The famous entrepreneur of the 17th century, William Penn, mentioned diligence and patience as the two qualities which like faith, can move mountains. Diligence is not a new concept, but lately, its significance in the business world is more recognised. So, what is due diligence? It is an extensive appraisal of the different aspects of a business to understand and evaluate its risks, assets and liabilities. The usual areas where due diligence matters are in mergers and acquisitions (M&A) or other strategic investments, in hiring vendors or employees, or on knowing more about the market or competitors, etc.
For easy understanding, there are three broad types of due diligence. They are:
- Business due diligence
- Due diligence on legal matters
- Financial due diligence
The business due diligence covers every aspect of business like operational, technological, ethical, environmental, human resource, etc. It gives an exhaustive report on whether the processes and policies of the organisation are conducive to its growth and sustainability. The due diligence on legal matters gives an understanding of the validity of all legal documents like memorandum of association, licenses, etc. Financial due diligence provides an insight into the accounting practices or tax compliances of a firm.
To better understand the evolving trends of 2022, it is essential to recap what changes were at the forefront of due diligence in 2021. As per an article published by Deloitte on this matter, cyber due diligence leads the list. The consequences of the pandemic include remote working and increased dependence on collaborative tools and technologies. It brings the focus on cybersecurity controls and regulations. With newer business models emerging, it is a given that there will be unprecedented challenges that need a risk assessment.
Due Diligence Trends in 2022
With the onset of the pandemic, the focus of every business was on surviving. Gradually, 2021 saw a revival from merely pulling through to focusing on scalability. The number of mergers and acquisitions is at a record high by almost 24 per cent as per a PwC study. Hopefully, it will continue in 2022 though the new variants of COVID-19 are posing uncertainty to the world. The new focus areas of due diligence, along with the existing ones, will help the firms to make informed decisions regarding their business.
- ESG- Environmental, Social and Governance
ESG, which expands to Environmental, Social and Governance, in simple terms, is an assessment of the firm’s commitment towards the above said intangible factors. As per an article published by PwC, is not just about upholding corporate social responsibilities. It is about using these principles to give the best tangible result to the business. So, many organisations realise that investing in ESG is a strategic and sustainable decision. That is why ESG investing are also known as sustainable investing, impact investing, or socially responsible investing.
The Environmental aspect looks into biodiversity, carbon emissions and various pollutions, energy efficiency, waste management, climatic impact, etc. Under the social feature comes the employee benefits and safety, gender equality, diversity, human rights, labour standards, etc. The governance part takes care of the business ethics, compensation, compliance, whistle-blower schemes, etc. An in-depth analysis of these features by ESG rating agencies like MSCI ESG Research, Dow Jones Sustainability Index, Bloomberg ESG Data Service, etc., provide a score on how sustainable the firm is. The ESG scores can influence the decisions of prospective investors.
- Business Transformation and restructuring
Business transformation is a fundamental change in how a firm runs, with the aim of improving its performance. Business restructuring is essential when the existing functioning or strategies give a less efficient result. As per the survey conducted by Deloitte, almost 63 per cent of businesses felt the need to transform for optimum results. About 53 per cent have restructured their business since the pandemic started. Another 44 per cent is planning the restructuring in the near future. Due diligence reports help in assessing the current scenario of an organisation. It helps to know whether a turnaround strategy like transformation and restructuring is a practical step to improve the business.
Divestiture is disposing or selling a part of a business to improve the overall efficiency. Divestiture and demergers are a transforming strategy, but it needs a special mention, as several prominent organisations have gone this route since the pandemic. The trend is likely to continue. A few examples are IBM, Daimler, Johnson & Johnson, etc., which adopted divestment and demergers to concentrate on their core business areas. The C-suite officers sense the evolving business models and consumer behaviours may require core concentration for better financial performance and operational agility.
- Regulatory framework
The oft-used quote of compliance is expensive, but non-compliance is even costlier is the best reason for regulatory due diligence. It helps in risk mitigation, prevention of fraud, audits, etc. The ever-changing business world or changes in the geopolitical situations may cause amendments in the regulations. The due diligence helps to understand whether the business is in concurrence with the regulatory amendments.
- Digital tools
Digital transformation has taken up the business world by storm. It played a vital role in weathering the difficult times caused by the global pandemic. Many organisations adopted remote working conditions. The threats, like data security, is also a part of this. The due diligence of all digital tools and technology will help find the loopholes in its functioning. The digitisation of due diligence is the need of the hour.
Though due diligence has always been a part of business for years, its influence now is much more in these changing times. The clarity of the due diligence reports helps to choose the best possible solutions to overcome the challenges.
The best due diligence report is an outcome of knowing the pulse of the business and in-depth knowledge of the process. The priority of the team Diligen is to provide a seamless service with the help of their experience, expertise and technology.