Corporate reorganizations are all the rage these days. Google recast itself by creating a new holding company, Alphabet, and spinning off some of its more ambitious interests into separate businesses, each with its own management team. Alcoa plans to split into separate corporations for its aluminum and automotive businesses. Dell and data storage giant EMC are in talks to merge.
“Reorgs” are often a fine exercise to try. They can boost shareholder value, give immature business ideas time to develop, or provide transparency and comparability to shareholders or investors trying to scrutinize a complex business.
They also, however, can backfire—especially in a conglomerate model, where investors might end up with less transparency than before, or directors get saddled with the task of overseeing strategy across many different entities. And losing focus on compliance, governance, or risk management details is a big risk all on its own.
So how does the chief compliance or audit executive keep focus amid a whirlwind of organizational change?
“A company that is splitting or dividing needs to do a 360-degree look at all the parties it has relationships with or exposures to,” says Eric Goldberg, a partner at DLA Piper who specializes in corporate restructuring and bankruptcy law. Those parties include shareholders, the board of directors, vendors, banks, and regulators; the needs of all must be carefully considered before, during, and after the reorganization. There are public disclosures to consider, for example, as well as restrictions and capital spending limits that banks and other lenders may impose.
Start with the idea of reshuffling one corporation into a collection of new operating units. That’s likely to change overall reporting relationships and compliance requirements. “Maybe you used to save everything under one umbrella but now you have a U.S. operation and an Irish operation,” Goldberg says. “Each is going to have different compliance requirements, regulations, and labor and employment laws.”
A concern large companies should have (and one that a restructuring can help address) is the use of one-size-fits-all policies and procedures. For example, trying to resolve pension law compliance in various countries with one common rule can get complicated and expensive. “If you divide things out, you are able to tailor things more appropriately,” Goldberg says.
The often complex web of vendors should be considered carefully during the restructuring process, both to minimize disruptions during the transition and to ensure that increasing regulatory scrutiny on supply chains doesn’t jeopardize the reorg. Particular attention also needs to be placed on ensuring that new business entities, especially if segregation is geography-based, don’t expose the parent company to liabilities under the Foreign Corrupt Practices Act.
“A company that is splitting or dividing needs to do a 360-degree look at all the parties it has relationships with or exposures to.”
Eric Goldberg, Partner, DLA Piper
aura Holm, a partner with Quarles & Brady, stresses the importance of driving culture through a Code of Conduct that uniformly applies to the parent company, any newly created entities, and existing businesses absorbed through an acquisition. Well-planned reorganizations and mergers start early, she says, on the work of ensuring that a new code reflected the needs of the combined company. “Even if the plan isn’t approved, you want people thinking about culture,” she says. “The Code of Conduct sets the culture.”
A big part of that focus on culture falls onto the compliance function. Holm recommends that companies revaluate its role before the reorganization and afterwards. “You want to think about ways of rewarding and supporting compliance,” she says. “It doesn’t show up in the numbers, but you need to show that compliance is important to your company. Having separate companies, if you do a spinoff, means you need to be even more focused on new risks and responsibilities.”
And the Little Things
Corporate governance and executive pay issues could also arise as concerns, says John Wilson, head of corporate governance, engagement, and research for Cornerstone Capital, a financial services firm.
DON’T BE EVIL: TAKE TWO
The following is an excerpt from the Alphabet Code of Conduct released on Oct. 2 as part of Google’s restructuring.
Avoid Conflicts of Interest
When faced with a potential conflict, ask yourself:
Would this activity create an actual or apparent incentive for me to benefit myself, my friends, or my family?
Would this activity harm my reputation or hurt my ability to do my job?
Would this activity embarrass Alphabet or me if it showed up in the press?
If the answer to any of these questions is “yes,” the relationship or situation is likely to constitute a conflict of interest, and you should avoid it.
Ensure Financial Integrity and Responsibility
Ensure that money is appropriately spent, our financial records are complete and accurate, and our internal controls are honored.
If your job involves the financial recording of our transactions, make sure that you’re familiar with all relevant policies, including those relating to revenue recognition.
Never interfere with the auditing of financial records. Similarly, never falsify any company record or account.
If you suspect or observe any irregularities relating to financial integrity or fiscal responsibility, no matter how small, immediately report them.
Various trade laws control where we can send or receive our products and services. These laws are complex and apply to: importing and exporting goods to or from the United States and other countries; exporting services or providing services to non-U.S. persons; and exporting technical data, especially data originating in the U.S.
If you are involved in sending or making available products, services, software, equipment, or technical data from one country to another, work with your manager to ensure that the transaction stays within the bounds of applicable laws.
Be sure you follow all laws designed to promote free and fair competition and protect consumers. These laws generally prohibit 1) arrangements with competitors that restrain trade, 2) abuse of market power to unfairly disadvantage competitors, and 3) misleading or harming consumers. Some of these laws carry civil and criminal penalties for individuals and companies.
Insider Trading Laws
Do not use non-public information to buy or sell stock, or to pass it along to others so that they may do so. That could constitute the crime of insider trading.
Various laws that prohibit bribery in different settings. Our rule is simple: don’t bribe anybody, at any time, for any reason.
Non-government relationships. Be careful when you give gifts and pay for meals, entertainment or other business courtesies on behalf of Alphabet. Avoid the possibility that the gift, entertainment or other business courtesy could be perceived as a bribe. Provide such business courtesies infrequently and, when you do, to keep their value moderate.
Dealings with government officials. Various laws prohibit seeking to influence official action by offering or giving anything of value to government officials, candidates for public office, employees of government-owned or -controlled companies, public international organizations, or political parties. Avoid not only traditional gifts, but also things like meals, entertainment, travel, political or charitable contributions, and job offers for government officials’ relatives. With pre-approval, it may be permissible to make infrequent and moderate expenditures for gifts and business entertainment for government officials that are directly tied to promoting our products or services (e.g., a modest meal at a day-long demonstration of our products).
“Shareholders will need a better understanding of how the board and management view their roles in acquiring, coordinating, and overseeing the operating companies, and how power will be shared between the operating companies and the group management team,” he wrote earlier this year in a client alert regarding Google’s restructuring.
His recommendation: establish incentives to drive executive behavior and signal board strategy and priorities. “Executive compensation disclosures provide an opportunity to explain how the company intends to implement multiple strategies,” he says. “Shareholders will be interested not only in compensation for the most senior executives but also for CEOs of the operating companies. Questions about compensation may include: In the absence of clear financial metrics, how will executives be judged on the success of acquisitions? How will social and financial goals be balanced? What financial metrics are appropriate given the company’s strategy?”
“You really need to reset compensation and incentives for each company,” Holm says. “There will be new leadership at these companies. What’s the tone they are going to set?”
Another important decision, one that can be easily overlooked during a restructuring, is staffing. Managerial structures may be part of the plan, but what about compliance and internal audit? A large company will likely have spent considerable time and money to attract and develop the talent these functions need, but as it gives birth to smaller enterprises, tough decisions need to be made. Should key personnel be moved to the new entity, running the risk of watering down the existing function? Is outsourcing compliance the answer for dealing with the complexity that comes with new business ventures? Is it feasible to start all over and build new teams?
“Starting from scratch is always tough,” Goldberg says. “Compliance is hard and requires such constantly evolving, specialized knowledge.”
That complexity is one reason a company might look to outsource the program, “but for big operating companies it is not always the right move,” he says. “They have spent a huge amount of time and money investing in training and people who know these things. It is one thing to know the facts—that’s just reading Wikipedia—but you really want to take advantage of the investment you made in people. They know how to work with the operating parts of the company and explain how you need to set things up. It is very difficult to just outsource compliance and throw the baby out with the bathwater.”