In a desire to complete transactions and largely due to the pressure of the market place, financial institutions frequently abandon the due rigor of review. As a result, dubious loans are approved, questionable acquisitions are completed, and shaky investments are implemented. And sooner rather than later, the results are disastrous.

While most analysis of the 2008 global financial crisis will pinpoint the excessive use of largely misunderstood derivatives instruments that went above regulatory oversight as one of the culprits, at its core the problem was lack of due diligence. Lack of due diligence allowed the proliferation of sub-prime loans. Lack of due diligence caused investments in complex transactions whose underlying were not fully transparent.

Due diligence refers to the process by which a person or a business carefully assesses material facts relevant to closing a deal with another person or business. It is the process of investigation and analysis related to evaluating the soundness of the decision. The objective is to ensure that the deal will not be harmful to either party; rather, that it must be beneficial.

Financial management teaches us the problem posed by information asymmetry, when one party to a transaction does not have full data on the other party. The asymmetry may be an innocent incongruence, yet it can be worsened by the active withholding of critical information. The decision making process can only be improved by due diligence.

Oftentimes however due diligence is disregarded in the face of expediency and haste, as well as political pressure. For example, it is not uncommon that pressure is applied by politicians on government financial institutions to approve loans. If the GFIs are not allowed to filter and screen the applications based on set standards, the results can be damaging. Diagnosis requires committed investment in background analysis, qualitative review, number crunching, character analysis, and most of all, time. It is a balancing act between speed and the depth and breath of careful scrutiny. It does not come without cost.

In today’s volatile environment, a return to the rigors of due diligence cannot be over emphasized. The analytics and discipline needed for a thorough due diligence must be reemphasized.

And two points need to be stressed. First, there must be clear checks and balances. It pays to have a truly independent set of people handling the due diligence from those officers in charge of the proposal. Second, while the quantitative aspects are important, the character of the other party should be established. The people or behavioral aspects cannot be neglected. Strong due diligence processes in the financial arena is the call of the times.

Speaking of due diligence, one cannot help but strongly recommend its principles to be applied to the politics of the day. As election fast approaches, responsible voting demands that we exercise utmost due diligence in our choice of the next leaders of the land.

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As this piece is being written, the sad news about the untimely demise of Sec. Cerge Remonde was broadcast. I have had the opportunity to work with Sec. Cerge Remonde, especially while he was at the Presidential Management Staff doubling as mSME overseer. And this I can say in all candidness - - Sec. Cerge approached the mSME situation with passion and dedication and he mustered the power of his office to try to put rhyme and reason to the mSME development effort. He was professional in dealing with the various stakeholders. Too bad, the assignment was short-lived. Hopefully, a more consistent approach and structure to mSME development will be sought in the future.

To Sec. Cerge, wherever you are, may God bless you.

( Mr. Benel P. Lagua is the President / COO of the Small Business Corporation. He is likewise an active member of FINEX. Feedback and comments are welcome at benellagua@alumni.ksg.harvard.edu ).