Rallying regulation

Determining the path to corporate health is more complex than it sounds


Our running discussion about transparency in 2010 has led to an interesting first year with this publication.

Admittedly, I have not been universally acclaimed for staking out a rather simplistic position on transparency and the virtues of parallel online due diligence. Indeed, feedback on my “pie in the sky” take on a potentially important aid for finance as outlined in my first editorial, The Way Forward (Jan-Feb p139), was more heated than I would have expected. Nevertheless, according to many respondents, I was “fighting the good fight” even if they thought it was a losing one. Many also thought I made some good points in Banking on Transparency (March-April p95). Among the most cited points was the role that ego plays in M&A.

I still maintain that technology can help us win the battle for transparency. Naturally, the technology I am speaking about is online due diligence platforms that are purpose-built to handle the heavy loads of parallel due diligence processes. After all, we cannot forget that speed is the key in corporate life. Clearly, the speed with which any due diligence process is carried out is a key factor in managing risk, which weighs heavily on managers everywhere.

A return to risk management
As risk managers regain their collective mojo after a scorching time in the desert I think more and more attention will be paid to risk in areas that traditionally have not been the stronghold of risk management. While it is en vogue to discuss “regulatory” risk as politics sticks its nose into finance, this type of risk primarily concerns monster banks that might become government-run any time. The types of risk I wish to discuss involve more common corporate activities, ones to which we can apply current technological solutions and come closer to reaching the goal of using transparency to mitigate risk. By way of illustration, I will discuss one common type of corporate activity –– restructuring.

Some will cry “foul” at my labeling restructuring as one of the more “common” corporate activities. Still, we must face the fact that this is an activity on which a disproportionate number of companies are spending increasing amounts of time and energy.  Herein, we discuss a simple way to make the exercise of restoring company health less painful in the long run while acknowledging the possibility of extra pain in the short term.

The reason for the extra pain is that many firms have deep-rooted problems that are not immediately visible to those charged with fixing them. In many cases, unfortunately, this is by design and can lead to quite sensitive situations. Yet, by exposing lagging performance, transparency can help solve even the most sensitive of problems.

Of course, determining the critical path to corporate health can be incredibly complex. If restructuring were easy, there would be no need for advisory. Two reasons for this complexity are that debt and equity structures are far more complex today than they were just a few years ago, and that stakeholders are more numerous and more diverse (not to mention more vocal) than ever before. At the same time, when you need to restructure, time is obviously critical. Any delay can mean the difference between solvency and insolvency. Therefore, rapid communication must be the order of the day and all communication must be reviewable and attributable once the restructuring activities have been implemented.

Restructuring is the most complicated type of due diligence due to the critical nature of the objective. The sheer amount of data that must be reviewed is mind-boggling. Thus the need has never been greater to use secure, flexible, powerful technology to help maximize the workout process.

By applying virtual due diligence processes, users can index data and assign permissions even for merely viewing key data.  Virtual due diligence tools now have sophisticated Q&A features and extensive reporting capabilities. All the data and the tools, can readily be accessed via the Web. During  due diligence, the board, advisors and management can disseminate communications securely, reliably and more swiftly than by using the methods of yesteryear.

As discussed in my previous editorial, the use of such technology is becoming more widely used in the world of M&A. It also should become mandated for such vital matters as restructuring. The day will come when virtual due diligence will be standard for advisory firms for the sake of successful outcomes and for law firms for compliance purposes. For some companies, that day will not come fast enough.

Robert Andrade is VP of Sales and Marketing at Data Room Services. For more information tel: +49 (0) 69 478 6400; www.drs-digital.com