By Bill Coletti, CEO, Kith
· You can (and should) leverage reputational due diligence efforts into actionable insights and opportunities.
· Today’s business visionaries are tasked with finding organizations which will help define their business culture.
· With the issue of corporate reputation becoming increasingly relevant across all sectors, we should embrace reputation-focused due diligence as an opportunity to holistically assess our own partners, vendors and investments in order to identify key issues in each impact and — ultimately — create positive change.
Think reputation-focused due diligence is the exclusive domain of proactive damage control? If we take a note from the private equity business, it may be time for a new perspective. Due diligence is a critical part of the private equity business: it protects the investor while safeguarding against fraud and non-compliance issues.
But a recently published Wall Street Journal blog indicates that private equity investors rely on due diligence for more than mere preventative measures.
In fact, a poll conducted by corporate investigations and risk consulting firm Kroll last month revealed that a full 32 percent of private equity investors used reputation-focused due diligence as a strategic tool to enhance performance and create value.
Which begs the question: Even if you’re not a private equity investor, can you leverage reputational due diligence efforts into actionable insights and opportunities?
A Closer Look at Corporate Reputation
In order to understand what is involved in reputation assessment, we need a common understanding of the term “corporate reputation.” One definition, as proposed in the article “Corporate Reputation: The Definitional Landscape,” defines the concept as:
“Observers’ collective judgments of a corporation based on assessments of the financial, social, and environmental impacts attributed to the corporation over time.”
Drilling down on these three impacts yields a roadmap of use for much more than identifying potential problems with prospective portfolio companies. We can all use this perspective to better evaluate partners. How? Identifying a few key questions can help hone in on relevant reputation assessment issues, yielding valuable insights into opportunities for both operational improvement and value creation.
Asking the Right Questions
Asking the right questions is as essential as zeroing in on the right answers. Let’s take a closer look at few questions in each impact germane to reputation-focused due diligence.
- How does the company make money?
- Does the company sell products you support?
- What does the company do with its profits?
- How does the company give back to society?
- What is the motivation of its corporate giving?
- How does the company treat its employees?
- Is the company’s environmental impact consistent with your values?
- If not, are adequate mitigatory measures in place?
All businesses are not created equally, and with a near-endless arsenal of potential questions, the task of today’s business visionaries is to identify the “right” ones. In other words, those which will help define your business culture and reveal an overall picture of who you should want to work with.
A Closer Look At Reputation-Focused Due Diligence
The Kroll study also revealed the varied roles that reputation-focused due diligence can play, with companies placing disparate degrees of importance on everything from the reputation of a target company and its management (74 percent) to the target company’s political connections (18 percent).
Just how important were insights gleaned from the process? According to those polled:
- 46 percent of investors’ reputation assessments caused exits from proposed transactions
- 37 percent identified areas for improvement
- 29 percent led to the restructuring of financial terms
- 29 percent led to new or amended compliance measures at the portfolio company
- 29 percent led to restructuring of the portfolio company’s management team
Private equity firms spend billions of dollars on due diligence, of which reputation is now a significant part. With the issue of corporate reputation becoming increasingly relevant across all sectors, the rest of us should follow the private equity sector’s example and embrace reputation-focused due diligence as an opportunity to holistically assess our own partners, vendors and investments in order to identify key issues in each impact and — ultimately — create positive change.