“Due Diligence” is a term used for a myriad of actions, usually in preparation for something. Parents of college-aged children analyzing school choices, executives reviewing financial information before a shareholder meeting, professional team owners looking into the backgrounds of potential new players… all of them perform some form of due diligence. For global organizations, however, their use of due diligence has become even more important. The potential risks that employees, vendors and business partners bring can negatively impact a company’s business and reputation.

“More clients are asking us to go beyond standard background checks and utilize our investigation services so that we can advise them about potential risks,” said Miguel Martinez, Vice President for Pinkerton Global Investigations Unit (PGIU). “News of a negative situation involving a company can spread so quickly, resulting in a damaged reputation, decrease in stock price and loss of business. An enhanced, holistic approach to due diligence can help to mitigate those risks.”

Why holistic due diligence is more important now

The internet changed the playing field dramatically, keeping people and businesses more connected than ever. And while that is generally looked at as a good thing, it also means that news about security incidents, technology breaches, disgruntled employees and other reputation-damaging events can spread globally within minutes.

“The global nature of business today requires that companies stay constantly abreast of risks within their business and outside of it,” said Martinez. “It puts far more pressure on hiring practices, vendor choices and business partner arrangements to ensure that potential security incidents are mitigated from the start.”

He further explained, “It’s critically important that companies know who they are dealing with, whether it is individual job applicants or corporations that they will do business with. And a regular background check or review of publicly available records may not be enough.”

Background checks vs. holistic due diligence: how does due diligence work?

“It’s critically important that companies know who they are dealing with, whether it is individual job applicants or corporations that they will do business with,” explained Martinez. “And a regular background check or review of publicly available records may not be enough.”

When should you perform due diligence?

Here are some targeted areas of interest for holistic due diligence programs:

  • Mergers & Acquisitions (M&A)
  • International joint ventures
  • Subsidiaries/agents/brokers
  • Clients
  • Charitable donations
  • Ownership interests
  • Identify red flags
  • State-owned companies
  • Boards of Directors
  • Credit standing
  • Civil litigation
  • Sanctions & debarred parties
  • Politically exposed persons (PEP)
  • Licensing & certification

Each of these areas is rife with risk to a company’s reputation or bottom line.

“Companies should understand the risks up front, but they can take considerable effort to discover. The magnitude of the potential relationship they will have with the future partner or vendor can determine how much investigation is needed,” said Martinez.

How do you prepare for due diligence?

Like overall security programs, these programs are not the same for every company. There is no “cookie cutter” approach that works. A few factors come into play when companies decide what kind of due diligence effort they need. 

“One of the first things to determine is the scope, which is based on how much risk a company is willing to assume,” Martinez said. “For example, hiring an employee for a part-time counter position is vastly different from a risk perspective than hiring a new CEO. The former may only require a standard background check while the latter involves many elements of reputation management to determine more than just the person’s background, but also potentially their affiliations, and other risk elements.” 

The level of due diligence is based on risk and the company’s business goals. If a partnership is critical to a company’s success, then the program must take that into account so that a more in-depth investigation can take place. But then, they also have to determine what they will do with information that’s uncovered.

“A company needs to know its risk tolerance based on the situation,” said Martinez. “If partnering with a specific vendor is needed and an enhanced due diligence turns up negative information, how much of that is a company willing to accept in order to move forward with its plans? This is an important part of the process and one that we discuss upfront as we counsel companies regarding a tailored program.”  

The importance of mitigating risks in the global marketplace

Risks are increasing and new ones continue to present themselves. As the saying goes, “Change is the only constant in life.” The global marketplace certainly fits that description. It is as important as ever to know who you are doing business with and what risks they present to your company, its reputation, and its employees. A little, or a lot, of due diligence can go a long way towards mitigating those risks. 

This blog was originally published March 23, 2017. It has been updated.

Published August 23, 2022