Regulation makes headlines
CEOs need to understand what can and can’t be said when the media come knocking for comment on a company’s merger plan
ANYONE who has done a management course will be hard pressed to forget Porter’s five forces that are popularly used to determine the competitive intensity of an industry.
But forces such as rivalry, bargaining power of suppliers and of buyers, as well as the threats of substitute products and of new entrants only get you so far. One major addition to the competition landscape has been the increasing threat of regulation and related litigation. Another major force that is gaining in prominence is meted out by the court of public opinion when a company is found to have colluded on price, or been part of a cartel.
The Competition Commission published draft guidelines on the assessment of public interest provisions in merger regulation under the Competition Act earlier this year. In an excellent review of the guidelines, Lee Mendelsohn from ENSafrica’s competition department says the commission feels parties to merger proceedings regularly provide insufficient information in respect of public interest considerations. As such, the draft guidelines are intended to provide guidance on its likely future approach and the information it is likely to require from parties. Importantly, however, the draft guidelines will not be binding (even when they are final) and will not fetter the discretion of the competition authorities to consider public interest issues as they deem appropriate.
There is therefore little certainty, which is why so many CEOs feel they have so little control when it comes to competition matters and why regulation has become such a powerful new force in the world of competition. The challenge has been set for companies to be more open and transparent to ensure the proper decision can be made.
But it’s a fine line — companies are quite concerned about what they feel is secret information being dished out to their competitors.
Mendelsohn points out that public interest factors can be used to permit an anticompetitive merger, or to prohibit a pro-competitive merger. In other words, where a merger is found to be anticompetitive, the commission will consider whether any public interest factors outweigh its anticompetitive effects. Conversely, where it is found that a merger is not anticompetitive, the commission will consider whether there are any substantial negative public interest grounds requiring the prohibition of the merger or the imposition of conditions.
In terms of section 12A(3) of the Competition Act, the competition authorities must consider the effect that a merger will have on i) a particular industrial sector or region; ii) employment; iii) the ability of small businesses or firms controlled by historically disadvantaged persons to become competitive; and iv) the ability of national industries to compete internationally.
In terms of the draft guidelines, the commission will adopt a five-step process in analysing each of the public interest grounds, namely: 1. Determine the likely effect on the public interest; 2. Determine whether the alleged effect is “merger-specific” (ie that there is a sufficient causal nexus between the merger and the alleged effect), and where an alleged effect already exists, whether the merger exacerbates it; 3. Determine whether the likely effect is substantial; 4. Consider whether the merging parties can justify the likely effect (the onus being on the merging parties to do so); and 5. Consider possible remedies address any likely negative effect.
While changes like these are giving CEOs sleepless nights, it is often misunderstood what CEOs and companies can say to the public (media
Regulation has become a powerful new force in the world of competition
and other stakeholders included here) when they are in the middle of an investigation. Too often companies simply refuse to speak.
A competition investigation is not sub judice — it’s not a court of law — so the issue is more that bigger listed companies feel they are vulnerable when these investigations begin. But there is no prohibition against commenting. Competition law director at Cliffe Dekker Hofmeyr, Chris Charter, is not so sure keeping quiet is always the best approach.
“When there is a public interest element it may be better, depending on the circumstances of each case, for the company to say something to control the story and thereby prevent speculation. But this comes with the proviso that you don’t want executives saying different things to the case that was presented,” he says.
After all, the commission is able to keep certain information, like their internal communication or leniency applications, confidential. The commission wants merging parties to trust the process, so they are naturally wary about what they make available and try to strike a balancing act to prevent peers from nosing into information. They won’t usually be willing to be the source of confidential information, but there have been a number of challenges by respondents to have information previously viewed as “secret” made available.
The modern CEO and executive team is under immense scrutiny and pressure from a competition standpoint. Many of these CEOs will feel illequipped to deal with the challenge. Porter himself alludes to this in an article he co-authored with Jay W Lorsch and Nitin Nohria in the Harvard Business Review in 2004, called Seven Surprises for New CEOs. One workshop participant quoted in the story recalled that he was stunned by the realisation he would have to rely on others in areas like operations, where he had previously thrived, and would have to master aspects of the company such as investor relations and regulatory affairs, where he had little experience.
While South African competition authorities appear more likely to listen, CEOs need to be more open to engagement too. Bureaucratic hurdles remain a challenge, but getting a late afternoon call from a journalist with a difficult question about an upcoming merger remains another.
The challenge with getting these calls is that a CEO has little control over the questions he will be asked. It is important to understand what can and can’t be said — and to be well prepared. The media is an important stakeholder, but also an outside threat to stability if not handled properly.
Sometimes, the best approach is to engage with the media and declare what the company aims to achieve. It is far better than letting speculation mount to such a degree that it becomes even more difficult to manage than if it was handled properly when the phone rang the first time.