The second component of the governance playbook is financial governance, which is always necessary.
This is another relatively short chapter with exactly the opposite message of the last chapter. Where your regulatory governance needs merely to secure your license to play, deploy a zero-tolerance approach to financial governance. Require complete integrity and compliance.
Every one of you knows a story of some executive that used their best judgment in recognizing some revenue in some period that others might not have recognized to deliver on their commitments. Every one of you knows a story of how that executive ended up causing severe reputational damage to themselves and their company when they did it again and again and again until they got caught.
Don't do it. Don't let anyone else do it. Own the miss. Take the short-term hit. Fix the problem. Recover. Move on.
Financial
Keep a close watch on all the financial items you looked at during due diligence:
Financials: Income statements, cash flow statements, balance sheets, general ledger, accounts payable and receivable
Off balance sheet liabilities
Credit report
Tax returns—federal, state, foreign
General accounting policies including revenue recognition
Risks attendant to foreign operations (e.g., exchange rate fluctuation, government instability)
Debts, their terms, and any contingent liabilities
Gross profit margins
Fixed and variable expenses
Gross profits and rate of return by each product
Inventory of all products, equipment, and real estate, including total value
Financial projections
Industry and company pricing policies
Economic assumptions underlying projections (different scenarios based on price and market fluctuations)
Capital expenditures, depreciation, and working capital arrangements
External financing arrangements
Business Structure and Operations
Look at the business structure and operations from the perspective of regulators.
Company's articles of incorporation and amendments
Company's bylaws and amendments
Investors and shareholders—shares outstanding, owners, options, warrants, rights, notes, any other potentially dilutive securities with exercise prices, and vesting provisions
Company names and trademark brand names
Products and services, including production cost and margins—follow the product through the key steps to understand strengths and gaps:
Design and innovation—especially if the company is design led. Look how they acquire ideas from others if they do that.
Production—looking at the whole supply chain from sourcing materials to handling materials to physically producing and managing inventory
Delivery and distribution—looking at the whole ecosystem of partners, allies, and contractors to understand how products and services move through the system
Service—looking at the guided accountability of the front-line service providers
Supplier database, purchases by supplier
Share of their business
Purchasing agreements
Consents
Ensure you have consents for all key contracts
Customer
Vendor
Material Contracts
Look at contracts from the perspective of regulators.
Nondisclosure or noncompete agreements, any guarantees
Company purchase orders, quotes, invoices, or warranties
Letters of intent, contracts, closing transcripts from mergers or acquisitions
Distribution agreements, sales agreements, subscription agreements
Loan agreements, material leases, lines of credit, or promissory notes
Contracts between officers, directors, or principals of the company
Stock purchase agreements or other options
Product and Intellectual Property
Look at products and intellectual property from the perspective of regulators.
Services and products: customers and application
Company's patents, trademarks, and copyrights
Product inventions, formulas, recipes, or technical know-how
Rights owned data and digital information
Work-for-hire or consulting agreements
Who owns or controls the rights to the intellectual property?
Has the IP been patented?
Customer Information
Look at customer information from the perspective of regulators.
Customer databases, subscriber lists and sales records, revenue by customer
Purchase agreements
Customer communication
Refund policies
Rebates
Contingent liabilities
Guarantees
Status and trends of main relationships
Description of the competitive landscape within each market segment
Litigation or threats of litigation
Standard communications and correspondence
Pending litigation or threats of litigation
Unsatisfied judgments
Insurance coverage and policies
Professional licenses and permits
Employee Information
Look at employee information from the perspective of regulators.
Employee contracts and independent contractor agreements—including noncompete, nondisclosure, severance agreements, and outsourced work to freelancers, consultants, and so forth
Workers' compensation
Payroll information and employee tax forms. Look for:
owner's either not paying themselves a fair salary or over-paying themselves to increase or decrease profits
leaders and managers' compensation as a data point on the strength and expected retention of leaders and managers
Human resources policies and procedures
Employee benefits, retirement plan, and insurance
Infrastructure, Physical Assets, and Real Estate
Look at infrastructure, physical assets, and real estate from the perspective of regulators.
Real estate, including office locations, warehouses, current leases, and titles
Fixed assets, including product inventory, furniture, fixtures, and equipment
Information technology infrastructure: data centers