Due Diligence Screening: An (In)Expensive Solution That Reduces Risk and Increases Profit

High-end screening is a necessity, not a luxury, for people and organizations making investments, establishing partnerships, and hiring high-level executives. The reputational and financial risks of failing to know what you should have can be devastating.
By Kevin Bachman
December 5, 2021

By Kevin Bachman, The CRA Doctor, Partner at IQubed Advisors & Host of the podcast, Background Check Radio

I’ve spent 20 years as a background checker and learned long ago there are certain truths in this business. Buyers want speed. Buyers want technology. Buyers want value. Not necessarily low cost. But value for their money. All these desires are normal, understandable, and most importantly, attainable.

But there’s one thing that buyers consistently get wrong. I saw it then. I see it now. And I expect to see it in the future. When creating their screening programs, buyers routinely underestimate business risk at the highest levels of their organizations.

Different positions warrant different levels of screening. The highest level should be done where decisions impact the organization the most. And in my professional opinion, screening is too light at the top.

What do I mean?

Organizations tell me all the time they screen. And most do. That’s not the issue.

Believe it or not, there is no standard definition of a background check. No universal acceptance of what is and what should be examined. And this is where trouble begins.

See, screening processes are pretty similar among providers. Third parties assemble and provide information at varying levels of depth, scope, and price.

But it’s a fallacy to think there’s one button, or one method or one source that’s utilized as an all-in-one research tool. Do you want an inexpensive search? You’re likely to get incomplete database information, limited in both scope and quality. Want something better but don’t want to break the bank? Maybe some county or federal records are looked at, but perhaps not too far back and rarely as many as needed.

I could go on. And on. And on! I’ve done this for 20 years, so I can think of dozens of examples without giving it too much thought. But a buyer’s eyes quickly glaze over the more options you provide. So will yours if I keep talking about it.

And it’s precisely at this point the wheels fall off. Because of the perceived complexity, and infrequent need to do it at this level, organizations wind up underscreening at the exact same point where they need to do the opposite.

Case in point? If someone lifts a few hundred dollars from the cash register, and you could have known but didn’t because your screening program was weak, the company will still be probably ok. If the CFO does it? Significant reputational and financial damage starts the next day!

There are some universal norms…

To talk about which screens are better or worse at managing risk, we need to establish a baseline. So, for the purpose of this article, let’s assume a “standard background check” includes a county search which looks at 7 years of criminal history, a multi-jurisdictional database check, a social security number trace, and a sex offender search.

When I consult with buyers to create screening packages, I’d point out that the “standard background check” described above is only about 60% of what I think they need. But for Higher end employees, executives, or business partners? I’d say it’s only about 20% of what you need.

Why? Because the depth and breadth of the screening solutions utilized matters a lot. And for Higher end positions, there’s a lot that should be done, that isn’t.

A true investigative report

But this kind of report is a tremendous business advantage. Deep dives, thousands of sources and data points, decades of review, if necessary. These investigative efforts are enlightening. They’re illuminating. They can be a window into the business practices of an organization or the capabilities of an individual. They can uncover previously hidden conflicts of interest, which is especially important if an organization has a fiduciary responsibility.

And like I said, they’re not done nearly often enough. This is an important point to remember and can turn into a competitive advantage. We’ll come back to that in a minute.

This isn’t your father’s background check

Screening and investigations have proliferated over the last 20 years, but it’s taken on a much different look. As we prepare for 2022, it is important to understand how much has changed in the last few decades.

We’re past the point of manual phone calls to previous employers. Researchers running into the courthouses each day to comb through public files and card catalogs are quickly becoming a thing of the past.

We don’t call Johnny’s grandmother to ask her if she thinks he’d be good at the job, and we don’t wait for days on end hoping the supervisor tells us whether he’d show up on time! This took too long, introduced personal and professional bias, cost too much and contained too little information.

Today’s background check is much comprehensive. It’s less anecdotal. It’s faster, deeper, more data-rich and easier to obtain than in the past.

But one thing has remained constant. The absence of a single button or that provides all the relevant information needed to make an informed decision.

Because this limitation remains, I like to say a background check is like a piece of swiss cheese. No matter how big the piece, there is always a hole somewhere.

But if you layer a bunch of pieces on top of each other (more and more data!) the holes eventually start to close. You need access to a lot of information, from a multitude or sources, to make quality decisions with confidence.

But it doesn’t just stop with more information. The best partners are those that provide solutions that combine data with analysis. And this is the game changer. Data without context isn’t as valuable. Analysis without data isn’t worth much more either. AI and machine learning capabilities are enabling better, more accurate uses of the information at hand.

Absent any regulatory or legislative-driven changes to the process, those improvements are not only here to stay but likely to accelerate even faster in the future.

Big data? It’s here to stay

Who benefits from doing a due diligence search?

There are 4 constituencies that immediately come to mind.

Investors. These reports build and maintain trust. Especially if both sides of the table are doing it. Better yet, using the same partner to ensure consistency with the process. But even if it’s just you, gathering insight into the person or the entity you’re considering partnering with is critical before writing that check.

Want to know how (relatively) inexpensive this is? If you’re investing $100,000, a true due diligence deep dive can cost less than 2% of the total investment. If it’s $1,000,000, the risk is less than 0.2%. $10,000,000? Only 0.02%!!! The more money at stake, the bigger the risk, and the lower the relative cost.

Individuals are better protected, especially if they are investing on behalf of an organization. A common phase in the screening space is, “if you could have known, you should have known…” Investors have deep pockets and longer memories. It’s not absurd to imagine some of them may be looking for someone to blame and/or recoup their money. They’d be willing to pay lawyers to make that happen.

Employees are better protected. When individuals choose to join an organization, they choose to place their livelihood in the hands of the organization they work for. Financial and reputational damage affects them to. Needlessly so if something happens but they didn’t have a hand in. For how many years were Enron employees judged due to actions of executives? Has it even stopped? Employees are just employees. They’re husbands and wives. Mothers and fathers. Daughters and sons. These reports also protect them and their family.

Finally, customers. They enter business relationships with you assuming everything has been squared away ahead of time. For them, there is an assumption that managing risk is important, and the organization they are working with or engaging has adequately taken steps to protect them. Anything less is a deal breaker, and frankly, it should be.

Due diligence doesn’t just cost you money

It makes you money. Significantly more money. Here’s how. Investments don’t always pan out. Many of them, actually. What looks great on paper may fall short in real life. It happens. That’s why investors diversity. It’s why they look at a lot of different options.

What if the success rate on investments went up 5%? 10%? Avoiding bad decisions increases your success rate. It increases your profits. And because your success rate is now higher, you’re much more attractive to others. We’ve just created a faster, more powerful business engine for your organization.

And it weakens the competition

Remember when I said that not doing this can be a competitive advantage? It’s not just you who wins. It’s your competitor that loses. Because that investment will happen. It just happens with someone else. There will be handshakes and hugs after the deal closes or the check is written. Or that board member who was brought on who has an undisclosed conflict of interest. They’ll find out soon enough what you already know.

Remember, people are watching. Treat this like the investment it is.

Cutting through the different types of screening options in the market, the theme remains the same.

High end, due diligence screening protects against and reduces business risk. In this world, friendships still matter, and handshakes can still seal business deals, it’s precisely at this space where organizations can get burned the most.

At this level, events are often celebrated publicly. Internal and external PR campaigns and marketing efforts are created and executed. Whether it’s a merger or acquisition, a partnership, investment, or an executive level hire, it’s often a celebration. A victory lap: an exciting time for everyone involved.

Therefore, this is not a “cost” to be managed. A proactive due diligence search can be the difference between tremendous success and public humiliation. It’s foolish to look past any opportunities that increase the probability of success. Millions in profit. Or millions in losses.

So, be the company whose due diligence work means you won’t be cited in textbooks or on the front of the Wall Street Journal as an example of corporate ineptness or worse, hubris.

Be different. Be boring.

Now that’s exciting!

About The Author

Kevin Bachman is The CRA Doctor, a Partner in IQubed Advisors and host of the podcast, Background Check Radio.

With 20 years’ experience, he is an employment screening though leader and industry executive providing financial, strategic and operational solutions to owners and senior management to increase their compliance, client satisfaction and profit. He advises private equity and venture capitalists on investment opportunities, and helps employers create screening programs and choose the right partners.

He is frequently invited to write, speak and present by the Professional Background Screeners Association (PBSA), the Society for Human Resource Management (SHRM), employers, screeners and vendors.

Kevin is the Chair of PBSA’s Background Screening Credentialing Council, which oversees the industry Accreditation Program. He also serves as a Steering Committee Member on the Industry Practices Committee.

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