiduciary oversight responsibility in a merger, some leave the bulk of the strategic decision making to management. For example, the Goodyear board was supportive of the company's deal with Sumitomo Rubber but did not take an active role in the decision-making process, according to CEO Samir Gibara.
At most U.S. and U.K. corporations, although M&A negotiations are carried out primarily by the CEO and other key executives, they report back regularly to the board on all major issues and any significant changes. The non-executives and independent directors thus act as a kind of check and balance because the executive officers have to update them at each meeting regarding where discussions are and what problems have arisen.
In Germany, the two-tier board structure means that the management board (which is appointed by the supervisory board and functions much like the group of U.S. top executives reporting to their board of directors) takes an active, hands-on role, while the supervisory board supervises and approves the deal.
THE POST-MERGER BOARD
The boards of most newly-merged companies often closely resemble a combination of the two previous companies' boards. However, few companies continue these sorts of "national quotas" going forward.
Some corporate governance issues do not have the power to make or break merger deals, but play a part in ensuring the successful integration of the two companies, particularly in the functioning of the new board going forward. For example, although its corporate governance structure is dictated by German law, in practice, DaimlerChrysler has tried to incorporate aspects of a more U.S.-style governance in its board deliberations. It did this from the outset by establishing a shareholder committee of the supervisory board. This committee includes only the directors appointed by shareholders who meet separately from the main board to discuss and resolve issues that they may not feel comfortable talking about in front of employee representatives.
Other more practical governance issues also need to be decided upon once the terms of the merger are agreed. These include: how often, where, and when should the board meet, and what language should be used for board meetings and board materials.
Source: Corporate Governance and Cross-Border Mergers
Report # 1273-00-RR, The Conference Board
Information on ordering this publication can be obtained by calling The Conference Board's Customer Service Department at (212) 339-0345. Copies are available free to the media, please call Frank Tortorici at (212) 339-0231.
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