“Due diligence,” at its core, is simply common sense.
From earliest times, anyone considering a decision used due diligence to arrive at the best answer. Over time, due diligence became more popularly used for essentially any type of transaction, where you would perform due diligence before the transaction to make sure you knew as much about the transaction as possible, before you would actually consummate the transaction. In the mid-20th century, due diligence began to be used in the financial industry, starting in the U.S. because of the Securities Act of 1933. Over time, however, the term became very confusing, with many different industries using the term for a very wide range of concepts.
The most common usage of the term was in the legal profession, and the second most common was in the financial profession. Most often used in conjunction with mergers and acquisitions, due diligence was also used in public and private equity and debt offerings, usually known as public offerings (such as IPOs) and private placements. Many people used and continue to use the term due diligence in a very limited way, referring to the act of investigating a person or an organization, typically known as background investigations. In the early 21st century, a new form of due diligence appeared, much more comprehensive. What is perhaps most interesting, while the new due diligence is a methodical and thorough scientific method, it has gone back to the earliest, simplest, and best definition, common sense, and perfected a modern process of one of humankind’s most obvious fundamental tenets. Before making a decision, follow a careful process to make sure you know everything possible, so that you make the most informed decision, whether in business, education, government, or your personal life.
Origin of the term “due diligence”
Most people mistakenly credit the origin of due diligence to the Securities Act of 1933 while in fact, due diligence has been with us since the dawn of civilization. The 1933 Securities Act began a new era in the financial services industry and due diligence was a small portion of the overall document, and certainly this is but a tiny portion of the overall concept of due diligence.
While the American marketplace popularized the idea of due diligence as part of financial transactions, due diligence has been around for a very long time. The earliest use in known documents is probably “When superior people hear of the Way, they carry it out with diligence. When middling people hear of the Way, it sometimes seems to be there, sometimes not. When lesser people hear of the Way, they ridicule it greatly. If they didn’t laugh at it, it wouldn’t be the Way.”, Lao Tzu, c.604 – 531 BC, in the Tao Te Ching. Probably the second oldest references comes from Confucius, born in 551 B.C., “The expectations of life depend upon diligence; the mechanic that would perfect his work must first sharpen his tools.” Probably the third oldest is is a quote from Menander of Athens, 342 – 292 BC, “He who labors diligently need never despair; for all things are accomplished by diligence and labor.”
Modern Due Diligence
Although the term “due diligence” is most often associated with mergers and acquisitions, in a broader context, every important decision (e.g., hiring employees, selecting suppliers, selecting software, etc.) should be supported by substantial, valid due diligence processes and data. The type and nature of each due diligence process is influenced by the varying needs and particular objectives of the organization.
Unfortunately, traditional due diligence processes have historically been limited in their application, and have been exceedingly inconsistent, immensely inefficient and decidedly focused on only extremely limited aspects of the due diligence process (e.g., legal issues, statutory requirements, regulatory requirements, etc.). This has led to most often producing erroneous or incomplete data, leading to inaccurate assumptions, upon which management decisions were based with disastrous consequences. With these wide-spread problems, in the late 20th century, formal research and development let to the creation of the first due diligence standards, and then the creation of the methodical due diligence science, to provide for more consistent and efficient due diligence.
Modern due diligence processes serve a broad range of interests, including executives, managers, boards of directors, shareholders, attorneys, accountants, business brokers, commercial bankers, investment bankers, mergers and acquisitions firms, private investors, venture capitalists, and any other parties interested in the performance of due diligence. Modern due diligence provides a structured, systematic due diligence program of planning, identifying, prioritizing, collecting and analyzing appropriate, relevant, necessary data; providing a consistent, more efficient, and methodical approach supporting fundamental decision management.
Beyond the obvious fact that all decisions should be made only after performing adequate due diligence on which to base decisions, organizations began to adopt formal due diligence programs as strategic initiatives by the decision-makers, adding much-needed structure to the decision management process. Once established inside an organization, the due diligence program became an integral, continuously-present facet of the organization’s strategy, assisting management through every decision; and created significant improvement in the organization’s capabilities, risk reduction, agility, morale and profitability.
Due Diligence Standards
Due Diligence Standards are tools to continually improve the quality, consistency, effectiveness and efficiency of due diligence services and programs.
Producing higher economic growth than patents and licenses, standards benefit organizations significantly at both the short and long term strategic level, with advantages in competitive position, agility, innovation, and profitability. Standards are a critical part of any successful business.
Standards are around us everywhere: the number system, weights and measurements, the monetary system, cellular phones, nuts & bolts, telephones, language, and world trade.
Due Diligence Standards are precise, optimum and practical policies and procedures emphasizing core principles rather than checklists and facts.
Development of the first professional association for the due diligence industry
As is typical with the evolution of due diligence as a separate discipline and industry beginning in the 1980s, a professional association began to be developed to support the field of due diligence, called The Association of Due Diligence Professionals. This association was founded to provide education, professional standards and forums, to advance the field and disciplines of due diligence, to advance the practices of professionals dedicated to due diligence. The association began building the infrastructure to support and enable due diligence at both the global and local scale by developing programs and systems in education, standards, certification, advocacy and research.
Background
The earliest concepts for The Association of Due Diligence Professionals were driven by the need for an independent organization to proactively educate and assist people and organizations to understand and make better decisions with lower risk, by using an early version of the discipline originally termed ‘management due diligence’. A new paradigm evolved from insights garnered from a combination of real world experience, formal scientific testing, formal education testing, and formal technology development:
- Large numbers of experiments in risk analysis, fraud prevention, technology development and corporate and financial engineering,
- Many educational and training experiments in joint educational seminars with firms, and
- A formal research and development program begun in the early 1990s.
This work culminated with the refinement of the first due diligence standards and the first scientific due diligence systems by 2003.
