EB116 - Discovery, Due Diligence, Reasonable Judgment © Question:
The term "due diligence" is commonly referred to as the process of examining the facts of a deal before you close.  Please explain how due diligence applies to QM leadership.

Larry:  In today’s business climate managers must be prepared to deal with the increasing legal risks associated with success.   What you might think are routine personnel matters can spiral out of control because of a society conditioned to super-sensitivity on discrimination, human rights, and a myriad of other social issues.

We must also be prepared to overcome the actions of dishonest employees who will say or do anything to defend themselves from accountability, dishonest customers who will say or do anything to gain a financial advantage to which they feel entitled, dishonest suppliers who will say or do anything to dodge the responsibilities of their errors and of course the unethical lawyers who are all too willing to aid them in the legal process.

While all this may sound overwhelming, for the truly honest manager there is a simple path of escape from this maze of deceit.  It is found in three principles which are commonly associated with the legal and fiduciary responsibilities of managing people and processes.   They are discovery, due diligence and reasonableness.

1.    The principle of “discovery” is best described as the point in time when we become legally responsible as individuals and managers.  It takes place at the moment we “discover” a fact or event.  You might see or hear the event yourself or it might be reported to you.

In some cases, you may even be held responsible for something you could have reasonably been expected to have known.  This has been demonstrated when the CEO of a business enterprise tries to claim that he or she had no knowledge of fraudulent financial transactions taking place within their own company.

2.    The principle of "due diligence" is best defined as giving every fact, event, issue or problem the “diligence” it is “due.”  This is a judgment call based upon what actions should reasonably be expected of a person who was being diligent to fulfill his or her duties.  The due diligence required when a charge nurse does not show up for her shift is quite different from the due diligence that will be required when it is discovered that a lead scientist may be falsifying laboratory tests.

3.    The principle of “reasonableness” is best described as the measure by which we determine whether or not a person’s actions are appropriate for the circumstance.  In other words, was the problem given the “diligence it was due” and was the subsequent action taken relative to what a reasonable person might do in the same situation?

By practicing these three principles and documenting the steps that were taken once discovery was made, an honest manager can eliminate much of the risk inherent in today’s business environment.   These three principles are even more powerful when combined with a Contemporary Extemporaneous Notes (C.E.N) Journal.  For a description of the C.E.N. journal and its practical value as a tool for every manager see Executive Bulletin 117.