Friday, 13 December 2013

Strength in numbers – consolidation in the non profit sector

The non profit sector has seen substantial change in recent years, particularly with increasing demands in respect to the quantity and nature of the services to be delivered.  Add to this a constantly evolving regulatory and taxation environment, challenges of funding, capacity constraints and an increasing cost base and it is not hard to see why many non profit service providers are considering opportunities to consolidate or collaborate with other providers in their sector.

The benefits of consolidation or collaboration may seem clear, including potential savings in administrative costs, greater geographical reach or a broader suite of deliverables, as well as improved access to funding.  Increased size may also generate greater influence within the relevant sector, especially in respect to policy determinations.  Ultimately, the key driver in deliberations should be about performance improvement.

Irrespective of the anticipated benefits, typically this is by no means an easy decision to make or implement and senior management needs to be alert to the range of issues which may arise by adopting this approach.  Substantial preparation needs to be undertaken to ensure the outcomes sought are clearly identified, as are the possible alternatives to achieving these outcomes and their relative costs and benefits.

If consolidation or cooperation is considered to be the preferred option, then further analysis needs to be undertaken to identify organisations in the sector with which this might be feasible to produce the desired outcomes. 

Key considerations in this process include:
  • Governance and risk management: It is important to understand the legal, tax and governance structures of the other organisation and to consider what legal or structural obstacles will need to be overcome as part of the process.  There may also be implications for the decision about what might be the best legal arrangement to implement – be that an MOU, a sharing of resources, a joint venture or a full merger.
  • Branding and identity:  These arrangements can often impact the brands and identities of the respective organisations.  Consideration needs to be given to the use or otherwise of the respective brands, how risk to the brand will be handled and, if new brands are to be created, how costs and ownership rights are to be allocated.
  • Engagement and communication: The repercussions of consolidation or closer cooperation also ought to be understood from the perspective of other key stakeholders such as employees, funders, clients, supporters and regulators.   The arrangements will require clear lines of communication and effective messaging to ensure that these internal and external relationships are effectively maintained.
  • Resource management:  Where there is to be a sharing or pooling of staff it is critically important that staff have clarity about the course of action and what is expected of them.  Similarly, the potential ramifications to the culture of the respective organisations have to be properly understood and managed.  Change can generate uncertainty for employees and gaining and maintaining their trust, acceptance and enthusiasm for the process can be the difference between success and failure.

However, whilst consolidation or closer cooperation may bring a myriad of issues, typically none of these are insurmountable provided that appropriate planning and preparation are undertaken at an early stage.  Usually, this process is significantly aided through the engagement of appropriately qualified and experienced advisers to work with senior management to establish the most suitable pathway and mechanisms to achieve the desired outcomes.

As Special Counsel at McCullough Robertson, Swain advises clients on corporate governance, international and non profit matters.

Thursday, 5 December 2013

Corruption Perceptions Index released – warning to Australian companies entering new markets

Transparency International has released its 2013 Corruption Perceptions Index (CPI), which is becoming a global benchmark for measuring perceived levels of public sector corruption in 177 countries.  For companies considering setting up operations in new jurisdictions, or undertaking cross-border M&A activities, the CPI provides a snapshot of the corruption risk posed in a particular country.

The CPI uses data from reputable independent institutions, specialising in governance and business climate analysis, who conducted international surveys with businesses and in-country experts over a 24 month period.

Countries are ranked on a scale from 0 (perceived to be highly corrupt) to 100 (perceived to be very clean).  Only a small number of countries rank on the CPI as ‘very clean’, while more than two-thirds of the 177 countries featured scored less than 50.  The index confirms that corruption remains prevalent at all levels of government, from issuing local permits to the enforcement of laws and regulations in a majority of countries worldwide.

Australia emerged as one of the year’s ‘decliners’, with its ranking falling from 85 to 81 this year, which could be attributed to the prosecution of Reserve Bank of Australia subsidiaries, Securency International and Note Printing Australia, for foreign bribery, and corruption in the NSW State Government with the recent findings of the NSW Independent Commission Against Corruption into the affairs of the Obeid family.

It is also worth noting the results of some of our trading partner countries in the Asia-Pacific region:
  • Papua New Guinea was ranked 144th, with a score of 25 (consistent with its 2012 ranking)
  • Indonesia was ranked 114th, with a score of 32 (consistent with its 2012 ranking)
  • Laos was ranked 140th with its score improving from 21 to 26.
  • Vietnam was ranked 116th with a score of 31 (consistent with its 2012 ranking).

Despite some improvement, corruption in the Asia-Pacific region remains an on-going issue which should not be overlooked.

As discussed in a previous post, corruption affecting corporate Australia is on the rise.  Australian companies looking to set up operations in new countries or seeking to grow organically through cross-border M&A transactions must be aware of the corruption risks posed, particularly in countries which appear in shades of red on this year’s CPI heat-map.

Conducting anti-corruption due diligence in cross-border M&A transactions is imperative, as systemic bribery and corrupt conduct can significantly affect the value of a target company or asset.  It is equally important to undertake an anti-corruption risk assessment before entering a new country to determine appropriate controls that should be put in place to minimise the risk of corruption.

With the regulatory environment ever increasing, Australian companies should focus on developing and embedding an effective anti-corruption compliance program tailored to the risks faced when operating in high-risk countries.  For some practical insights into the key elements of a compliance program, please refer to our previous post.

Tiffany is a Senior Associate at McCullough Robertson