You never really know the person who is responsible for your money. What's important is to be comfortable with his or her character. We all have different definitions of ethics, morals, and success. You need to confirm that the person who has access to your money meets your expectations, and background checks are an integral component of the process.
Whether for individual investments, acquisitions, or new hires, your due diligence process should, at the outset, include conducting an exhaustive background check. From that point forward, we also recommend incorporating the following
- Dig deeper. If the background check uncovers any civil or criminal cases or bankruptcy filings, you should always review the documents filed in these matters. The same goes for any regulatory actions that have been taken against the company or person(s). Taking a look at these public records allows you to find out what the issue was and see the person's demeanor during the situation. If a person were accused of wrongdoing, did he or she embrace a Mel Gibson-esque attitude, or did the person cooperate with attorneys, law enforcement, and/or regulators? How did the matter get resolved? The answers to these questions may surprise you. Talk to independent third parties to confirm how it was resolved to make sure the matter will not become your problem in the future. If the problem happens again, you can explain to your board of directors, limited partners, co-investors, or others that you did everything to address the issue. You will not be subject to redress for being eager; you will, however, for being lazy.
- Interview managers/management. If you find a person has been involved in any controversies, compromising reputational issues, or inflammatory lawsuits, or there were factual discrepancies on his resume, talk to the person. Document his statements so you have it in the file and on the record, should anything happen down the road. Also, public records only tell a part of the story. If you find an executive was sued for securities fraud, get the executive's side of the story. There may be mitigating circumstances that explain what happened.
- Contact former employees. Former employees are constantly overlooked and undervalued in the due diligence process. These people often have enormous amounts of valuable information that will assist you in your deal.
- Ongoing monitoring. A background check should not be considered finite. Conduct annual or biennial background checks, get daily news alerts, and monitor relevant blogs. Stay on top of your investment. Just because someone met your investment standards at the beginning does not necessarily mean they will stay true to your expectations.
- Consider a whistleblower hotline. Many investors do not realize how easy it is to implement an anonymous tip line. It is an inexpensive preventive type of insurance where you offer employees, vendors, and others a vehicle to anonymously report not only fraud and unethical behavior but also unsafe work conditions, violence in the workplace, drug use, and so on. There are no downsides to the hotline; it is a win-win for employees, investors, board members, and regulators.