Forbes Column: Investors Should Be Adding Political And Reputational Risks To Their Due Diligence
In his latest Forbes column, Delve CEO Jeff Berkowitz how increased political and reputational scrutiny can have a significant impact on your investments. To learn how to discover and assess risk to keep you ahead, read the excerpt below, then head to Forbes.com to read the full article.
From the collapse of FTX to Theranos founder Elizabeth Holmes’ prison sentencing, 2022 gave us plenty of reminders of how important investment due diligence is. Now, if the U.S. Securities and Exchange Commission (SEC) has its way, a failure to conduct that due diligence properly could have even greater financial and legal consequences for investment firms. While ensuring the financials add up and the business case is realistic are obvious components of due diligence, that’s no longer sufficient. As more industries face more public scrutiny and increased regulatory and policy pressures amid fraught domestic politics and more complex geopolitics, investors need to give greater consideration to potential political and reputational risks.
Last year saw numerous examples in which failures to appreciate the impact of political and reputational issues cost investors. Beyond the well-publicized fall of Sam Bankman-Fried and court sentencings of Theranos founder Holmes and her partner in crime Sunny Balwani, there was venture capital firm Andreessen Horowitz’s announcement that their largest investment yet would fund the resurrection of problematic WeWork founder Adam Neumann. Further adding to the reputational scrutiny, Neumann’s new enterprise focused on affordable housing just as named partner Marc Andreessen was opposing low income housing in his own wealthy community, despite publicly championing the construction of such housing elsewhere. The incident showed exactly how incorporating thorough political and reputational vetting can protect investors not just from possible embarrassment, but from avoidable financial losses.
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The SEC is taking note of such issues and is beginning to ask investment firms tough questions about their due diligence practices. The financial markets regulator is also considering a proposal that would make it easier for limited partners to file suit when they believe due diligence was not diligent enough. Regardless of whether the proposal goes into force, smart investors are already stepping up their efforts to anticipate and mitigate potential political and reputational issues that could impact deals.
To ensure you can do the same, there are three key areas of risk to assess: the company you are investing in or acquiring and its management and operations; external factors such as the company’s operating landscape and range of policymakers and stakeholders that can impact it; and your own business practices and public statements that can raise red flags in a deal. While your deal may not be as high profile as some of the above examples, in this day and age of heightened scrutiny amid growing expectations for socially responsible investing, heeding such cautionary tales will pay great dividends. Here is what to look for in each of those areas of risk:
Continue reading at Forbes.com and find out how to assess and avoid political and reputational risk.
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