Due diligence is the level of judgement, care, prudence, determination, and
activity that a person would reasonably be expected to do under particular
circumstances.*
As a
legal defense, it’s the opposite of
negligence. (For example, in a
liability suit or
claim, a
defendant would want to show that they had taken all reasonable
precautions, under the particular circumstances, to prevent injuries or accidents.)
In the corporate world, the reasonable judgement, prudence, and care applies to information gathering on behalf of shareholders and stakeholders. A Dictionary of Accounting defines due diligence as "An analysis, normally conducted by an independent accountant, of the current financial
position and future prospects of a company prior to a stock exchange flotation or a major investment of capital." Whether it’s a merger, acquisition, or the search for a 401(K) vendor, a business will want reliable and impartial information before committing. Recent American usage applies to any research done on a potential business partner, or the competition. While often outsourced to a legal or accounting firm, I’ve heard the term used to in-house research, using Google, the Wall Street Journal, Moody’s, and EDGAR.
Eric Janszen, CEO of Bluesocket, adds a definition from "The Devil's Dictionary of VC Terms":
Due Diligence:
Research used by venture capitalists to uncover information they want to know about a company they do not want to invest in, and to avoid uncovering information they don't want to know about a company they do want to invest in.
Sources:
*"What is meant by due diligence?", Canadian Centre for Occupational Health and Safety, 20 January 1999, <http://www.ccohs.ca/oshanswers/legisl/diligence.html> (4 February 2002)
Oxford University Press,"Due Diligence," A Dictionary of Accounting, 1999, <http://www.xrefer.com/entry.jsp?xrefid=447763> (4 February 2002)
Eric Janszen, "The Devil's Dictionary of VC Terms," Always On. 28 May 2003. <http://www.alwayson-network.com/comments.php?id=498_0_4_0_C> (12 June 2003)
Carole Levitt, "From Due Diligence to Corporate Intelligence," Internet for Lawyers, 20 October 2001, <http://www.netforlawyers.com/article_company_research.htm> (4 February 2002)