Reputational Due Diligence: What You Don't See Can Destroy Everything
Introduction
In the era
of high-stakes business, when data rooms overflow with revelations and
documents are
searched
through obstinate painstakingness, one would believe that the landscape of
risks has
been
mastered. And yet, deals self-destruct after closing not because the purchaser
overlooked a
provision,
but because they overlooked a letter. This blog discusses Reputational Due
Diligence
(RDD), an
oft-overlooked but distinctly important layer of insurance in business deals.
It's the
layer that
doesn't look at what is written, but what's intentionally not said.
Understanding
the Concept: What Is Reputational Due Diligence?
Reputational
due diligence refers to the process of research into the social, ethical, and
political
reputation
of a company or individual beyond their official compliance or litigation
record. In
contrast
to traditional legal or financial due diligence, RDD considers:
Earlier
controversies,
● Media
attention,
● ESG
authenticity,
●
Political affiliations,
● Cultural
red flags (like a toxic workplace),
● Hidden
settlements,
● And
behavior patterns that influence long-term brand trust.
It's not
yet legally required, but it's becoming a best practice in mergers,
acquisitions, venture
capital
investment, and joint ventures.
Background:
Why the Need for RDD Has Increased
The world
after 2020 has increased public oversight. A firm's ecological footprint,
social
behavior,
and boardroom morality are not "soft issues" anymore; they are
material ones.
Investors
would pull out, consumers boycott brands, and governments blacklist entities
not for
flouting
the law, but for breaching public trust.
Consider,
for example, Better.com's reputation collapse when its CEO fired 900 workers
via
Zoom
during the pandemic lawful but reputationally catastrophic. Or Theranos's fall,
where
investors
might have been alerted if reputational indicators, such as scientist exits and
subdued
regulatory
concerns, had been investigated.
Real-Life
Case Study: When Reputation Costs More Than Law
Uber had
its license to operate in London revoked, not because of financial corruption
or
technical
illegality, but because of reputational issues. The regulator found:
● Failure
to report criminal offenses,
● Poor
driver vetting,
●
Corporate evasion culture.
Even as a
global tech giant, the company's image of swagger and opaqueness proved to be a
burden. A
more comprehensive RDD would have anticipated this, given prior confrontations
with
regulators, driver protests, and executive misconduct scandals.
Legal
Context in India
India
currently doesn’t have a statutory mandate for reputational due diligence.
However,
relevant
touchpoints include:
● SEBI’s
Listing Obligations & Disclosure Requirements (LODR) Regulations (2015)
emphasize
corporate governance and whistleblower policies.
● The
Companies Act, 2013, Sections 166 (Director duties) and 134 (Board's report),
which
stress
ethical disclosures.
● The
Prevention of Corruption Act, 1988, and the Benami Transactions Act, 1988, can
indirectly
link reputation with underlying risk.
● ESG
reporting obligations under Business Responsibility and Sustainability
Reporting
(BRSR) for
listed entities.
These
regulations skim the surface — but they don't cover the iceberg.
Is
Reputational Due Diligence Voluntary?
Technically,
yes. In reality, not. The lack of legal mandate should not be conflated with
insignificance.
Large law firms and VC participants now order private RDD reports before
critical
transactions. The price of not doing it is too steep:
● Investor
exits (example: SoftBank distancing itself post-WeWork scandal)
● Negative
PR (example: Infosys whistleblower episode)
●
Political backlash (example: Patanjali’s ongoing advertising controversies)
Comparison
with Common Law Practices
In the US
and UK, reputational due diligence is more embedded. Firms often hire
investigative
journalists,
intelligence units, or ex-police officials to run background checks.
● In the
UK, the Bribery Act 2010 indirectly encourages RDD under “adequate procedures”
for
anti-bribery compliance.
● The USForeign Corrupt Practices Act (FCPA) has prompted firms to conduct
reputational
due diligence on third parties and subsidiaries to escape liability.
India is
catching up — but slowly.
Solutions:
How to Incorporate RDD into Practice
●
Integrate RDD as part of pre-deal assessment, particularly for startup
investments and
foreign JV
tie-ups.
● Harness
third-party intelligence providers to conduct quiet open-source and human
intelligence
investigations.
●
Establish internal red-flag triggers, such as sudden staff departures, removed
media
coverage,
or sudden PR purges.
● Run
reputational legal checklists — such as ESG truthfulness, political risk
exposure,
sexual
misconduct claims, and unofficial stakeholder feedback.
● Train
clients that what is not revealed can cost more than what is.
Conclusion:
Reputation Is the New Compliance
Ultimately,
legal compliance is just the beginning. The environment of today requires
vision.
Due
diligence on reputation is not paranoia; it's forward-thinking and planning. A
firm can
weather
regulatory penalties but collapse under social outrage. And once a brand's
reputation is
tainted,
no force majeure provision can ever salvage trust.
As
attorneys, we need to cease labeling reputation as a marketing issue. It is
ours as well.
Because
when the transaction collapses six months down the line under the glare of
publicity, the
one thing
the client will ask is: Why didn't you inform me this would occur?
Call to
Action:
If you're
counseling a company, fund, or founder, ask the more profound questions. Dig
with
discipline.
Peer over the law. Establish an RDD culture before headlines compel it. Because
in
the court
of public opinion, silence isn't golden; it's risky.
Closing
Credits
Author: TREASY NILOPHER
"The views expressed are personal. This article is intended for educational purposes and public discourse. Feedback and constructive criticism are welcome!"
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