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The objective of due diligence is to entrench value How many business leaders have forgotten this?

09 July 2019 Lerato Thekiso, Founding Director at Thekvest Legal Advisory Services

The South African political and business space continues to be marred by state and corporate political wrangling. Revelations of corruption and ongoing investigations into scandalous misappropriation of assets continues to make headlines every week. Yet, those involved claim to have little to no knowledge of the other players. And, while certainly these investigations must be pursued to the fullest extent of the law [and hopefully, without interference], in the meantime the domestic economy continues to be assaulted – having contracted by 3.2% for the first three months of 2019 - and it faces further possible downgrading from international ratings agencies.

What’s perhaps more disheartening is that the actions of the few [that in turn affect the many] are happening despite the fact that we have advanced and well-established regulations, legislations and a responsible governance framework as safeguards. For instance, both the Companies Act and King IV lend themselves to subscribe to due diligence practices.

Due diligence can be described as an investigation of an entity or person. While the scope of the due diligence, and the mechanisms of investigation, may differ when undertaken on a person versus an entity, when applied correctly, due diligence refers to the care a reasonable person [or organisation] should take before entering into an agreement or a transaction with another party.

The idea is that due diligence will provide objective and reliable information on the other party [entity or person], which will better enable a reasonable person [organisation] to assess any potential risk exposure that may result from engaging with the other party – and thereby be able to make an informed decision.

Certainly, while a due diligence may not uncover, foresee or quantify every possible risk exposure, the more thorough the due diligence investigation is, the more specific the contractual protection can be. Also, while a full and detailed due diligence investigation and report back is always recommended, a high-level due diligence can achieve similar results. Even a high-level due diligence can reveal any red herrings or highlight any warning signs of "deal-breaking" or "commercially negotiable" issues.

However, it’s also important to note that it is not just the person [organisation] at risk. In fact, King IV notes that the “onus is on individual directors [as reasonable people] to determine whether they have the requisite skills and capacity to make a meaningful contribution and are free from apparent of actual conflicts”. Additionally, considering the hugely increased exposure to personal liabilities that the Companies Act imposes on directors, it is just as important for individual directors to ensure suitable due diligence is conducted and that they themselves are kept informed on all key parties [person or entity] where an alliance is strategic to continued operations.

Why then, given our legislative climate and the clear framework of rules and guidelines to regulate responsible governance, does appropriate due diligence fall through the cracks?

Simply put, because there are those who are in a position of power and responsibility, but do not act accordingly and regrettably this gives way to other evils of; lack of transparency, bad governance, nepotism, laxed professional ethics and morality, greed, etc.

If we are to truly change the status quo and affect a collective ethos of responsible business and responsible governance, then we need to be prudent and apply professional scepticism on what we believe at face value. And, each of us have a role to play in acting responsibly, in support of the change towards responsible governance in society, business and government that we want to see. As individuals, the onus is on us to ensure that – over and above a formal due diligence process – our behaviour is underpinned by ethics and integrity. Without this as a second sounding board for a formal due diligence, society will continue to witness fraud, corruption and untoward business. Sadly, it is often the case that where the ‘paperwork’ upholds us, those with authority fail us.

As a nation, we need to get better at asking ourselves, our peers, our leaders – in all tiers of society - is it worth breaking the rules to save or make a quick ‘buck’. What we say, and what we do, must mean something. As business leaders, we must ensure that our decisions are underpinned by ethics and real care, as this is when the whole business – and our economy - will benefit.

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