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Merger Case Study
Challenges to Institutional Change
The merger initiates a series of institutional changes that substantially affect the dynamic balance of MTR Corporation's sustainability management system (Sustainable Competitive Advantage model) due to new inputs arising from the process. To this end, we have dedicated this section of the Report to addressing the unique challenge of maintaining the sustainability perspective while undergoing a major corporate reorganisation, in this case, a merger.
Our approach is a test of the integrity and portability of the Sustainable Competitive Advantage model as an underlying hypothesis for developing the business case in sustainability. By applying the model to the new set of identified priority business risks attached to the new organisation and to the merger process itself, we investigate and test the model's ability to effectively reduce the collective risks and deliver on expected outcomes. To this end, we will assume that the model can be used to predict
a correct outcome of the risk management and/or stakeholder engagement processes. However, as a predictive-corrective exercise, we will then consider correction to the basic components of the Sustainable Competitive Advantage model by looking at process outcomes in future years. To assist in understanding this process, refer to the illustrative graph immediately following this case study discussion.
Background
The purpose of a merger is to arrive at a sum of the risks or a sum of the mitigation of risks that is lower in the combined organisation than in the individual entities acting independently. Undertaking the rail merger in this context is an exercise in risk management that marshals available resources to realise a set of synergies that reduces risk exposure in the combined railways to a level that could not be realised under the separate operating networks.
In 2004, the HKSAR Government tabled a proposal based on this framework of optimisation to merge the two rail network operators in Hong Kong, MTR Corporation and the KCRC. In this proposal, five principal parameters were identified that would drive the merger agreement for the purposes of promoting the future of rail as the backbone of public transport. These parameters were:
- Adoption of a more objective and transparent fare adjustment mechanism
- Abolition of a second boarding charge and review of fare structure with the objective of reducing fares for the public
- Early resolution of interchange arrangements for new rail projects under planning
- Job security for front-line staff of both rail operators Provision of seamless interchange arrangements in the long run
- MTR Corporation perceived these five parameters as the performance value outcomes to be achieved through sustainable competitive advantage application.
In April 2006, the MOU was signed, which included the rail merger structure and the key terms of the merger agreement with due consideration to the five value outcomes. The subsequent Rail Merger Ordinance and Transaction Agreements form the legal and commercial basis upon which MTR Corporation operates as the merged organisation.
Testing the New Dynamics
At the time of the MOU a set of perceived key business risks was established by the Enterprise Risk Committee. Mitigating these risks was central to the licence to operate and assuring the future sustainability of the new organisation. The Sustainable Competitive Advantage model, which provides the process to manage the social, economic and environmental impacts on the organisation, served as the platform to manage these identified risks.
Sustainable competitive advantage operates as the dynamic interaction of risk management and stakeholder engagement acting independently or collectively with the corporate strategy to deliver value-added performance. Each operates under a process of identification, prioritisation, mitigation, monitoring and reporting as new inputs impact the process, giving rise to a reiterative system of management. The chart on sustainable competitive advantage graphically represents the dynamics between risk management and stakeholder engagement. The Materiality Map gives guidance on how risk and engagement are prioritised and reported.
In applying a predictive-corrective approach to the model's processes, the outcome of the mitigation measures the level of success in risk reduction and identifies where gaps remain. This provides an understanding of the resilience of the merged entity's future sustainability and points to those areas in need of further action. Likewise, the predictive-corrective approach confirms the importance of those gaps when considering stakeholder engagement.
The model has also been applied to mitigating those risks identified at the divisional levels for the merger. These included cultural integration, job skills, service standards and other specific business unit needs. By using the risk management and stakeholder engagement processes, actions and programmes were structured and implemented to build the capabilities required to smoothly integrate the two organisations.
An illustrative example of the model's application at the enterprise level is the management of the linked risks to ensuring job security for front-line staff in both rail operators (one of the five defined value outcomes). Under the Enterprise Risk Management system, the priority business risks related to the merger outcome were identified as service maintenance in conjunction with the more direct risk to the development and retention of staff, both having substantial social impact on MTR Corporation. Triggering these risks would be a general industrial discontent by staff prior to the merger if job security was not resolved. This would directly result in widespread services disruption. Such an adverse event would have subsequently damaged the merger process. With 80% of staff in the combined organisations in front-line jobs, such actions would severely threaten the merged organisation's licence to operate and its reputation.
Industrial discontent was identified as the risk mitigation focus. Using the dynamics of stakeholder engagement, the Human Resources management conducted sessions with staff representative bodies including unions, staff and relevant consultants to enact programmes that reduced the potential of industrial action and resolved contentious remuneration points. This was achieved through clear communications and consensus building for constructive employment practices within the new organisation.
A deed poll was issued prior to the merger that effectively guaranteed job security for relevant front-line staff post merger as well as keeping existing remuneration packages intact. The threat of industrial action was subsequently substantially reduced along with the enterprise risk. Since the merger, the introduction of unified employment packages has actually increased earnings opportunities for such staff.
Value Outcome
Within the predictive-corrective approach, we have successfully back cast the job security issue to substantiate the effectiveness of the Sustainable Competitive Advantage model's ability to reduce risk and, in turn, drive the business case of the merged organisation. In this case, it demonstrates the mitigation of potentially damaging social and economic impacts while delivering on the expected value outcome of job security.
As continuous mitigation using the risk management and stakeholder engagement processes brings change forward into sustainable actions at the enterprise level, the need to address adjustment in the vision-mission-values has become apparent. By introducing the new vision-mission-values set, sustainable competitive advantage is institutionalised. With such change, performance outcomes will align more closely with the specific long-term business goals of MTR Corporation. This next step is currently under review with the new set of vision-mission-values expected to be issued by mid-2008.
