What does the phrase ‘due diligence’ suggest to you? You might think of it in terms of your company’s financials. Or maybe the phrase reminds you of the need for public schools to be very careful when they hire teachers. Ask the due diligence experts at Mezy, Inc. and they are likely to define it in terms of investments or mergers and acquisitions.
Studying the term is a fascinating journey into the evolution of language. If you know a thing or two about how languages evolve, you are familiar with the science of etymology. In short, etymology delves into the roots of the words we use. It tells us where a particular word came from, when and how it was first used, and so forth.
Fortunately, you don’t necessarily need comprehensive etymology to understand where ‘due diligence’ came from. The term is a financial one rooted in the actions of stockbrokers and other financial agents selling securities in the 1920s and 30s. Today, the term is applied to a lot more than just buying and selling stocks.
Due Diligence and the Stock Market Crash
The infamous stock market crash of 1929 plunged the U.S. into the Great Depression. Our financial woes subsequently had a ripple effect on the rest of the world’s economies. To this day, there is still considerable debate about what caused the crash. One thing most students of history can agree on is a surprising lack of due diligence among both stockbrokers and investors.
When Congress passed the Securities Act of 1933, they codified the concept of due diligence. Their legislation made it clear that brokers and other financial agents must always do what they do in the best interests of their clients. By extension, the law requires full disclosure and transparency at all times.
Doing Your Homework
These days, due diligence doesn’t apply strictly to the stock market. In fact, we often use the term to denote doing one’s homework. What does that mean? Well, consider a recent dustup at CNN. They dismissed a freelance writer and regular contributor accused of anti-Semitism.
CNN tried to sweep the whole incident under the rug. However, critics have continuously pointed to the fact that the contributor in question has been posting anti-Semitic content for the better part of seven years. Those same critics say CNN should have done their due diligence before bringing the contributor on. In other words, they should have done their homework by looking into his background.
Along those same lines, we can apply the ‘doing one’s homework’ principle to mergers and acquisitions. Consider a company looking to acquire one of its competitors. That company does its due diligence, or homework if you will, before deciding whether or not to move forward with the acquisition. Due diligence would still apply to investing here, but not in stocks or bonds.
Diligence in Hiring
Sometimes the concept of due diligence is applied to hiring. For example, the introduction to this post discussed hiring teachers. Public schools go to great lengths – or at least they should – to vet teaching candidates before ever bringing them in for interviews. Similarly, local governments require their HR departments practice due diligence before hiring city managers, police chiefs, fire chiefs, tax collectors, etc.
The key to productive due diligence is the information one has access to. Regardless, due diligence doesn’t apply just to buying stocks and bonds. The concept has long since evolved into one we can apply to all sorts of things. Due diligence is all about gathering as much information as possible and analyzing it before making a critical decision.