Top 5 Things You Should Know About Protecting Investors

Investors play a key role in the success of many businesses. They invest their capital into your business to provide the money necessary to fund your ideas, visions, plans, and products. By doing so, they allow new businesses to start or existing businesses to grow and flourish. At the same time, they are taking on great risk; if your business succeeds, they should get a substantial return on their investment, whereas if it fails or does poorly, they stand to lose money or their entire investment.

There are numerous examples of people investing in companies, only to lose significant amounts of money. In many cases, some have even lost everything. A few famous examples include:

The Enron scandal - The founder, CEO, and Chairman were found guilty of corporate abuse and accounting fraud. Other charges against executives included money laundering, securities fraud, wire fraud, mail fraud, conspiracy, and insider trading. Enron’s shareholders lost $74 billion during the four years leading up to the company’s bankruptcy. Employees lost billions in their pension funds.

Stanford Financial Group of Companies - Investors lost a total of around $7 billion US dollars in a Ponzi scheme run by Allan Stanford who is now serving a sentence of 110 years in federal prison. Many of his victims were retirees who were promised “safe investments”, and not all of these losses have been recovered.

Clients of Bernie Madoff - Stanford comes in second, however, to Bernard Madoff. Madoff was involved in widespread fraudulent activities that wasted the investments of thousands of investors. In November 2008, prosecutors estimated the fraud to be worth $64.8 billion.

Theranos - Elizabeth Holmes CEO and  COO Sunny Balwani perpetrated a massive years long fraud according to the SEC. Executives at Theranos claimed the company's innovative blood testing technology was successful.  Theranos raised $700m in venture funding from prominent investors. Yet the product did not perform as expected, it was surrounded in secrecy and access to the main lab was locked to prevent anyone from exposing the real situation. They further claimed $100m/year in sales which was a substantial misrepresentation of the company's financial situation.

These are just a few notable mentions. Many other cases of mismanagement of funds, fraud and outright theft - big and small - can be found. During the dot com crash, many investors learned the hard way that the tech companies they invested in were only fronts with empty desks where no real work was being performed. The damage done by these fraudulent companies was very real, and had a ripple effect on legitimate businesses when their investors pulled out of companies with strong potential for fear of being stung by additional fraud.

Anyone with a serious mind to success is interested in protecting their business. They also realize how important it is to protect their investors who want a fair return on their investment and who you want to be there for the long-term. So, what steps can you can take to protect yourself and your investors? Let’s take a look.

The rise and exposure of litigious behavior within companies has  been the cause of scandal, lost profits, and reputational damage. Thorough "deep dive" due diligence could have mitigated, if not prevented, many of these situations and losses.

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that you'll do things differently.” ― Warren Buffett

1.    Choose Your Executive Hires and Business Partners Wisely

Some people choose their dinner items or coffee more carefully than their business hires and partners. From the entertainment field to the political arena, some of the biggest scandals to rock businesses have been a flood of accusations and cases of misconduct, ranging from sexual allegations to criminal activities. This brings to light the fact that even though those involved in malfeasance may have been experts in certain fields, they were also people of less than upstanding character.

Bad choices in hires and business partners result in a number of damages, including lost productivity, potential legal charges, reputation damage, and scandal. This can also have an impact in the form of revenue loss when clients and customers choose to go elsewhere. Additionally, there is the more subtle form of capital loss: money bleeding out due to the poor attitudes and conduct of employees, internal waste, poor morale, and bad work ethics. In larger companies, this may be less visible than in smaller ones, but it is still important. Your guiding principles regarding investors is to first and foremost safeguard those investments - something you should want to do in any case, since making a good profit in an ethical manner, for your company, yourself, and your employees should also top your list.

What are you looking for in your partners and hires? Is character and integrity at the top of your list? Are you working with people that are hardworking? Team players? Honest? Focused? Solution-oriented? Positive? If not, you need to invest in finding out more about the people you are entrusting with your hard-earned money.

How can you choose wisely when it comes to executive hires and business partners? Create a list of your top priorities and make the process integral to your hiring and partnerships, no matter the current trend in hiring practices.  Make sure you know who you hire by working with an investigative firm who will conduct executive due diligence on executive hires and business partners, rather than routine background checks, so you can protect your investors from regretting their investment.  Remember that investors can and may pull their money out if your company is rocked by fraud or corruption, sexual misconduct, loss of morale and productivity, misconduct or malfeasance, or reputation loss. Proper due diligence and wise choices are important.

“When cost is number one in importance, you’ve already lost.” Jim Rembach, Six Sigma Consultant

2.    Create a Culture of Integrity

Company culture has been lauded for the last decade or so and is increasingly important with Environmental, Social and Governance (ESG) investment  and social responsibility concerns taking center stage in the last few years. Understandably, different companies can take on different cultural tones. For example, a company that makes surfboards will have a different cultural feel to one that focuses on accounting. However, whether your product is high-tech, ecofriendly clothing or traditional banking, the most important aspect of any company culture is integrity.

Why is integrity so important? Because in any legitimate work environment, the primary focus is to create a successful business that is honest, fair, and focused on getting the job done.  Furthermore, more and more consumers prefer to spend their money and do business with companies that are committed to integrity as a core value, and are committed to great workplace culture. Integrity can also mean being more aspirational in your company's vision and/or mission, such as having a commitment to social values such as environmental sustainability. In the past, these values were often relegated by companies as “nice to have, but not essential to bottom line profits”. This is changing fast as more employees share personal workplace stories on social media and people have better access to information on workplace culture and values.

How do you define integrity? “Integrity is defined as the quality of being honest and having unshakable moral principles, situated at the intersection of consistent actions and strong values,” according to Learn Loft. As part of building a culture of integrity, you will want individuals who are team players, and who do the right thing at all times, even when no one is looking - and even when it is difficult.

Your leaders should also lead with integrity. A team that pulls together with leadership that is based on clear values, good character and guiding principles, will help instill integrity into the fabric of the company’s culture. No company culture should expect or accept less.  A company owes it to its investors to create a company culture that is based on integrity, fair, and equally applied policies that favor no one group or person over another. A company culture that fosters fair decision-making and does not allow internal or external pressures to negatively influence those decisions holds enormous value for executives, employees and investors.

One way to reduce the risk of hiring a leader who may not fit with your culture of integrity is to run due diligence checks on all new executive hires. Additionally,  routinely running due diligence checks on leaders can help ensure that any significant life changes or circumstances do not negatively impact your business or your investors.  Deep due diligence protects both you and your investors.

“It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.” ― Warren Buffett

3.    Protect Your Business and Your Investors by Choosing Due Diligence Investigations to Mitigate Risks

Deep dive due diligence is significantly different from typical background checks. Standard background checks are often run when new executive hires come aboard. These standard background checks can miss numerous underlying issues that deeper due diligence investigations will catch.

Standard background checks generally uncover only a cursory level of information (less than 1% of serious issues), while executive due diligence investigates 30 components of public record information, in addition to in-depth reviews of media and news sources along with a deep, dark web and historical internet search, yielding 20% serious issues. Deep dive due diligence can uncover vital information that is unattainable in routine background checks.

Information reviewed in deep due diligence checks includes:

  • federal, state and county criminal history,
  • con artists operating under alias names,
  • anti-competitive behavior,
  • financial and legal issues,
  • civil litigation issues,
  • undisclosed relationships with other companies and board advisory positions which may represent conflicts,
  • misrepresented education and overstated work history,
  • reputation issues,
  • behavioral history (for example litigiousness or history of sexual harassment),
  • hidden and undisclosed  issues.

Criminals, imposters, and con artists abound in every society and are difficult if not impossible to detect using only basic background checks.

Finally, it's important to remember that people’s situations can change over time and as a result, so can their actions. This means that due diligence should be conducted more often than just at the start of a new hire coming aboard. How often due diligence should be conducted can be determined by your company’s unique situation, risk tolerancee, and with the advice and guidance of a professional investigative firm with international expertise that is well informed on regulatory compliance requirements.

"Whoever is careless with the truth in small matters cannot be trusted with important matters." – Albert Einstein

4.    Select an External Investigative Firm with Due Diligence Expertise

Not all investigative firms have the same degree of experience, expertise, or ability to perform deep dive due diligence investigations. In protecting your company and investors, it is critical to partner with an external firm that can perform individual and company deep-dive due diligence checks. The investigative firm you work with should have global resources as well as long-term expertise in the investigative field. Partner with an investigative firm that not only does deep due diligence investigations well, but one that does deep due diligence uncommonly well.  You can only mitigate those risks that have been identified.

“The secret of success is to do the common thing uncommonly well.” — John D. Rockefeller Jr.

5.    Be Willing to Invest and Commit to Vetting Business Partners

Just as your investors choose to risk their investments with your business, a smart business is committed to investing time and money to protecting those investments, along with protecting the company itself, its reputation, and its success.  This commitment is especially important in larger business ventures, Joint Venture Partnerships, international business ventures, and in M&A deals. As many as 35% of international suppliers have corruption related issues; basic due diligence may only reveal 5% of these serious concerns.

Fraud in international supply chains has been well documented with numerous companies incurring substantial fines. Every year, the fines for Foreign Corrupt Policies Act (FCPA) violations continue to rise. In 2020, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) imposed an astounding $6.4 billion+ in financial penalties for violations against 12 companies.

Since deep dive due diligence requires specialized expertise, this type of commitment involves a comprehensive analysis of all available public records data, augmented with detailed field intelligence, and deep web investigations to identify known and, more importantly, hidden and undisclosed situations.

Protect your investors who are investing in you early on. Be prepared. When you invest in a robust due diligence program and risk management maintenance plan, it is always an investment that yields a high return.


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