How to get real about the questions not-for-profit board members need to ask when a potential merger or acquisition comes up.

So you’re on a not-for-profit board and the question of a merger or acquisition comes up. What’s your primary objective as a board member in navigating these often complex discussions? Is it:

• To safeguard the organisation’s legacy?
• To rigorously examine the potential business case and its financial viability?
• To thoroughly explore the risks and push for detailed due diligence on the potential partner?
• To dust off your Australian Institute of Company Directors training (or get legal advice) on your fiduciary duties as a director during a transaction?

From where I stand, it’s none of the above. That’s not to say these objectives aren’t important – simply that they are secondary to the board’s primary objective: ensuring your organisation is effecting positive changes in the lives of the people or communities it supports. During a merger transaction or acquisition this fundamental purpose shouldn’t change.

… the overriding principle that needs to govern all decision-making is whether this transaction will improve the impact your organisation can achieve for your clients.

Mergers and acquisitions can be complicated and lengthy transactions with many moving parts to consider (see our how-to guide on not-for-profit mergers if you’re interested in a detailed account). However, the overriding principle that needs to govern all decision-making is whether this transaction will improve the impact your organisation can achieve for your clients.

Based on our experience working with not-for-profit boards, we have found four things to keep top of mind so that the focus on client impact remains paramount.

#1 Know how your organisation has an impact

If your organisation were to close its doors tomorrow, what would the impact be on your clients?

What quantifiable change is the organisation making? Do you know? These questions apply whether your organisation is considering a merger or not. But, it’s surprising how frequently boards can’t answer them. As the purpose of a merger is to increase impact, you can’t gauge that potential change unless you know what impact you currently have.

Having the ability to measure and track impact is key for all organisations, but particularly those engaged in merger conversations. Weighing up a merger costs time and money, but implementing a merger is an even greater investment. Before you begin, ensure you have a solid understanding of your own organisation’s performance, and its strengths and weaknesses too.

#2 Explore your options

We often speak with organisations that have been approached by another organisation for a merger or acquisition. This can be flattering. But it’s important to pause and consider a few things before taking any action:

• What is your organisation’s current strategy, and how does the merger or acquisition align to it?
• If it is not aligned with your strategy, but seems like a good idea to achieve your organisational objectives, are you clear as to why?
• Who are the other participants in your ecosystem? Is there a more suitable partner than the one who has approached you?
• Is there a values-alignment between your two organisations?

Ultimately, all organisations should be looking to find ways to drive better outcomes for their end beneficiaries. A merger could do this in any number of ways including extending an organisation’s reach to new locations, creating new capabilities, reducing cost, or by providing a more compelling case for government or philanthropic support.

However, you don’t want to waste valuable resources vigorously investigating a merger business case if a simple run through the questions above tells you this isn’t the right opportunity to pursue.

#3 Check your ego (and that of your organisation) at the door

We are involved in the social sector because we’re passionate about doing good or making a difference. At the same time, we’re human and can’t help having egos too. One of the major causes for derailment of a partnership transaction is people-related issues. These can be things like:

• Board representation – how many seats does each organisation get on the new board?
• Board selection – who from each board gets to be on the new board?
• CEO selection – you start this process with two CEOs but at the end of the day, there can only be one, so who will it be?
• Leadership team composition – what criteria is used to select the leadership team? How do you retain exceptional talent during this period of uncertainty?

If not handled well, these issues can lead to confusion and ill-will, or even complete relationship breakdown between parties. Boards play an instrumental role in setting the tone for merger proceedings. Have tough conversations early and make sure that lines of communication are open and clear from the start. If you can keep personal feelings in check and stay focused on the larger purpose, these potential showstoppers can be avoided.

#4 Don’t be afraid to get pointy when the time comes

Finally, if you have worked through those three items above and you still think a merger or acquisition is a good idea there are some practical issues to explore before you can commit. They may change your approach significantly. These include:

• Governance – given the constitutions and legal structures of the entities involved in the transaction, how would the merger/acquisition be executed? Are there significant changes in the constitution (for example objects) that are required for that to happen?
• Stakeholders – not-for-profit organisations have many stakeholders who need to be considered when entering into a transaction: clients, staff, members, philanthropic supporters and government funders. You will need a plan for how and when to engage and communicate with them.
• Business case and due diligence – the board needs to align with management as to what they want to see in the business case and how deep to go in the due diligence activities.

We hear from our clients how frequently the topic of mergers or acquisitions comes up in their organisations. Boards have a vital role to play in these discussions. Whether the right decision is to merge or continue solo is dependent on factors unique to each situation. However, what is universal is the board’s role in managing these considerations in a way that strengthens the organisation and supports the executive not to lose sight of what matters most – better outcomes for the clients.

For more information on navigating mergers and acquisitons, see ‘How to go about a non-profit merger’

Or contact Malcolm Garrow on mgarrow@socialventures.com.au