Executive Due Diligence Protects Your Brand and Your Bank Account

When a company is poised to hire its next senior executive or enter into a merger or acquisition, the stakes are high. The company’s reputation, brand and culture are about to be wedded to a new person or entity. Whether through an M & A transaction, company expansion or executive hire, new people are likely to be representing the company in the public eye. And those new leaders will be making significant strategic decisions and large investments that will likely determine the company’s future.

Private equity, venture capital, investment banking and hedge fund professionals rely on pre-transaction and executive-hire due diligence to safeguard their reputations and their investments. A thorough due-diligence process is always worthwhile. Like an insurance policy, it’s a wise investment, because it helps mitigate risk and maximize value for your organization.

The goal of all due diligence, whether preceding a transaction or an executive hire, is to identify any red flags before inking a deal. Those red flags may be associated with individuals’ backgrounds, relationships with questionable companies or people, or financial condition. When decision-makers are armed with complete and accurate information, they are in a better position to make sound investment and hiring decisions as well as negotiate more favorable deals.

The due-diligence exercise should consider litigation and criminal histories, financial and credit records, business affiliations and professional licenses, among other areas. Social media is also a critical category to cover, particularly since this information is so easily accessible.

Make the Right Executive Hire

Hiring the wrong executive can lead to reputational erosion and financial loss.

The recruitment process for an executive hire is lengthy and costly, even when everything goes smoothly. By some estimates, senior executive turnover can cost 200% of the executive’s salary, after accounting for the costs of recruiting, interviewing and training a replacement, as well as lost productivity during the transition period.

Bringing on the wrong executive or business partner can have several negative impacts:

Increased recruiting costs. It’s expensive and time-consuming to run job advertisements, pay recruiting firms and conduct interviews. If a company has to go through the process a second time, all these costs are doubled.
Higher training costs. Training a new senior executive requires a significant time investment, usually from several employees, and sometimes also involves hard costs.
Loss in productivity. Bad hires can result in a 36% drop in productivity, according to a CareerBuilder survey. This drop may be even more impactful for executive hires, because of the number of people involved in their onboarding and affected by their decision-making. If a high-level employee is not an effective leader or turns out to lack the necessary skill set, poor performance and inefficiencies can occur. Especially for executive hires, the wrong executive hire can hurt company morale and further weaken productivity.

Reputational erosion. If the new hire doesn’t perform well, it reflects poorly on the entire company. Customers, partners and other stakeholders may start to question the company’s management ability. This can negatively affect the company’s reputation and make it harder to attract and retain top talent in the future.
Cultural effects. Hiring the wrong executive can also lower overall morale, harm company culture and limit the growth of the business.

With all this in mind, the cost of pre-hire research is easily offset both by the cost avoidance and by the peace of mind a thorough due-diligence process brings to a hiring company.

Due Diligence in Mergers and Acquisitions

Private equity firms, hedge funds and other investment managers must closely evaluate prospective acquisition and merger targets. The decision-makers at these firms should perform in-depth background investigations on corporate entities and their executive teams to uncover any concerns related to reputation, compliance or financial condition. When decision-makers do not perform pre-transaction due-diligence investigations, potential risks include future regulatory violations, harm to the firm’s reputation and brand devaluation — not to mention the legal and financial costs associated with entering into the wrong deal.

At a minimum, a background investigation should review litigation and criminal histories and financial and credit issues. More comprehensive research can include a look at past business affiliations, verify professional licenses and uncover any adverse regulatory filings.

Choose the Right Investors and Partners

Due diligence can help companies avoid the risks and repercussions of taking on the wrong investor or business partner.

Decision-makers can discreetly verify the credentials of prospective investors or partners and gather data on the financial and reputational condition of any other business ventures. That research can reveal criminal history, significant litigation, false credentials or financial issues such as liens or judgments.

In one recent example, the general counsel of a private equity firm requested due diligence research on a South American company and the family that operates it before making an investment decision. The due-diligence investigation uncovered business disputes, an undisclosed affiliated company, personal debt and other red flags. With this information, the private equity firm proceeded with extreme caution and reworked the proposed deal terms.

Protect Private Companies Going Public

Another circumstance that should trigger a due-diligence process is when a private company makes the decision to sell securities to the public, since this means they are moving into public view. The companies and their potential investors both benefit from an assessment of the background and reputation of its executives.

Red flags could include previous litigation, regulatory sanctions or prior failed business ventures.

Corporate Social Media Risks

In our current media landscape, any due-diligence investigation should include a social media assessment — either as part of a personal background check for a potential executive hire or partner or as part of pre-transaction research on a potential target company.

Potential business partners or executive hires may have posted content that presents a reputational risk to the company. They may have expressed viewpoints that are not in alignment with the company’s values, or they may have shared confidential information.

Another risk is that potential deal partners or potential executive hires may have a habit of posting sensitive data on social media, which could lead to intellectual property loss and issues with compliance and confidentiality.

Several social media research tools are available. Automated and manual data analysis techniques can also be used together to allow researchers to review hundreds of social media platforms at once.

By identifying red flags ahead of a transaction or hiring decision, questionable content can be removed, and executives can ensure that potential hires or partners understand the company’s social media policies going forward. Of course, if the posted content suggests a wider discrepancy in values or ethics, the company also has the option to cancel the transaction or the hire.

Due Diligence Today Can Prevent Surprises Tomorrow

If this due diligence investigative work is done thoroughly, companies can avoid reputational risk, negative press and post-acquisition disputes, not to mention duplication of hiring costs and the expense of entering into a bad deal. For more information or assistance with conducting executive due diligence, contact us. We are here to help.

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