When hiring a new executive, considering a merger, purchasing another company, or even contracting a vendor, you need to know who you’re about to be working with. Hiring, merging, or acquiring an executive or business blindly can lead to many problems. That’s where the due diligence process comes into play. By doing your due diligence, you can make an informed decision with the full understanding of what risks you’re taking on. Without doing due diligence, you’re leaving yourself open to many different problems.
Many people fail to fully grasp what due diligence is or why it’s so important. It’s more than doing a quick search of public records or verifying what someone has written on a resume. It’s a deep dive into their background and their history. Due diligence can reveal everything from faked credentials and offensive public statements to embezzlement and bribery.
It also takes a lot of time and resources to do, which is why many companies either skip due diligence or only do some light digging. When you partner with Infortal, we take on the task of doing due diligence. We will provide you with the information you need to know what risks you’ll assume.
Is doing due diligence into every single executive hire, acquisition, and potential partnership really necessary? It is if you want to avoid the potential consequences that can come with hiring the wrong person or working with the wrong company. Here are a few of the risks you’ll be opening your company up to if you skip the due diligence process.
You Hire Someone Unqualified
Skipping executive due diligence can result in hiring someone who isn’t qualified to do the job. They may have not been completely honest about their education or job experience. Unfortunately, a number of businesses simply don’t check whether or not someone has the degrees they claim to have. Unfortunately, 32 percent (almost one-third) of American job hunters admitted that they have lied on their resumes. These lies include their years of experience and education.
Some of these lies were made to hide the fact that they were fired from a previous job, while others stretched the truth about their experience or qualifications. Almost half (44%) lied about their education, while 27% lied about professional credentials. According to studies, 80% of those who lie on their resumes get job offers, and about a third of them are never caught. Even out of those who are, some faced only a reprimand. The people who are lying aren’t just aiming for low-level positions, either. Companies such as Wal-Mart, Sunbeam, and Yahoo have hired lying executives.
Hiring someone who has lied about their qualifications can impact your company in several ways. First, they may not fully understand how to do the job they were hired to do. You could end up with a vice president who has no leadership skills or isn’t as familiar with industry standards as they claimed to be. You could bring someone into your C-suite who makes poor decisions while trying to cover up their lack of education.
You Hire a Criminal
Even worse than hiring someone who doesn’t know what they’re doing is hiring someone who has a criminal background. Many companies assume that their standard background check will have revealed any criminal activity, but that’s not the case. While a background check or basic due diligence may highlight any convicted criminal activity in the United States, it’s not going to show you much else.
Did the person engage in shady behavior but stayed just on the side of legality? Some criminals know how to work the system and are always careful to toe the line while still lining their own pockets. Others may have committed crimes in other countries. If you don’t check international court databases and other records, you may never know that someone was convicted of bribery, embezzlement, or even murder.
Sometimes the crimes just haven’t been discovered yet. That was the case with Moderna’s now-infamous “one day CFO.” Their new CFO reported to work the same day his previous employer launched an investigation into some of his financial dealings and potential use of incentives. Had Moderna done their due diligence, they may have discovered that the investigation was coming. As it was, the mistake cost them $700,000 and made them look ridiculous.
If you do hire one of these individuals, the chances that they’re going to continue their criminal activity is fairly high. While there may be a few who want to start over and live an honest life, it’s likely the criminal you’ve hired is going to start embezzling from your company or engaging in other immoral and illegal activities. They could drag other employees into their activities, and the end result could be catastrophic for your company. You could end up being fined or involved in multiple criminal court cases. One single person could destroy your business.
Your Reputation Could Be Ruined
Along those same lines, hiring a criminal or someone who has a history of making embarrassing statements could greatly damage your company’s reputation. This has become more prevalent with social media, but that’s not the only way a new executive can damage your company’s reputation. Maybe they gave interviews years ago that didn’t age well. Perhaps they spearheaded practices at a company several decades ago that damaged the environment. They may have been caught up in a scandal. Even if that scandal was of a more personal nature, such as infidelity, it may still cast a bit of a shadow on your business.
All of those things will reflect poorly on your company. While people can change, bringing on anyone with a checkered past is a risk, even if they have disavowed their previous stance on something or worked hard to show they have changed. Is it worth doing damage control? If a potential new executive pushed for poor environmental practices in the early 80s, it won’t be as damaging as if they did in the 2000s. That may be a risk you can take on. However, someone who has made anti-LGBT+ comments in the past five years may be someone you want to avoid hiring.
Repairing your damaged reputation isn’t always easy. It could take years before customers and potential business partners view you in a positive light again. With the internet, missteps are always just a few clicks away, even if they happened decades ago. In the short-term, you’re likely to lose customers and may have deals fall through. If you survive this fallout, you’ll have to start rebuilding your reputation slowly and carefully.
A Lack of Due Diligence Can Lead to Government Fines
Do you know what countries are currently under sanctions by the United States? If you don’t, you run the risk of partnering with a company from one of those countries. However, while doing a little digging will tell you what country a business operates in, it may not necessarily tell you where that business’s vendors and other partners are. For example, you could partner with a company in Germany. That company has a vendor located in Romania, and they import products from Belarus. That company in Belarus gets its raw materials from Russia, a country that faces sanctions from its war on Ukraine. Even though you’re not directly working with Russia or even the manufacturer that imports Russian materials, you can still be fined for breaking sanctions.
This is where due diligence in your supply chain is vital. It’s also why some companies skip this part of the process. It takes a lot of time and resources to thoroughly vet every supplier and manufacturer in your supply chain. However, the consequences of not doing so can be severe. In 2022 alone, the SEC had 462 enforcement actions against companies. The average fine was a little over $9 million dollars. Can your company afford that? Even if you can, it’s going to greatly damage your finances.
You Could Purchase a Business with Problems
Forgoing doing your due diligence while merging or acquiring a business poses risks, too. You could purchase a company only to find that the previous board or owners concealed a number of issues from you. You may dive into the books only to find that the business isn’t as profitable as you were led to expect. You could also find that the brand has a negative history that now affects your company.
If you’re merging, failing to do your due diligence can mean that some of the board members or executives who stay on have engaged in criminal activity before. You could be merging with a company that has accepted bribes, engaged in illegal hiring practices, or has been investigated by local authorities for any number of reasons. This is especially true with you’re looking to merge or acquire a business overseas. Few U.S. companies have the understanding needed to do a deep dive into companies or individuals in other countries.
Infortal Will Help You Avoid the Consequences of Poor Due Diligence
If you’re preparing to hire a new executive, purchase a business, merge with another company, or contract with a new vendor, you need to be certain you know who you’re really working with and what risks you’re assuming. Infortal has years of experience in handling deep dive due diligence, including due diligence in other countries. To learn more about what we can do for you, contact us today.