What is Due Diligence and Why is it Important for HRM processes?

We come across the term Due Diligence in many contexts as part of our everyday lives. Indeed, Due Diligence is used in a wide variety of contexts and fields including finance, legal, and commercial transactions. Often, we are also advised to do our Due Diligence before embarking on a new venture.

So, what does the term Due Diligence mean and why it is important in HRM or Human Resource Management processes.

To start with, Due Diligence refers to the practice of identifying, assessing, and deciding on whether a particular project, a job, or a commercial transaction is worth the effort and whether one would land in trouble because of it.

Indeed, Due Diligence essentially refers to whether we have gained enough knowledge about a new venture and has essential information to make an informed choice.

In the HRM context, Due Diligence is very important as without due process of risk identification, assessment, and decision making, there are chances that a new hire or a new recruit would cause more harm than good to the company.

For instance, if the HR manager decides to hire somebody, then he or she must first do a thorough background check on the prospective employee, and then must assess whether that particular hire is suitable for the position or the role that is being filled.

In other words, there must not be a proper assessment of the suitability of the candidate for the position to be filled in addition to finding out whether the prospective candidate does not have a criminal record nor has a past that he or she is concealing.

The Perils of Not Doing Due Diligence

So, what might happen if organizations do not do their Due Diligence when hiring employees? First, the particular employee might have faked his or her experience and furnished false information on their resumes.

This would mean that such a candidate would not be suitable for the role and might struggle to get work done or underperform on the job.

In addition, providing false information or window dressing the resume means that the organization would be providing him or her more compensation than deserve.

Next, in case due diligence is not done before hiring, it can also lead to potential legal troubles in case the employee steals confidential information or indulges in IP or Intellectual Property theft and other misdemeanours.

Indeed, not doing due diligence can have disastrous consequences for organizations for these and other reasons such as employing people who are plainly not suitable or unfit to join the organization.

Due Diligence is Not Restricted to Organizations Alone

Next, is Due Diligence restricted to the organizations alone? Or, is it that prospective employees too must do their due diligence before joining organizations.

Indeed, Due Diligence is a process that applies equally to employees as well and in such cases, prospective hires must ascertain whether the organization is genuine, pays on time, and is not collecting money with the promise of employment and other such illegal activities.

In our working careers, we were often advised to do our due diligence before joining organizations and look out for signs during the selection process as to whether we would really fit into the organization from all angles.

Thus, Due Diligence is something that all parties in the HRM processes must do for conducive and mutually fruitful and beneficial longer term relationships.

How Firms Do Due Diligence

Having said that, it is also not the case that we would know everything in the Due Diligence process and more importantly, might be unsure on how to do it.

For instance, most Multinational firms use the services of professional background checkers who then conduct a thorough check on the prospective employees.

In the United States, background checks are easy because the SSN or the Social Security Number that each resident takes is a one stop source for all public and sometimes private information about prospective candidates. Similarly, in the Indian context, the Aadhar number is being used to track people’s activities.

How Individuals Can Do Due Diligence

In addition, most individuals who do not have the resources or access to professional legal and other entities who do background checks often rely on word of mouth or other such means to assess whether they should join the company or not.

For those of you who are interested, the online portal, Glassdoor, often has information on how organizations treat their employees, the anonymous comments from present and ex employees on the working conditions, and even space for asking questions on all the doubts that one might have about such organizations.

Indeed, more often than not, the internet is the best medium for conducting due diligence mainly because of the variety and range of details that it has on all companies.

Conclusion

Lastly, Due Diligence is a loaded term that can mean a range of options and processes, and hence, both HR managers and prospective employees should tread carefully when they start their due diligence.

After all, everyone has something to hide and hence, taking the Due Diligence too far might result in no new recruitments.

On the other hand, we are not advising companies to hire those with dubious records. Jus that there should not be too much caution and at the same time, there should not be too much leniency.

Thus, there must be a middle ground where the parameters for the Due Diligence process are met and at the same time, there are no important details left out.

To conclude, just as you would think twice before buying an expensive item, we should also think twice before hiring somebody and before joining a job.