Companies frequently fail to conduct thorough background checks and due diligence on their employees and management. The headlines are filled with stories of corporate officers who exaggerate their business experience and lie about their education. This negligence on the part of management can lead to embarrassment and potential liability for the corporation. It is a sound business practice to conduct a thorough due diligence on an individual you may hire or do business with.
What is due diligence? It is the process of research and analysis, to identify risk and potential issues in connection with a possible hire, proposed transaction or business. The following two examples illustrate why due diligence is critical:
As part of international private equity transaction, due diligence was conducted on theU.S.target company. One of the members of the management alleged he was an Ivy League graduate, an attorney and an accountant. Our investigation revealed none of this was true. Although the individual had terrific management skills, his fraud and lies were serious character issues and the individual was removed from the deal.
A recent private equity deal involved a company engaged in correction facility management. Background checks disclosed that company’s general counsel had been indicted and had a criminal record. This attorney resigned from the company.
Lessons to be Learned
Thorough due diligence is a necessity. What does it entail? A thorough examination of the background of an individual or company. This is accomplished through researching and reviewing public records, including litigation, regulatory records and media. Analysis is critical, even if there is no information on the subject, there could be additional information on past business affiliations. In addition, a thorough background should also check experience and education.
In the first example, the manager would have been exposed by confirming his education history – this would have been a warning flag. The second case demonstrates how preventative measures avoid potential embarrassment. When due diligence is not conducted you run the risk that your manager and your investment could be tomorrow’s news headline.
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