Reduce Investment Misconduct and Improve Business Decisions with Enhanced Investor Due Diligence
Every year, investors and investment firms around the world invest hundreds of billions of dollars, if not trillions of dollars into startups and established companies across a variety of industries. Although these large investments can often result in considerable gains, they can also lead to substantial losses. The smartest, most competitive investors understand how to mitigate the risk of losses by implementing a comprehensive investment due diligence process. This process not only reviews the company and financials, but also the management teams in place to support company growth and success.
This article dives deep into traditional investment due diligence processes and also provides new strategies and innovative solutions that the most strategic investors have adopted to reduce risk of management challenges such as fraud and misconduct, protect investment capital, and enhance the ability to make smart, well-informed decisions.
Overview of Traditional Investment Due Diligence Processes
The typical due diligence process being executed by investors today is fairly thorough and involves taking an in-depth look at a variety of criteria that have been shown to indicate whether a company is worth investing in.
Investment Operations teams carefully scrutinize everything from a company’s business model, product offering, financial wellbeing, market size, competitive landscape, industry-specific trends, and any historical or ongoing legal actions or legal implications around the company or product.
Investors are also known to review founders and management teams, albeit often limiting their interest to work-related matters, including overall experience and professional credentials, previous track records with other companies, and individual exit strategies and existing IPO plans.
Executive and Investment Misconduct: Addressing the Elephants in the Boardroom
Despite existing due diligence processes, many investors find themselves working with founders and management teams that are highly detrimental to their portfolio’s bottom-line. These unfortunate investors are learning that management teams need more than work history, experience, and credentials to successfully lead a company - it takes good quality humans that know how to lead an organization to business performance and financial success.
When investment operations teams skip these character references and screening protocols, it opens the door for significant and costly workplace misconduct issues. Over at least the past decade, workplace misconduct issues like fraud, theft, and harassment have become increasingly common—and increasingly costly—for businesses in the U.S. and around the world.
In 2017, for example, employee and executive theft and fraud schemes were found to cost U.S. companies $50 billion each year. An earlier study revealed the annual cost of fraud to be close to $3.7 trillion globally. Even more, the latest report from the Association of Certified Fraud Examiners (ACFE) showed that the average occupational fraud scheme lasts between 12 and 18 months even before it’s detected.
Occupational fraud and theft aren’t the only costly issues. Misconduct can also manifest as anything from bribery, insider trading, and allegations of harassment and sexual misconduct. Any one of these issues can have serious consequences not only for the perpetrators but for the company itself.
In fact, in one exceptionally concerning 2018 report, it was found that more CEOs left their companies due to unethical behavior than poor financial performance. More specifically, nearly 40% of CEO departures that year were the result of unethical behavior, including allegations of sexual harassment or abuse. Considering the success of management teams are significantly tied to a company’s reputational and financial success, investors should be particularly interested in identifying potential bad actors before any kind of scandal puts their investment in jeopardy.
How Enhance Investment Due Diligence Solutions Can Help
While traditional investment due diligence processes fall short by failing to account for relevant information related to humanity, integrity, and overall personal conduct, there are easy and inexpensive solutions that can help.
Today’s investors now have access to new screening solutions that look for any potential misconduct issues in a person’s day to day online public interactions. Investors are not only using these innovative solutions to screen management teams and founders, but their co-investors, as well.
These solutions offer much-needed and often-neglected insights into how a person conducts themself, shedding light into how they will show up in the workplace. Even more, these solutions are highly configurable and can screen for misconduct behaviors that an investment team wants to screen for in a way that is fast, easy to use, and is significantly less expensive than less modern due diligence solutions.
Let’s take a look at one of these modern due diligence solutions: online screening solutions.
The Benefits of Advanced Online Screening Solutions for Investment Due Diligence
Online screening solutions look at the way someone behaves online and on social media and reports on misconduct-related activities that could disqualify someone from best-performing their job. They do this by flagging misconduct behaviors, like fraud and harassment, then compiling those flags into a report for investment operations teams to review and assess the quality of their potential investment partner.
These online screening solutions are readily available to investment teams and can go a long way in protecting capital, improving screening efficiency, as well as enhancing the overall investment decision-making process.
Here are just a few specific benefits that investment teams benefit from after integrating an online screening program like Fama’s into their due diligence process:
Increase efficiency of the due diligence process through automation
Today, the typical due diligence process takes around 20 hours per investment. For investment teams navigation dozens, if not hundreds, of pitches, that can add up. Online screening solutions can help investment teams navigate complex, tedious, and time consuming manual searches and get results back many times in 3 days or less. This saves ops teams time and money while maintaining the necessary level of thoroughness and accuracy.
Reduce the risk of investing in or with bad partners, founders, and management teams
What someone posts online or on social media says a lot about who they are, what they care about, and how they behave. For investors to determine which co-investors, founders, and management teams to partner with, understanding this information is important in assessing risk. But, it’s also important to remember that codes of conduct may not be the same for every company. Choosing a screening partner that is configurable to different codes of conduct can help tailor due diligence to the things that matter most to each individual investment team and organization.
Enhance business decisions through additional information
The good thing about online screening is that it is as much about embracing good actors as it is about weeding out bad actors. In fact, between 2009 and 2015, companies featured on the “Best Places to Work” list published by Glassdoor were found to have outperformed the S&P 500 by more than 84%, while outperforming the overall market by more than 115%. Needless to say, these are massive returns that investors cannot ignore. Investors looking to make decisions based on positive performance indicators can leverage online screening to factor in management team’s and founder’s ability to create and maintain healthy workplace cultures into their overall investment criteria to see similarly enhanced returns.
Gain a competitive advantage
For investors looking to enhance their business and gain a leg up on their competition, leveraging as much information as possible in as fast a time period as possible can be the difference between winning a deal and losing out on a great opportunity. That’s why online screening solutions that leverage automation are so valuable. They can screen in the background with over 99% accuracy and deliver results in days - providing enhanced insights quickly and inexpensively while operations teams navigate other areas of the investment process. Not only does this save time on due diligence, it also provides teams time savings by weeding out bad actors before they invest any additional time on the investments of poor-quality, high-risk founders and partners.
In summary, investment due diligence has been part of the investment process for a long time. But, with the help of advanced and modern technologies, the due diligence process doesn’t have to look the same as it did when it was first implemented.
For investors, investment firms, and investment teams looking to reduce risk, increase efficiency, and enhance their decision-making abilities, online screening solutions can be a great option.
If you want more information on enhancing due diligence processes or these solutions, check us out at fama.io. Or, come join our round table discussion at GAIM Ops this April. Let us know you’re going and get 5 free reports here.