Buyout firms planning an acquisition or preparing a portfolio company for exit must consider the impact of poor corporate culture, particularly on a potential IPO.

By David Berman, Chris Horton, Robbie McLaren, Anna Ngo, Nell Perks, Charlotte Collins, Catherine Campbell, Tom Evans, and David Walker

No institution, whatever its geography, industry, sector, or size, is above the negative impact of a poor culture. Culture-related issues at Uber, Sports Direct, Boeing, and others highlight the implications of getting things wrong, including financial loss, reputational issues, and damage to investor confidence.

Often defined as “the way that people within an organisation behave when no one is looking”, the focus on corporate culture has become more acute during the COVID-19 pandemic, as investors and consumers observe and judge companies based on their navigation of the crisis, particularly the treatment of employees and wider societal stakeholders. LP expectations on PE firms to adequately diligence and monitor portfolio company culture are also rising, and the global regulatory direction of travel is clear. In our view, buyout firms planning an acquisition, or preparing a portfolio company for exit must consider the impact that poor corporate culture may have, in particular on an IPO.

Regulators Care About Culture and Conduct

In the financial services sector, the UK’s Financial Conduct Authority (FCA) leads the way on corporate culture and conduct, having set out heightened expectations relating to both financial and non-financial conduct. In the US, the New York Federal Reserve, the Securities and Exchange Commission, the Consumer Financial Protection Bureau, and others have all also recently emphasised their focus. And the importance of culture extends beyond financial services — a wide range of prosecutors and regulators are increasingly coordinating efforts and sharing learnings.

IPO Preparation

Companies preparing for an IPO must pay close attention to cultural indicators as part of the transition to the additional scrutiny and reporting obligations that a listing brings. The Financial Reporting Council’s (FRC) UK Corporate Governance Code, which is applicable to all companies listed on the premium segment of the FCA’s Official List, requires continual assessment and monitoring of company culture to ensure that policies, practices, and behaviours are aligned with corporate purpose, values, and strategy. In particular, the FRC has indicated that boards should develop a common and consistent language around culture, noting that sources of cultural insights can come from, among other things, turnover rates within the company, employee surveys, health and safety data, and promptness of payments to suppliers.

Furthermore, UK public companies are required under a combination of statutes, rules, and guidance to disclose how they have effected good culture in their organisation, including through granular disclosure of executive remuneration, diversity, and recruitment policies, and discussion of how directors have considered and discharged their duties to key stakeholders. Pre-IPO candidates, particularly those seeking a premium listing in London, must assess internal culture, as well as systems and controls, to ensure that they can operate effectively once listed.

Measuring and Monitoring Culture — What Are the Key Metrics?

While there is no easy way to identify a good or bad culture, in a portfolio company context, values, attitudes, and behaviours both within the company and in relations with external stakeholders are critical. Often this is set out in defined values, such as integrity, respect, innovation, safety, transparency, trust, and honesty. But to see how widely adopted such values are within the business, it is necessary to look at a range of factors, including the company’s purpose and strategy, internal guidelines and codes of conduct, recruitment and reward processes, and interactions with third parties. Latham & Watkins’ guide Culture — A Practical Framework for Sustainable Change seeks to bridge the theory-practice divide by outlining practical measures and techniques that companies can usefully adopt in their quest to institute a meaningful, objectively monitorable, and operationally workable culture change program.

Remedying Toxic Culture

When allegations of a toxic culture or broader conduct problems (dominant CEOs, leadership arrogance, siloed thinking, excessive pressure to meet numbers/ overambitious targets etc.) are identified, an independent cultural review is often the first step towards remediation. Such reviews frequently entail policy review, targeted interviews and focus groups, with post- review reporting and practical recommendations. Some companies have established dedicated culture or conduct sub-committees, while others have extended the remits of existing committees to explicitly cover culture. The same remedy will not be right for every company, but when acting on portfolio company boards deal team members are encouraged to incorporate culture as an agenda item, pay close attention to measured cultural indicators, and ensure that positive culture and conduct is promoted throughout.


Examples of how to approach analysing the culture of a business include:

·  Definition and articulation — Has the business defined and communicated its culture in a readily identifiable and understandable manner, including its purpose and core values and beliefs?

·  Conduct and values training — Do culture and conduct feature regularly in the business’ training program? Does “mandatory” training really mean mandatory?

·  Board/Executive Committee engagement — Do the Board and ExCo focus adequately on the embedding of values and conduct? Is this focus evidenced in the businessʼ practices?

·  Effective leadership — Does the business actively promote tone from above (and not just from the top)? Do managers visibly and sincerely sponsor policy changes and culture-related initiatives? Are they acting as role models?

·  Incentives — Is the businessʼ compensation structure appropriately aligned with its espoused cultural values?

·  Recruitment and progression — Are culture, conduct, and ethics positively promoted within all HR processes and procedures?

·  Standing back and learning lessons — Is the business prepared to respond where deficiencies are identified? What processes are in place to ensure the businessʼ response is appropriate?