Through the Looking Glass(door)
Investing in the wrong people can be a costly mistake.
In M&A due diligence, assessing the workplace culture of an acquisition target or existing holding has for too long been overlooked. There are many reasons this is the case, not least because it is a complex topic where objective insight can be hard to find.
Yet understanding a company’s working environment and its respect for diversity, equity and inclusion (DEI) are critical factors in assessing its true value. Acquiring a poorly-managed, disenfranchised or marginalised workforce can lead to unexpected and expensive fixes – intensive training, engagement, retention and rehiring efforts – with no guarantee of success. The costs are significant: in 2019, the US Society of Human Resources Management (SHRM) found that over the preceding five years toxic workplace cultures and DEI issues had cost US businesses around $223 billion in revenues. This is to say nothing of the potential for legal action, financial recourse and reputational damage if formal complaints and legal proceedings are pursued. Any of these issues could lead to challenges with fundraising and cost of capital in the future.
Leading asset managers and their limited partners (LPs) are starting to take note. In recent months we have seen a trend towards a “Glassdoor diligence” review of employer-rating websites, at both the pre-transaction stage and during periodic monitoring of portfolio companies. This is a welcome development, but poses its own challenges. As online review and social media resources become increasingly available, the issue is in assessing whether the public praise or criticisms they contain are real and fair. We are helping responsible investors approach this as a priority in their diligence, on equal par with more established disciplines like financial management and anti-bribery and corruption reviews.
Navigating online reviews and commentary
Common types of workplace complaints are well known. Frustrations with middle- and senior management can develop in response to a disrespectful working environment, rude or dismissive behaviour, favouritism in promotions and compensation, other biases, and a range of other complaints. In severe cases these may lead to “toxic” or “hostile” workplaces, with allegations of bullying, sexism, racism, nepotism and other harmful discriminatory actions. Workplace review websites and social media can be vital windows into such behaviour.
However, there are real challenges in assessing the veracity of claims made on these sites. Good or bad reviews are inherently subjective to the reviewer. It may be tough to tell whether positive reviews are real, or if negative ones are fair and representative. The latter can be particularly tricky to assess: no company is perfect, and all receive some bad reviews. These may be driven by personal grudges or isolated bad actors – or they could reflect genuine toxicity and institutional failings. Perhaps most importantly, people who have suffered severe discrimination or harassment may find it too sensitive or upsetting to discuss online at all.
As such, deal teams screening out potential targets based on online reviews may be passing on promising opportunities. Those not screening at all might be acquiring ticking timebombs. Targeted investigation and nuanced analysis are required to work out if online reviews are fair, and whether there are any other red flags lurking outside public view.
New investors are often expected to be the catalyst for cultural changes
The gathering pace of responsible investing adds another layer of importance to workplace culture reviews. The acquisition of a company and accompanying injection of capital have long been seen as an opportunity for improving efficiency. Now, private equity sponsors and their investors are expected to present a turning point for better working environments and DEI at companies they are backing.
Respecting and elevating employees through DEI is a key tenet of ESG best practice. As such, many of the world’s most influential institutional investors and other limited partners want to see their ESG goals reflected in their investment managers – and the assets they ultimately invest in. In June 2022, the UN-backed Principles for Responsible Investment (PRI), a leading network of investors pursuing and promoting sustainable investment, released a questionnaire designed to help LPs assess how their asset managers address DEI in investments, including whether they:
consider DEI issues in pre-investment due diligence;
have a strategy for identifying and managing material DEI risks and opportunities; and
consider DEI matters in preparation for an exit.
It is clear that workplace culture and adherence to good DEI practices are of utmost importance to sophisticated investors. In light of movements like #MeToo and the very public focus in boardrooms on better corporate citizenship, and as the costs and consequences of inaction mount, responsible capital recognises that information about workplace culture is available, accessible, and should not be ignored.
Done well, workplace culture diligence strengthens a deal proposition. In most cases it supports the analysis of potential in a target company, highlights issues to fix and downstream problems to avoid, and maps out a path to quickly unlocking value. For current portfolio companies it can help an investor ensure the company adheres to its own DEI standards, and support value creation ahead of an exit. Asking the right questions at the right time helps investors back the best people, deliver for their LPs, and drive forward the evolution in responsible investing.
Wallbrook’s approach to assessing workplace culture
Our Workplace Culture Assessments combine expert research and intelligence gathering with ESG-focused stakeholder engagement to provide an outside-in view of potential issues. Our analysts gather on-the-ground insight into working environments, and dig deeper into issues that have been raised publicly. We provide a balanced and analytical view of how a company operates from those who know it best, and ascertain whether serious workplace issues exist. This can be vital in discounting unfounded allegations that might derail a deal, or uncovering problems that might undermine value growth down the line. These would otherwise only become apparent after closing.
In many cases our assessments can support the value proposition by informing rapid remediation of the problems at hand. Moreover, given no company is perfect, in many cases these assessments can surface priorities for respectful employers to engage and retain top talent. Our team is well experienced in working with clients on follow-on workplace transformation and ESG advisory programmes that build on our workplace culture findings.