Peter Dun
Leadership & Governance
Why we need due diligence and how to do it
Ian McLintock Founder at Charity Excellence Framework Posted 7 years ago
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Following some recent high profile issues, I thought it might be helpful to share a summary version of a toolkit from the Charity Excellence Framework. Due diligence is carrying out reasonable checks on new funders, partners contractors or others to help ensure problems will not arise in working with them.
Below are a range of very simple and quick, but effective checks that anyone can carry out, followed by others that are a bit more technical. This checklist is not exhaustive and, if in any doubt, seek professional advice.
Factors to consider
- Is the project/contract particularly sensitive, important, complex or large scale?
- Is the individual well known and respected, or might they hold views, undertake activities or work in an area that may potentially be problematic?
- How much potential is there for things to go wrong and what’s the worst that could happen?
Carry out sufficient due diligence to mitigate any risk to an acceptable level. For large scale, complex agreements, such as mergers, this is likely to require lawyers and accountants. However, it can be as simple as phoning round to check that your proposed new window cleaner is reliable.
This is risk management and, as such, a core responsibility for management and trustees.
Quick, easy to do, basic checks
- If they have a website, have a look at it – check that what they’re proposing fits with what’s on the site. It will probably also identify key members of their team.
- Carry out an internet search. On the company, if applicable, and key individuals, to see if there is anything of concern. Don’t just check page 1 of your search.
- Speak to someone who has worked with them, or knows their sector well. A phone call is best, as people tend to be more open.
- Take up references, if appropriate.
Additional more thorough checks
The list below details some issues you may wish to think about and lists some checks that you might consider.
Compliance - significant breaches of regulatory or other frameworks, investigations by government agencies/police, court cases, debt default, disqualifications, any registrations/licences are held and current.
- Check with any relevant regulator for reports and other information that might be available. You can find a list of regulators here.
- For individuals, checks for disqualified director, insolvency/bankruptcy or Charity Commission automatic disqualification.
- For donors - potentially tainted donations (tax avoidance schemes).
Ethics - activities that are illegal or incompatible with your aims and values. Issues such as corruption/bribery, criminal activities, discrimination, exploitation of people, or involvement with radical groups, or companies, regimes, products or services that conflict with your aims/values.
- Any relevant compliance checks above, plus designated people and proscribed organisations.
Finance – risk of takeover, sustained annual operating losses, level of leverage (debt) too high for their sector, bad credit risk, liquidity (cash flow) issues, weak asset base, unusual related party or intercompany transactions, or significant amounts of capital being taken out of company, adverse comments by auditors, court judgements, significant recent debt restructuring/profit warnings or redundancies.
- If applicable, Companies House (or other registrar) records and obtain a copy of their accounts.
- Buy an online company assessment/risk report.
Legal - organisation is legally constituted - can enter into an agreement. It has the powers to carry out the activities planned.
- Company registration check.
- Organisation’s governing document – often called the Memorandum and Articles.
Ability to Deliver - Capacity to deliver services/products, track record in delivery, security around key staff (eg a small company relying on a single individual), any supply chain issues (eg reliance on shipments from overseas), or an organisation that has operated in only a single area delivering in an entirely new one.
- Check during negotiations and take up references specifically covering any areas of concern.
Reputational Risk – any potential negative media attention, or concerns from other funders/partners from being associated with this company/individual.
- Ask them.
Ensure the findings are reviewed and approved by someone with the necessary experience and authority.
Due diligence checks cannot eliminate risk, but should substantially reduce it or alert you to not proceed. And, if something does go wrong, you will inevitably be asked about what you did to prevent it. Ensure your checks have been recorded and filed, just in case.
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