The importance of corporate governance in M&A for a company

Corporate governance is a very complex argument. It refers to groups of rules which regulates companies life and management, in particular the relations among shareholders, directors and any other person involved. Since year 2000, corporate governance has become more and more important, especially considering the international financial crisis that pointed out the attention on companies behaviour. Many companies have been failing and today many others are still in great economical difficulty, hit by dramatic worldwide chain reactions. The main consequence is that people no longer trust companies, so in many cases the value of stock market actions collapsed.

In recent years, many studies focused on how to re-build trust for the companies through a good corporate governance. Is very important to improve communication between shareholders and board directors, managers and press. Each communication must be as transparent as possible: transparency is the key point in every communication, and it can be a very good strategy to increase a company’s value on the market. Value creation is the basic purpose of all corporate activity, and a company can increase its value through profits and efficiency: that’s what corporate governance is for.

During its life, a company can face extraordinary situations like mergers and acquisitions. Before dealing with the importance of corporate governance M&A, is important to explain the difference between these two situations. A merger is when two or more companies combine themselves to form a completely new company, while an acquisition happens when one company purchase another one company: in this second case no new companies are formed. The reasoning behind mergers and acquisitions is that two companies together are more valuables than two separate companies, and merging two companies creates more value than their sum.

Talking about corporate governance in M&A, we can broadly divide mechanisms in two groups, according with their internal or external nature. The internal governance mechanism includes structure and role of the boards, the role of the CEO, the nature of employment practices, incentives and reward measures. External corporate mechanisms are capital markets, product markets, managerial labor market, market for corporate control. After a merger or an acquisition, new company must focus on human rights, environment, labor condition and anti-corruption.

Sodali, global leader in corporate governance M&A, is a conflict free international consultancy. Sodali is exclusively dedicated to advising Boards and the Management of companies on shareholder response and shareholder communication. Every member of Sodali’s team of professionals agreed to a code of business conduct. Sodali’s offices are located in London, New York, Athens, Copenhagen, Geneva, Madrid, Milan, Paris and Rome.