What is due diligence?

What is due diligence? A corporate governance education guide explaining the term and what you should know about it. 

Due diligence is the crucial process that provides corporate leaders with the information needed to make informed decisions. 

It involves thoroughly investigating and analysing potential risks and opportunities, helping stakeholders understand a business transaction’s actual value and possible pitfalls.

Due diligence is the complete investigative process which gets to the bottom of all aspects of a corporate decision.

It involves reviewing and verifying any relevant information including, but not limited to:

• A company’s financial health
• Operations
• Compliance
• Risk
• Liabilities

Due diligence is all about being informed, and this is one of the most essential priorities at the corporate governance level. 

The items in the list above are vital to any company’s continued success, and all can be affected by a wrong business decision. Due diligence will always play a key role in separating those bad decisions from good ones. In other words, it is the make-or-break process for many companies.

The complete list can be subjective and exhaustive, but common examples include investment decisions, corporate partnerships, compliance checks, and mergers and acquisitions. 

The process is the go-to when the goal is to learn more about another corporate entity rather than make internal business decisions.

It encompasses a range of activities, typically organised into several key areas:

• Financial: Reviewing financial statements, revenue streams, profit margins, liabilities, and tax compliance. 
• Operational: Assessing operational efficiency, production capabilities, and logistical infrastructure.
• Legal: Verifying legal compliance, intellectual property rights, and the existence of any ongoing or potential litigation.
• Human resources: Evaluating the company’s workforce, including employee contracts, benefits, and any pending HR issues.
• Environmental and social: Examining ecological policies, social impact, and alignment with sustainability goals and standards.

These processes should uncover red flags in any of the above areas. From this, corporate leaders can decide on any fundamental risk attached to the company they intend to work with.

Like most matters, the board of directors has a crucial oversight and inquisitive role. 

It’s the board’s job to ensure that the due diligence process is completed in its entirety and to a high standard. Directors should review all findings the process uncovers, asking questions wherever something isn’t clear. 

And, of course, it is the board’s role to approve important decisions made once the process is complete. 

Due diligence is a vital process for making well-informed business decisions. Companies can make strategic choices that foster growth and minimise potential losses by thoroughly assessing risks and compliance values. The board’s role in overseeing this process ensures accountability and helps protect the company’s long-term interests.