Environmental, social and governance (ESG) issues are emerging as the heart of next-generation M&A practices, particularly in Europe. However, there is a problem: how can dealmakers measure nebulous social issues?

“Good workplaces are often characterised by motivated teams and good internal communications, both of which can lead to staff retention,” according to Liz O’Leary, co-founder and director of Claros Due Diligence, a qualitative due diligence firm founded in 2023.

As a result of the need to understand what is really going on in workplaces, some private equity (PE) firms and hedge funds increasingly undertake qualitative due diligence in-house before an investment, O’Leary said. However, these investigations can “lack objectivity” without a strong methodology behind them, she added.

The need for a deeper understanding of fuzzy issues could create an entry point for anthropologists, ethnographers and qualitative researchers into the world of M&A.

“Most of our work is based on understanding and fixing toxic or broken cultures,” said Andi Simon, a corporate anthropologist and the founder of Simon Associates Management Consultants. “As part of that, we have done ethnographic research on cultural fit around acquisitions.”

Simon’s firm works with a methodology based around the Organizational Culture Assessment Instrument (OCAI), which was developed at the University of Michigan, Simon said. “Social issues in ESG involve culture and communities; and ethnographic research can be used to understand these topics.”

In practical terms, ethnographic research could be used within the due diligence process to understand “how things are really done, rather than how people say things are done,” she said.

O’Leary made a similar point: “It is very easy to present a certain image on social media nowadays. Artificial intelligence (AI) and machine learning only work if the underlying data is correct – qualitative due diligence can provide an interesting counterpoint by probing human behaviour that might not be captured in a dataset.”

Many of the documents in a virtual data room (VDD) have been carefully curated, according to Noelia-Sarah Reynolds, senior lecturer in management and marketing at the University of Essex, who has used qualitative research techniques to study M&A in an academic context.

The documents in a VDD can often be characterised as “one-way communications”, such as messages from top management with no recording of the reaction from staff, Reynolds said. “This is a really big thing to miss out.”

Some qualitative research has already begun as dealmakers ponder known unknowns around culture, communities and communications.

“We already see in-depth interviews with management for buy-and-build deals when sponsors need to decide who to keep,” according to Julian Macedo, CEO of The Deal Team, an in-house project management firm specialising in corporate finance transactions. These interviews can be used to probe cultural fit, he added.

The people who hire Claros Due Diligence “typically realise that they don’t have all the answers,” O’Leary said. As well as screening for risks, deeper research can also be used as a valuation tool before an investment, she added.

The need for qualitative research into culture is part of a wider trend involving the need for more detailed deal preparation. For example, dealmakers increasingly need to consider copyright issues on the dataset used to train an AI system; and spending more time preparing earnout agreements can reduce the risk of litigation later.

Although the trend towards more thoughtful due diligence looks set to continue, dealmakers who want to take a deeper look at cultural fit should bear in mind a significant caveat from corporate anthropologist Simon, who said, “It is important to hire ethnographic researchers with business expertise to get the full picture.”