By Chris Cochran
The due diligence devil is usually in the details. Investigating reputational risks shouldn’t just be an “add on” to make due diligence more thorough. As Jeff Berkowitz points out in his recent Forbes article about political and reputational risks, digging deep and understanding all the potential vulnerabilities of key participants in a deal is crucial. But really, it always has been.
It’s not just the high-profile cases ripped from the headlines where this is critical. Sure, the FTX‘s and Theranos‘s of this world get a lot of the attention, but smaller investors face similar issues. Once while working on a fairly routine reputational check, I uncovered news about a court proceeding outside the U.S. involving my client’s potential partner. Everything in the check had been going great until a news article from a small news outlet halfway around the world popped up, reporting that the individual had admitted in court to perpetrating certain essentially illegal actions while on a regional international flight. A flight attendant reported the incident to the captain, and law enforcement met the plane upon arrival at its destination.
The court in the destination country basically let the individual off the hook (that’s another story), but the optics of the incident were too great, and thankfully the local media followed and reported the story. I’m leaving out specific details of course, but the individual’s actions directly collided with the social impact aspect of the investment. Working with someone who admitted to those actions was too big a reputational risk for the client, and they had to call off the deal.
No one wants to call off a deal, especially if significant amounts of time and effort have already been spent working toward a successful conclusion. This also speaks to the timing of a due diligence investigation, which will be discussed in a future blog post. In the case described above, the project team had committed significant time and energy to move the deal forward. Unfortunately, once they requested the due diligence investigation and received the results, their work essentially became wasted. But in the end, cancelling the transaction was in the best interest of my client.
Though the project failed and the investment was cancelled, this should be seen as a success in terms of reputational due diligence. Nothing devilish about it. My part was to remain value-neutral and present the information I discovered to the project team for further deliberation. In the end, the right decisions were made.
An Inquiring Mind 