Five Key Steps to Integration Success

When it comes to the completion of a merger or acquisition, whether you view the glass as half full or half empty will likely depend on your planned approach to integration. After all, there’s no shortage of statistics on the failure rate of mergers and acquisitions due to post-deal integration issues. And it’s easy to see why. The challenge of integrating the people, processes and technology of two organizations into one is a daunting exercise whose success depends on a variety of factors, many of which can be subtle, yet complex.

Still, such challenges are not deterring bankers from the pursuit. Through November of 2015, there were 306 M&A banking deals. With the December numbers not yet available, we would expect the total for 2015 to be about the same as the total for 2014. And, according to recent KPMG community banking survey, nearly two-thirds of the 100 bank executives surveyed anticipate being involved in a merger or acquisition as either buyer or seller during the next year. Moreover, one out of three of those community bank executives foresee integrating information technology systems as the most difficult integration challenge, followed closely by talent management.

While such challenges are undeniable, directors must play a key role in helping management achieve positive results. These five key steps can help directors guide management in driving a successful integration.

Step 1: Set the Tone at the Top
Prior to signing the deal, establish a set of goals that cascade a vision of the deal into high-level, practical operating objectives for the combined organization. Directors should review and provide input in these operating objectives to ensure they align with the bank’s overall strategy, risk appetite and the strategic rationale for the deal. With a strong set of operating objectives in place, executives can develop guiding principles which clearly define the key fundamentals that stakeholders should follow as they begin the planning phase of the integration.

Step 2: Assess the Integration Plan and Roadmap
An integration plan and roadmap needs to be established early in the deal lifecycle. Anchor the plan with a well-understood methodology and a clear, high-level and continuously monitored timeline that identifies key activities and milestones throughout the course of the integration. Develop an integration playbook that details the governance structure, scope of the work streams and activities in addition to well defined roles and responsibilities. Directors must fully understand the integration plan so they can provide valuable feedback, effectively challenge timelines, and have the requisite knowledge to determine if there is a prudent methodology for each phase of the integration. Key disclosures about the transaction should be reviewed to ensure communications to regulators and shareholders set realistic expectations for closing the deal, converting customers, and capturing synergies.

Step 3: Effectively Challenge and Monitor Synergy Targets
Operating cost and revenue efficiencies are identified as part of the deal model, factored into the valuation, and play a critical role in determining the potential success of a merger. Executive management should establish synergy targets at the line-of-business level to promote accountability. Directors should foster effective challenge of expected synergies and provide oversight of the process for establishing the baseline and tracking performance against targets over the course of the integration.

Step 4: Promote Senior Leadership Involvement and Strong Governance Oversight
The program structure and governance oversight is established during the initial planning phase to control the integration program and drive effective decision making. Executive management should identify an “integration leadership team’’ with sufficient decision-making authority and a combination of merger and operating experience to effectively identify risks, resolve issues and integrate the business. Directors should examine the team’s experience, track progress against goals, and closely monitor key risks to assess management’s ability to execute the integration activities.

Step 5: Evaluate Customer and Employee Impacts and Communication Plans
The objective of customer and employee experience programs is to take a proactive approach to help ensure that significant impacts are identified, analyzed and managed with the goal of minimizing attrition. Integrated and effective communication plans are established to address concerns of customer and employee groups to reduce uncertainty, rumors and resistance to change. Directors should scrutinize customer and employee impacts in an attempt to ensure management has an effective mitigation plan for negative impacts through communication, training and target operating model design. Planning for employee retention should include the identification of critical talent to mitigate risks to the integration while ensuring business continuity.

By taking these five steps, directors can provide management with the guidance and support needed for a successful integration.

Best Practices for Your Compensation Committee

11-13-13-Meridian.pngCompensation committees today face increased responsibilities, time commitments and risks. The Dodd Frank- Act, the Securities and Exchange Commission (SEC) and the stock exchanges are mandating new governance standards and disclosure rules. Bank regulators, shareholders and their advisory firms (e.g. Institutional Shareholder Services, Glass Lewis) create pressures to conform to their requirements, which often conflict. As external pressures continue to evolve, compensation committees need to address more complex issues and change their practices to ensure proper oversight.

Committee Governance

Establishing appropriate governance structures is critical to enabling compensation committees to make effective decisions in this complex environment. The SEC recently approved new independence requirements for compensation committees listed on NASDAQ and NYSE. In consideration of these requirements and other trends, below is a list of some best practices related to compensation committee governance. A compensation committee should have:

  • Composition comprised solely of independent board members, willing to encourage discussion, debate and challenge the status quo.
  • A charter that provides clear definition of authority and meets new SEC requirements.
  • Clear definition of its authority to manage compensation risk.
  • An annual calendar defining activities/actions to be taken throughout the year.
  • Oversight that includes CEO and top executives.
  • Agendas and meeting materials sent well in advance of meeting with clearly define topics for review, discussion and approval.
  • A two-review process for major decisions (e.g. one meeting to review materials and discuss; second meeting to approve).
  • Executive sessions without management at every meeting.
  • Annual self-assessments of the committee’s performance.
  • Annual assessments of independent advisors.
  • Ongoing director/committee education (through advisors, conferences).

Compensation Program Design

Compensation program designs and practices are changing as a result of the increased influence of bank regulators, shareholders and advisory firms such as ISS and Glass Lewis. Best practice compensation programs should:

  • Align and drive the bank’s strategic goals and business plans.
  • Reflect the bank’s unique compensation philosophy and guiding principles.
  • Provide a balance of or between:
    • Performance measures (e.g. return, operational, shareholder).
    • Fixed and variable/performance based programs.
    • Short and long-term performance.
    • Cash and equity-based compensation.
    • Bank, division and individual performance.
    • Formula versus discretion.
    • Absolute and relative performance.
  • Include a mechanism for risk-adjusted compensation. (Approaches vary but might reflect inclusion of risk metrics in the incentive plan, such as risk-adjusted returns, or deferral of incentive pay.)
  • Embrace meaningful stock ownership for executives and board members through ownership guidelines, holding requirements, payment in stock and outside purchases.
  • Include a clawback policy (which may need to be revised as rules are finalized implementing the Dodd Frank Act).

Compensation committees today need to conduct more rigorous analyses and testing to ensure total compensation programs are effectively meeting objectives and complying with today’s requirements and best practices. Some examples of good analyses include:

  • Compensation history and tally sheet of executives’ total compensation.
  • Pro forma illustration of the range of potential total compensation resulting from a variety of performance results.
  • Realizable pay analysis (total compensation likely to be paid based on performance).
  • Updates on progress toward annual and long-term performance goals.
  • CEO and executive performance and pay relative to peer group.
  • Current stock ownership and progress toward ownership guidelines.
  • Value of retention tools (e.g. stock awards, Supplemental Executive Retirement Plans).
  • Annual review of compensation risk assessment.
  • The ratio of CEO pay to median employee pay (this is required by the Dodd-Frank Act with an estimated implementation in the year 2015).

All of these analyses can provide helpful perspective for committees when designing programs and making pay decisions.

Communication and Disclosure

Communication with shareholders and regulators is more critical than ever, as both groups are seeking to determine if compensation programs align with their expectations. Best practices include the following:

  • Enhance your compensation disclosure and analysis on your proxy statement with an executive summary to tell your story and communicate to shareholders the objectives of your pay program and the resulting pay-performance relationship.
  • Understand the influence and perspectives of shareholder advisory groups (e.g. ISS, Glass Lewis) but don’t try to emulate them. Their policies evolve and their analysis is a one-size-fits-all approach.
  • Provide clear documentation of your incentive plans and be prepared for the formal documentation that will result as required by Section 956 of the Dodd Frank Act.
  • Engage in ongoing communication with shareholders; not just during annual say-on-pay voting.

These checklists provide a starting point for assessing the effectiveness of governance practices and could help a compensation committee review their own practices and see what they would like to change.