A 2020 client letter by Blackrock CEO Larry Fink which announced the firm’s belief “that sustainability should be our new standard for investing” is notable for bringing environmental concerns to the forefront of investor considerations. Similarly, a recent hiring wave of Chief Diversity & Inclusion Officers by corporate powerhouses highlights the prioritization of DEI (diversity, equity, and inclusion) considerations by investors. This focus is reverberating throughout adjacent industries, including investigative due diligence.
As 2021 winds down, focus on DEI issues within the diligence industry ramps up and should be at the forefront of investigative offerings and client considerations. Notably, neglecting DEI issues carries significant risks to businesses of all sizes. These risks are not restricted to a handful of countries or industries. Incorporating DEI considerations into investigative due diligence investigations hedges against the following risks:
Reputational Risk
A January 2021 study by McKinsey & Company found that “The business case for increasing diversity and inclusion is indisputable.” For due diligence investigators, this means reviewing media and legal records with a DEI lens. Consumer reviews alleging discrimination and litigation findings pertaining to unfair hiring practices warrant immediate client notification. Identifying subjects with poor DEI track records prior to closing a deal or extending an offer of employment can prevent future costly discrimination claims and public outrage.
Regulatory Risk
A March 2021 speech by FCA CEO Nikhil Rathi, announced the regulator’s intent to hold firms accountable for diversity improvements at senior levels. It behooves companies to stay ahead of this regulatory transformation. Identifying upcoming regulatory issues early on reduces a company’s chance of attracting negative regulatory attention while gaining an opportunity to positively differentiate from competitors’ failure to adapt.
Business Continuity Risk
Failure to comprehensively vet corporate leadership from a DEI perspective can result in a C-Suite void whose effects ripple throughout the organization. Consider last month’s resignation of Time’s UP CEO Tina Tchen following the revelation of ties to the sexual harassment scandal of former New York Governor Andrew Coumo. In an August 2020 HRDIVE article, Ramcess Jean-Louis, global head of diversity and inclusion at Verizon Media, emphasized that “It would be counterproductive to have a succession plan without a D&I focus.”
Third-Party Risk
With so many corporations reliant on outside partnerships, DEI considerations must extend to third-party relationships. Evaluating the risk of third parties safeguards a company’s reputation and profitability against irreparable damage. Having a thorough understanding of a firm’s vendors, partners, and clients, has gone from being a compliance suggestion to a necessity.
Employee Satisfaction
The June 2020 resignation of Adidas’ global head of human resources, Karen Parkin, following employee calls for her resignation over dissatisfaction with the company’s approach to addressing workplace racial grievances, is indicative of employer’s support for staff concerns regarding DEI issues. The importance of positive employee feedback is underscored by the hiring challenges across a variety of industries. Similarly, as millennials and Gen Z climb corporate ladders, they look to work for and lead organizations committed to diversity, equity, and inclusion.
Strategically incorporating DEI considerations into your firm’s risk management strategy carries dual benefits. First, it allows for the early identification and prevention of reputational and legal issues. Secondly, it demonstrates commitments to employee and client values.
Ready to learn more about incorporating DEI insights into your investigative goals? Contact Vcheck Global to kick-off an investigative due diligence program or to enhance existing investigative capabilities.
Seth Harlan is Senior Associate, Market & Regulatory Affairs at Vcheck Intelligence.
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