Diligence Not Enough by Adrian Tan

It has been a long time that I have read a hard copy version of a newspaper, since I outsourced all my newspaper subscriptions to the web. Somehow, something prompted me to picked up Today outside my home and started reading it on my journey to work. I came across this article

“diligence not enough” by Adrian Tan, Today dated 14 November 2005.

For those who do not know what due diligence means, you can check out this URL in Wikipedia. Please note that the article in Wikipedia is incomplete and will be merged with other related entries in due time.

Coming back to the article, the theme is centred on failure of due diligence and corporate governance. Due diligence is an essential process to help the investor in deciding whether a company is worth investing. The article pinpoints on how due diligence has failed to pick up cases where the company ended up buying (in the author’s words) “rubbish and of new listings annoucing awful results months after listing”. I agree with the general observations of the article, but will like to point out some additional factors that might render the due diligence process incomplete.

There are three essential and interesting questions which he has brought up in his article, and I will list and paraphrase some of them out here in no preferred order for discussion:

1.Why were the CEO, directors and professional advisers not sued by shareholders? Or why didn’t the company sue its advisers?

2.Should we incorporate more checks and balances (that almost like a full audit) in the current due diligence process?

3. Will a more ligitous attitude from investors deter bad deals from being made?

For the 1st and 3rd question, it depends on the quality of service from the advisors. If you are trying to do due diligence on a company with disruptive technology, there is obvious difficulty in coming up with a valuation. Some financial advisors are not adequately trained in the technology side to produce good due diligence. If there are more experts on the subject in the country, we have access to more information. For some industries, the critical mass has not been reached and hence the due diligence is incomplete. If that is the case, then we need to focus on putting in more checks and balances. However, the checks and balances should not impede the speed of deal flow structure.

I believe that there should be a more ligitous attitude from the investors, particularly when the management distort certain information to acquire investments. To do that, I will prefer to have a similar body to the Securities and Exchange Commission (SEC), US whose objective is to protect the interests of the investors.

If you have any thoughts on the subject, please feel free to comment.

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