A growing number of companies are turning to ‘ethical due diligence’
before they embark on partnerships, mergers or takeovers of other
businesses.
An analysis by the Institute of Business Ethics suggests that such
pre-deal checking – which it defines as ‘obtaining and judging
information of an ethical nature about potential business partners and
ventures as a prelude to a business transaction’ – is now more
widespread.
The findings, based on in-depth interviews with more than 20
organizations, including Deutsche Bank, HSBC, Man Group, and Xstrata,
have been released as stock markets are approaching all-time highs. At
such times due diligence can be quite cursory, suggesting that now
there is generally a greater sensitivity to intangible risk in
corporate valuations.
Among companies that have begun to use ethical due diligence is Shell,
which vets potential business partners to see if they conform to its
business principles on sustainable development, human rights, the
environment and transparency. The IBE says demand for such procedures
has also led some consultancies, such as Environmental Resources
Management (ERM), Control Risks Group, and Scott Wilson, to develop
services in this area.
ERM said that social and ethical issues are ‘only occasionally found to
be deal-breakers’ at present, but that some businesses feel ‘a clear
advantage is gained by having such knowledge in the post-acquisition
phase, as it allows a more rapid implementation of risk mitigation
plans’. ERM has recently carried out ethical due diligence for
corporate clients in biofuel and mining deals.
In two separate previous studies, the KPMG consultancy and the Enhanced
Analytics Initiative, an investor group, both warned that due diligence
is hampered by poor understanding of the associated social and
environmental risks (EP6, issue 3 and EP8, issue 11).
The IBE says: ‘Traditionally due diligence has involved an examination
of the third parties’ financial position and business record, but the
growing pressure on companies to show they behave responsibly has added
an ethical dimension.’
