When companies evaluate a joint venture, merger, or acquisition, they usually bring a high degree of rigour to the decision. Financial performance is scrutinized, valuations are challenged, synergies are modelled, and legal and operational risks are examined in detail. Technology compatibility is assessed because integration problems can disrupt systems, reporting, customer service, and productivity.
Culture is often considered as well, but usually with far less discipline.
That is particularly striking given how many organizations publicly describe their people as their most important asset. The language appears in annual reports, corporate values, leadership presentations, and employer branding. Yet when a significant transaction is being evaluated, the people who will ultimately have to make the combined organization work are often given less attention than the financial model, systems, or operating structure.
There is a broader reality behind this. Regardless of the industry we operate in, most of us are running people companies. Our organizations may manufacture products, develop technology, provide professional services, operate infrastructure, or sell consumer goods, but people make the decisions, serve the customers, solve the problems, manage the operations, and ultimately determine whether the organization performs.
If people are central to creating the value of the business, understanding how those people will work together should be central to evaluating a transaction.
Cultural Compatibility Is More Than Executive Chemistry
Executives may talk about whether the two organizations are a good "fit." That judgement is often based on the quality of the discussions between the CEOs and senior leadership teams. If the conversations are constructive, the strategic rationale is clear, and there appears to be mutual respect around the table, there is a tendency to conclude that the organizations are compatible.
A transaction is negotiated by a relatively small group of people. The success of the relationship will eventually depend on hundreds or thousands of employees who were not involved in those discussions.
That may be a useful early signal, but it is not a reliable measure of cultural compatibility.
A transaction is negotiated by a relatively small group of people. The success of the relationship will eventually depend on hundreds or thousands of employees who were not involved in those discussions. They will be expected to make decisions together, manage performance, resolve disagreements, serve customers, and operate within structures that may be quite different from the ones they knew before the transaction.
One of the international business professors at Ivey we know once described a joint venture or acquisition as being like two dogs sniffing each other. It is an informal analogy, but it captures something important about the early stage of these relationships. Each organization is trying to understand the other before trust is fully established. Both sides are evaluating intentions, behaviours, and boundaries. During the transaction process, however, everyone is also highly motivated to make the relationship work. The more revealing period begins after the agreement is signed and the organizations have to operate together under normal conditions.
That is when culture becomes much more than a discussion about whether people get along.
Culture is often described through stated values. Organizations may characterize themselves as collaborative, entrepreneurial, innovative, disciplined, or customer-focused. The difficulty is that two organizations can use the same language while operating in very different ways.
A more useful definition of culture is the familiar expression, "the way we do things around here." It is reflected in how decisions are made, how authority is exercised, what behaviours are rewarded, how poor performance is handled, and how employees respond when something goes wrong. These patterns shape the day-to-day experience of work.
When two organizations come together, those established patterns do not disappear. They encounter another set of equally established assumptions about how work should be done.
The Differences We See and the Ones We Miss
Cultural differences are sometimes easier to anticipate when a transaction crosses national borders.
If a North American company is entering a joint venture with a Japanese organization, acquiring a German business, or merging operations with a company in South Africa, leadership is more likely to recognize from the outset that cultural differences will need to be understood. National and regional business norms may influence communication, hierarchy, decision-making, negotiation, and expectations of leadership. Language differences can add another layer of complexity, even when the organizations have established a common business language.
The important distinction is that these transactions often cause leaders to go looking for cultural differences because they expect them to exist.
The same awareness may not be present when two organizations operate in the same geography.
Two companies headquartered in Toronto may share a language, operate under the same legal and economic environment, recruit from a similar labour market, and even serve many of the same customers. It is easy to assume that their cultures will therefore be relatively similar.
They may not be.
One could have developed a highly centralized organization in which senior executives remain closely involved in operating decisions. The other may give considerable authority to managers and expect decisions to be made close to the customer. One might have a culture where disagreement with leadership is expected and encouraged, while the other has developed more formal boundaries around authority.
Because there are fewer visible cultural differences between the organizations, leaders can underestimate the less visible ones. An international transaction announces its differences. Two organizations from the same city can look very similar until their people begin working together.
When “The Way We Do Things” Collides
Consider a company in which managers are expected to make decisions quickly within their area of responsibility. Combine it with an organization where significant decisions typically move upward for review and approval. Both approaches may be entirely rational within their original context. One may have been designed to support speed and entrepreneurship. The other may have developed in response to regulatory requirements, risk exposure, or a need for tighter control.
The difficulty appears when the two groups begin working together. One side may interpret the other as bureaucratic and slow. The other may see its new colleagues as undisciplined or unwilling to follow appropriate controls. The underlying issue is not necessarily competence. Each group is behaving according to practices that have been reinforced over time and that previously contributed to how its organization succeeded.
Similar friction can arise around risk, accountability, communication, or performance standards. One organization may tolerate experimentation and occasional failure because it values innovation. Another may place greater emphasis on predictability and consistency. These differences can be manageable, but only if they are identified and understood before they become sources of frustration or resentment.
This is why the concept of cultural “fit” can be misleading.
The objective should not be to determine whether two organizations are culturally similar. In many transactions, cultural differences are part of the strategic rationale. A large organization may acquire a smaller company precisely because it is more entrepreneurial. A joint venture may bring together organizations with complementary capabilities that neither possesses independently.
The more important question is whether those differences are compatible with the strategic intent of the transaction.
Integration Can Undermine What You Intended to Acquire
If a company acquires a business because of its speed, innovation, or customer intimacy, those characteristics should be treated as capabilities worth protecting. Yet integration processes can unintentionally erode them.
The acquiring organization may introduce its normal approval processes, reporting requirements, governance structures, procurement rules, and operating policies. None of those practices may be unreasonable in themselves, but collectively they can alter the environment that allowed the acquired company to perform differently.
Over time, decision-making may slow. Employees may have less discretion. Leaders who were accustomed to moving quickly can find themselves spending more time navigating internal processes. The acquired company may retain its brand and products while gradually losing some of the behaviours that made it attractive in the first place.
From a transaction perspective, that is a significant risk. The integration may appear successful because systems have been consolidated and reporting structures established, while the organization has quietly weakened one of the capabilities it intended to acquire.
Acquisitions also create an inherent power imbalance that deserves more attention. Regardless of how collaborative the integration process is intended to be, one organization bought the other. Employees quickly notice whose systems survive, whose policies become standard, whose executives receive the senior roles, and whose language becomes dominant. What the acquiring organization considers integration can easily be experienced by the acquired organization as assimilation.
That perception matters because culture is influenced as much by decisions and behaviour as by formal statements. If employees conclude that the acquiring organization automatically regards its own methods as superior, they may become less willing to contribute ideas or challenge decisions. This can be particularly damaging when the purpose of the acquisition was to gain capabilities that did not exist within the acquiring company.
Joint ventures present a different problem. Neither party may have complete authority, which means differences in decision rights, governance, policies, and operating expectations need to be addressed explicitly. If they are left unresolved, relatively minor operating disagreements can become recurring sources of tension between the parent organizations. The venture leadership team may find itself trying to satisfy two sets of expectations that were never properly reconciled at the outset.
These issues can appear technical on the surface, but they are often cultural. A disagreement over approval limits may reflect different attitudes toward trust, while a dispute over reporting may reveal different expectations about control. Without an understanding of the assumptions beneath these disagreements, organizations can spend considerable effort addressing symptoms without resolving their source.
The People You Lose May Be the Ones You Needed to Keep
Talent is another area where the consequences of cultural incompatibility can become expensive.
Most acquisitions involve some degree of restructuring, and leadership teams typically plan carefully for overlapping roles and redundancies. The more difficult problem is the loss of employees the organization expected to retain.
Strong performers often have options. If they dislike the emerging culture, feel that their authority has been reduced, lose confidence in leadership, or find that the new environment no longer reflects the way they want to work, they may leave voluntarily. Those departures are not always immediately recognized as a major loss.
Institutional knowledge rarely appears on a balance sheet. It exists in customer relationships, operating history, informal networks, and the accumulated understanding of why certain decisions were made. The value of that knowledge often becomes visible only after the person carrying it has left.
A customer relationship may weaken because the individual who understood its history is gone. A process may become less reliable because an undocumented exception was known by only a few people. Decisions may take longer because the context behind previous choices has disappeared. By the time leadership understands the significance of the departure, the knowledge has already left the organization.
There is an additional tension here for organizations that describe people as their greatest asset. If that statement is genuine, retaining the people who carry critical knowledge, relationships, and capabilities should be treated as part of protecting the value of the transaction, not simply as a human resources consideration after closing.
Cultural Due Diligence Belongs Before the Deal
This is why cultural due diligence should be conducted before the transaction is complete rather than treated primarily as a post-close integration activity.
Financial diligence asks whether the economics are sound. Operational and technology diligence examine whether systems, capabilities, and processes can work together. Cultural diligence should assess whether the organizations can work together in a way that supports the value the transaction is intended to create.
That assessment needs to extend well beyond the senior executive team. CEO chemistry tells us something about the relationship between two CEOs. It tells us very little about how managers will exercise authority, how teams will resolve conflict, or how employees will respond when expectations change.
A serious cultural assessment should examine how decisions are made in practice, where authority actually sits, how accountability is enforced, and what behaviours are rewarded. It should identify where the cultures are compatible, where differences may create value, and where they are likely to create friction.
The purpose of due diligence is to identify risk before capital is committed. Culture should be treated with the same intent.
Most importantly, the findings should influence the transaction or the integration strategy.
If cultural diligence can never affect governance, leadership structure, retention priorities, integration pace, valuation assumptions, or the decision to proceed, then it is not really diligence. It is simply information gathering.
The purpose of due diligence is to identify risk before capital is committed. Culture should be treated with the same intent.
This does not mean organizations should avoid transactions where cultural differences exist. Different cultures can work together successfully, and in some cases those differences are precisely what creates value. The objective is not cultural sameness. It is understanding what each organization is bringing into the relationship and determining how those differences will affect the ability of the combined organization to perform.
Most Companies Are People Companies
Organizations routinely spend months evaluating financial exposure, legal obligations, technology compatibility, and operating risk before committing to a transaction. Given the scale of the investment involved in many joint ventures, mergers, and acquisitions, the same level of curiosity should be applied to the people and behaviours that will ultimately determine whether the expected value is realized.
If an organization genuinely believes that its people are its most important asset, that belief should be visible in how it evaluates a major transaction. It should not disappear when the deal team enters the room.
Regardless of what we manufacture, develop, sell, or deliver, organizations ultimately rely on people to make them work. A merger, acquisition, or joint venture does not simply combine financial statements, systems, technologies, and assets. It brings together people who have learned different ways of leading, deciding, communicating, and getting work done.
If an organization genuinely believes that its people are its most important asset, that belief should be visible in how it evaluates a major transaction.
Understanding those differences before the transaction is completed does not remove the challenge of integration. It does, however, give leadership a much clearer understanding of the organization they are actually creating.