Due Diligence for Socio-Economic Risk

By on June 18, 2018

Executive Summary of an article written by
Jack Vaughan, K&L Gates and Patrick Marrinan, Analyitica

Today, investors and their diligence teams face the challenge of emerging socio-economic risk exposures. These risks are varied, and they are growing out of our divided cultural and business environment. This means that investors are bringing new diligence demands to deals. Businesses are being held to account by the media, consumers and the market, for perceived or real shortcomings and failures to live up to socio-economic obligations. A good example is The Weinstein Company, which has seen its value reduced to a fraction of its former multi-billion dollar valuation, for grossly ignoring (and consequently enabling) the conduct of its namesake. Now it’s in bankruptcy.

Lapses in ethical labor policy anywhere in a supply chain, lack of sensitivity to issues of importance to a particular interest group and expression of political thought on social media can all result in media backlash, boycotts and value loss in the market.

While businesses scramble to address these risks and satisfy new investment criteria, investors should likewise task their due diligence teams to conduct detailed analyses of company and brand risk exposures to socio-economic issues. Empower management, legal counsel, and socio-economic risk and research analysis experts to do the necessary research and implement an action plan. Socio-economic risks can include numerous individual issues: immigration policy stance; economic inequity concerns; racial, gender and sexual preference policy management; and much more. Many issues do not surface in responses to standard due diligence questionnaires or disclosure schedules.

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