Caveat emptor: the accountabilities and required actions of directors in securing value when merging or acquiring companies : or long title: Can a set of governance 'right practices' be distilled from literature and the views of practicing board directors regarding the accountabilities and actions necessary to achieve responsible value management for shareholders during mergers and acquisitions?

Mergers and acquisitions (M&A) are critical mechanisms for corporate growth and potentially for increased shareholder returns. The reality, however, often does not live up to the promise, as is borne out by empirical data on the high incidence rates of M&A under-performance. At present in Australia, directors and executive management, particularly of the acquiring company, have considerable latitude to put at-risk shareholder value via M&A without any meaningful pre-event restraints or post-event sanctions (and with the benefit of the Business Judgment Rule defence). The old adage caveat emptor (‘let the buyer beware’) still holds true for buyers, but when it comes to ensuring that shareholders’ interests and capital are properly protected, there is little clarity on what are the acceptable ‘checks and balances’, key activities and behaviours of the directors of the acquiring company, that represent responsible standards of conduct. The initial question to be considered is whether there is a discernible set of ‘right practices’ that provide a reference set of benchmarks for non-executive directors to know whether they are exercising the necessary care, diligence and skill in selecting and overseeing transactions. Looking from the ‘outside in’, the corollary is ‘How do shareholders in the acquiring company have some visibility and assurance that their executive management team and board are exercising (or have exercised) sufficient due diligence (in the broadest sense of the word)?’ The challenge thus arises as to how to describe the ‘right practice’ stewardship that should be exercised by ‘reasonable directors’ of the acquiring entity to manage the risks and performance of transactions – before, during and after acquisition. This thesis focuses on identifying and describing ‘right governance’ i.e. the required level and mix of actions and responsibilities of directors of the acquiring company, necessary for protecting the interests of their shareholders. To carry out this research, and to shed light on these gaps in knowledge and required practices, the extant commercial, governance and legal literature relating to M&A practice has been studied; and has been juxtaposed with the opinions and experiences of a cross-section of non-executive directors and Chairmen, emerging from targeted interviews (‘grounded research’). From these gaps has arisen an emergent theory regarding ‘right practice’. T he emergent theory points to six key themes that those directors interviewed believe make a difference to deal performance: (1) the Board’s degree of strategic thinking (‘Clear strategy upfront’); (2) planning and preparation (‘Early preparation and planning’); (3) the extent of board members’ cultural due-diligence (‘Proper understanding of culture’); (4) robust business-case scrutiny and investment assessment (‘Rigorous testing of the investment business case and funding strategy’); (5) their focus on tracking the delivery of the targeted benefits (‘Effective monitoring post transaction’); and (6) the quality of their mutual challenge and critical debate (‘Well-chaired board with constructive challenge’). These emergent board-level themes have been compared to the extant literature to examine whether similar learnings and congruent practices have been articulated or whether there are key gaps or contradictions between the emergent theory and the extant literature. In most cases there is alignment, although the interviewed directors’ views have crystallised what in the literature could best be described as ‘un-consolidated ideas’ based on ‘an extrapolation of managerial practices’, as the body of documented knowledge is generally not targeted at board members. This process of comparison has indicated that these initial findings have merit and should be regarded as an emergent theory. Whilst still not a guarantee for success, these themes – once subjected to further testing and validation for relevance and impact – could help to crystallise standard board practices in a way that better meets M&A transaction demands and more effectively serves shareholder expectations in the 21st century.