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[HR] Due Diligence and Your Business

A lot has been made of and written about when it comes to workplace due diligence and the process of establishing it in can be a chaotic and daunting task for anyone, especially with today’s added global complexities and legislative changes. However, it is a necessary evil, and it is imperative that you uncover any non-compliant area’s before you are held to task as an employer.

As an HR professional, or an owner in a small to medium size business, there are a number of things you’ll need to consider and you’ll probably work closely with your company legal counsel, if you have one, senior leaders or the owner(s) to review all workforce and employment related material. It’s wise to sit down as you kick off diligence and note down the areas that you’ll need to focus on to prevent duplicate work and ensure everything is covered. It will also be invaluable to compile a target list of data needed for analysis and review. There are a number of due diligence lists available on the web that are good starting points. Over time, as you become familiar with the diligence process, you will likely modify the list to best suit your company. All said, I assure you that this will serve as an invaluable process to have in place, as you grow your business and kick revenue targets up a notch and add more employees to your team to enable you to do more.

Diligence time frames vary greatly, depending on the number of processes and locations under review, company size, and the speed at which the target data is available. When planning your time, consider the fact that you may need to have a number of documents translated, (Canada is a bilingual country) which can add time to your schedule.

Key Areas to Review

There are three main areas that HR should focus on during due diligence: Employment practices and policies, talent and culture.

Employment practices and policies — which is a rather large bucket of work — captures all of the detailed HR work. This is the traditional part of diligence that requires digging through piles of data to gain a grasp of everything happening within the company. Key areas for review should include company policy documents, employee contracts, benefits policies, compensation policies, entity and employment structure, union or collective bargaining agreements if applicable, org charts, immigration management, performance management processes, the annual review processes and past or pending employment litigation if any. The goal is three-fold: understand why they exist and what they are designed to be accomplishing, establish if appropriate policy and process documents exist, and finally identify any potential risks or impacts due to non-compliance and deviations from process.

It would be helpful to have on hand an employee census with all of the employee details. You can use this to randomly and quickly assess the employee HR file and contents, employee policy acknowledgements, employment status (Active, on leave, PT/FT etc), years of service, vacation entitlements, tracking of vacation time versus vacation pay and overall compensation costs. Don’t forget about the contingent workforce during your data review. This group can become a pain point from both a cost and legal perspective. It’s important to address any co-employment issues (i.e., concerns over the employees being hired/defined as contractors but actually working as FT employees etc)

The next key area to review is Talent. You will want to set up time to meet with key leaders to talk through the talent in the organization (OTR or Organizational Talent Review). This should be done in a manner that allows each leader to speak freely. Walk through their leadership style, what roles exist on their teams, what makes a successful employee in the company, who the critical employees on their team are (using the life boat exercise is helpful — if you could only take 5 people with you…), and any risks or concerns. Use this meeting to watch the actions of leaders and study how others react to the person speaking. Realize that each leader is naturally inclined to make everyone sound great so you will need to really drill down to understand why each employee is critical.

The second part to this exercise is to verify existence of documented job descriptions for each role in the organization, review employee files for the existence of signed employment contracts in each employee file, verify coaching notes or performance plans as applicable (this serves as a sounding board for the lifeboat exercise) and the presence of completed mid-year and annual reviews for each employee.  These documents go a long way in establishing your top tier talent and as well identifying your talent challenges that need redress.

The final key area of diligence is a review of the company’s Culture. Culture diligence has become a normal and accepted part of the process over the last few years. Earlier, it was brushed off by the business, but there are numerous articles and examples in which company culture fails due to companies turning a blind eye to cultural challenges, business leaders are much more receptive to the discussion of culture. During the diligence process, your real goal is to look at the three layers of culture: the geographical cultural differences (if you have more than one business location), the work style difference, and the business impacting differences.

Most companies will have similar stated values, so you will need to dig deeper to understand how the company really works. Many companies just look at each organizations stated values and come away saying “wow, we are so similar, we both value customer service.” However, as you start to drill down into the details, you may find that your approach to customers is completely different- driving variations in the way you budget, manage, and respond within the company. The culture diligence doesn’t usually stop a deal but is key for building a long-term sustainable organization in which culture similarities and differences work for and not against you. A great tool to institute and review the culture aspect and a s well, allow you a peek at the inner workings of your company is a periodic employee feedback review or company survey process. Typically done anonymously, it allows your employees to rate leadership and provide feedback on what aspects of the company they feel are doing well and which ones need to be focused on. Another aspect to focus on is review internal employee complaints or investigations if any and see if there is an established pattern that reveals itself.

Summarizing the Results

It is advisable to develop a process that can be repeated on a periodic basis – preferably once a year so that it becomes second nature. This will reduce the overwhelming feeling in starting the diligence process. The following are four practical steps for reviewing and summarizing the diligence material:

Create a working diligence document that captures the following key areas that you will review:

* HR “Data room” notes : This section will have a list of the HR folders and, under each folder name, it will have the document number and the name of the document they have loaded (Policies, Procedures, template documents etc). After you review that document, enter your summary notes. This will help you remember what you have reviewed and any concerns or red flags. This will also later feed into your due diligence summary report.

* Contract review : The second tab is ’employment contracts,” which will hold the employee contract details. When the company is small, it is easy to review every contract. However, in larger organizations this is not practical, so the focus should be 3-8 random checks (depending on employee population) from each employee class – executives, FT employees and PT employees. A review of the standard company employment agreement and any other contracts identified with different terms. It is beneficial to call out all of the details (type of employment, performance reviews, severance terms, work hours, employing entity, and non-disclosure terms) because you will frequently use this information later. This is also where you will identify the change in control terms.

* Follow-up items : This area consists of all of the items that may be of concern or that need follow up, allowing you to keep a record of non-compliance items, decisions, any corrective actions and completion dates.

Summarize your findings in a document that has a section for each key area (leadership team, key talent, benefits, compensation, litigation, union/collective bargaining agreements, culture, etc). This summary document is shared with the business leaders and cross-functional partners as necessary. It’s also a key document that you can archive to remember any unique items about the findings of the organization. This will also help you with your corporate development efforts, decision making and can be used as the starting point for your development planning.

Due diligence can be a busy and thankless job, but it is a critical process that ensures the company you build and the people who help you built it are the best fit. It also helps reduce problems downstream and down the line. The most costly mistakes for any company will come through a lack of diligence reviews, inconsistent approaches within the organization, undocumented changes in company policy and practice, inappropriate termination or employment practices that could result in future litigation, or poor leadership. So, your thorough and detailed review of the company on a periodic basis is the first step to building a successful organization.

It is important to connect the dots and make sure the findings in due diligence reviews are passed on to the appropriate decision makers and in conjunction with your HR consultant, reviewed and analyzed into nto the process of corrective actions. After much practice and experience, you will be amazed at how quickly you will be able to pick out the core issues and ignore all of the other noise.