Management team due diligence: a key factor in the success of your investment

The management team is a key factor in the success or failure of any investment. This team is entrusted with executing the investor’s value-creation plan ahead of a successful exit and having the wrong leaders can create huge delays. Control Risks has experience working on thousands of pre-investment management due diligence assignments and has identified four key themes that investment teams should consider when scoping their diligence.   

Base your management due diligence on your investment thesis 

A CEO who is a perfect match for one company may not be the best fit for another. The same is true of management teams as a whole.  Framing your management due diligence in the context of your investment thesis for the business is a crucial step in ensuring you have the right team onboard.

If the company’s growth is based on technology adoption, you should be asking how literate the management are with technology and implementing change; if the company’s growth is based on entering new markets and geographical expansion, you will want to know the management team have a successful track record in this area. When the intention is to IPO a company in a few years’ time, we often see a systematic and cautious CFO who acts as the perfect foil to a more freewheeling and visionary CEO, but if the investor’s intention is simply to ramp up sales and exit in a later round of fund-raising, a cautious CFO often isn’t ideal. These considerations are the basis of ensuring you have
the right team for the job.

Management behaviour and integrity can be more important than competence

Management due diligence focused exclusively on professional track records and achievements is untenable today. Yes, your due diligence needs to give you confidence that the management team has the skills required to execute on your plan, but you also need confidence in behaviour and culture. Data on metrics such as an organisation’s gender pay gap and the representation of minority groups in senior roles can be of some help, but to really get a handle on such issues, you need access to people who can speak to the culture that the leadership team sets. Robust and well-sourced management due diligence offers exactly that.

For anybody unconvinced of the ethical imperative of ensuring that management teams walk the walk on diversity, equity and inclusion issues, and that businesses in your portfolio are representative of their stakeholders and society as a whole, think of the reputational and financial damage that can result when a company’s culture is exposed as toxic. Such events can lose you clients, contracts, and employees, and easily knock plans off course for an IPO or other exit. 

Management due diligence should be done early in the investment process 

Following a lengthy period of deal negotiations, the last thing anyone wants is for a due diligence report to come in identifying the involvement of the company’s CFO in a fraud case 20 years ago, or that the general counsel is experiencing financial difficulties. Such revelations can force you into difficult discussions with the investment target or your investment committee at the 11th hour.   

But management diligence does not need to be a deal killer.   When done early in the process it can create value and enhance the overall deal. Some management diligence findings can be used to restructure the deal to mitigate risks – for example, adding a stronger moral turpitude clause if executive diligence identifies concerning online or real-world behaviour by a member of the management team. Other findings may enable you to negotiate from a position of strength. Going in fully informed and with a greater level of confidence about the leadership of the company can only be to your team’s benefit.

Intelligence is interesting, but don’t overlook public records

When conducting management diligence, attention is mostly placed on gathering intelligence from sources who can speak to the inner workings of a company and its leaders, as well as their behaviours and habits, which you might not find reference to in the media . Human intelligence is an integral part of the process.

However, public record research should not be forgotten or treated as a box-checking exercise. Unlike intelligence gathering, which takes skill, experience and knowledge, Twitter and other platforms are easily accessible to anyone with a smartphone. When a deal is announced, it takes just one user to scroll back to see what the CEO was tweeting when they joined the platform in 2011 to create a potentially massive reputational headache. In one case with which Control Risks was involved, the target company had a low media profile with no issues of concern identified. Research into the CEO, however, identified numerous negative comments on employer review website Glassdoor alleging that employees were not paid for work done through another of the CEO’s corporate interests. Control Risks substantiated these claims through the identification of legal filings. In another instance, although there were no red flags identified following diligence research into an investment target, further research into the CEO identified numerous social media accounts where the executive frequently shared profane, explicit and highly politically charged posts.  Without these insights from rigorous public record analysis, the clients in each of the above instances would have left the door open to reputational risk down the line.