Which is all very well and good but we don’t treat them like assets all the time. Assets are taken into account when buying or selling a business, or when merging or floating. While the management teams often talk a good game about the quality of their people and their value in terms of adding to the overall sale or purchase price, that’s rarely properly carried throughout the process.
There are lawyers who carry out due diligence, there’s commercial due diligence and obviously financial due diligence. But does anyone bother to carry out people due diligence? And I don’t mean a quick check of the personnel files to make sure everyone is registered and paying the proper rate of tax and to see if it’s possible to shave a couple off the headcount to make the numbers appear better.
Experts believe proper people due diligence should be a formal part of any deal. John Craig, a director of DC Consulting, says the diligence process on people usually tends to focus on senior executives, and he argues that this exercise perhaps doesn’t drill down deep enough.
At a recent investment conference one of the venture capital speakers noted that from his firm’s portfolio of deals, 78 per cent required a change of chief executive prior to exit. What wasn’t evident here was whether this change in the team was planned from day one or whether the need arose subsequent to investment, but it would have become apparent in a people due diligence exercise.
Craig is involved in many of the major deals carried out in Scotland. He believes the importance of the team cannot be overstated and the confidence that is instilled in investors by a strong executive team or managing director, is key to equity-backed transactions. He cites high profile examples such as the effect of Steve Jobs’ death on Apple’s share price and the £1 billion which was wiped off the value of Lloyds Banking Group after its chief executive, Antonio Horta-Osorio, took leave on medical grounds.
So what is proper people due diligence? And why should it extend beyond the C-level executives?
Jane Buick is managing director of Miascape. She believes that it is at least equal to other elements of due diligence.
Conventional due diligence establishes the veracity of the facts presented by the organisation. However, while these facts could all be true and compelling, if there is one or many individuals in an organisation whose thinking – and therefore subsequent behaviours – negatively or disproportionately positively impacts the performance of an organisation, then an investor needs to know about it.
Mitigating people risk is as important as mitigating financial, IT, operations or sales because all these functions are people led, says Buick, who has created a unique product to help advisors and senior executives understand the need for, and value of, doing proper people due diligence.
“Proper people due diligence models organisations at a thinking level. It works out the unwritten rules of the organisation, the way things really are,” says Buick.
“A policy and procedure audit determines that you have policies and procedures. A people due diligence audit tells you what is really going on in spite of governance, policy and procedure.
“Proper people due diligence also identifies links between people issues throughout the organisation that impact the performance of the organisation.”
Buick warns if people due diligence is not done properly then you are taking a huge risk on the performance of the organisation. This could involve major rectifying actions involving recruitment, development, grievance, severance, engagement. Knowing about the issue means it can be dealt with rapidly prior to it impacting your investment detrimentally. Sometimes the smallest issues could have the potential to impact in a massive way.
Realising the value of your business assets means understanding how they contribute to the value of your business – and that includes the people stuff most senior executives don’t even know exists.