Comprehensive due diligence is a valuable mechanism to reduce your company’s risk exposure. Financial due diligence is a common and vital step taken by companies exploring a new business relationship with a partner or vendor. But a true risk evaluation includes more than just financial elements; it evaluates the reputational, legal, and liability risks affiliated with the company and its key executives.
Corporate reputational and legal crises have long-term impacts that span far beyond the initial source of the issue. A 2018 study of eight notable corporate crises since 2010 found that while the companies ultimately survived, they were worth approximately 30 percent less in 2018 than they would have been based on a comparison to their peers (source: The Economist).
Regardless of your company’s size, maturity, or industry, proper due diligence fits into a successful long-term risk management strategy. Consider these four benefits of proactive due diligence:
- Preempt costly crises with a small upfront investment. Evaluate the full picture before you get involved with a partner or vendor in order to head off risky engagements rather than reacting after something has gone wrong. It is typically far more cost effective to invest limited resources up front to prevent an issue from occurring than to devote significant time, funding, and effort to control and recover from it.
- Protect your company’s reputation and values. Reputational due diligence enables you to avoid partners or vendors whose conduct would be embarrassing or damaging to be affiliated with. These indicators could include pending lawsuits, media coverage of unethical behavior by an executive, or widespread negative reviews online. Researching these possibilities before engaging with a partner builds confidence that their values align with those of your own company.
- Avoid potential scammers and frauds. There will always be those looking to take advantage of corporate wealth and resources. Screening potential partners and vendors for criminal histories, fraudulent activity, sanctions, and regulatory actions is vital to weed out those who have demonstrated a lack of integrity and compliance, as these could be indicators of future misconduct targeting your company and/or your clients.
- Reduce your company’s liability. If the worst happens and the partner or vendor reveals themselves to be problematic down the road, you can stand behind your decision knowing you made every effort to vet them before engaging. Establishing a thorough due diligence process now also sets your company up to take on future clients who have compliance or corporate governance requirements.
Take steps now to proactively safeguard your company’s reputation and assets, and build confidence in the integrity of your corporate partnerships. Establish comprehensive due diligence as a required step in corporate engagements to empower well-informed decision making.