Vetting

What Is Vetting?

Vetting is the process of thoroughly investigating an individual, company, or other entity before making a decision to go forward with a joint project. A background review is an example of a vetting process for a potential employee. Once the vetting process is concluded, a well-informed hiring decision can be made.

Managers, investors, and analysts use such a process to identify worthwhile investments through a process known as due diligence.  Due diligence requires a close examination of a firm's financial records, key personnel, and growth potential before entering into an investment or proposed transaction with that party. Once fully vetted, the investment or deal may proceed.

Understanding Vetting

The verb "to vet" has its origins in 19th-century British slang. A horse was thoroughly vetted by a veterinarian before being allowed to race, so a patient undergoing an examination could be said to be vetted by a medical doctor.

In modern business usage, vetting has come to mean the process of examining a person or company for soundness and integrity.

Real-World Examples of Vetting

Examples of vetting appear frequently in the context of business and investing. For instance, a company's board of directors will thoroughly vet a candidate for company CEO or other top management positions before making a hiring decision. Or, a business will properly vet a potential major supplier in order to determine whether it has conducted its business efficiently and honestly in the past.

As part of doing their due diligence, an investment adviser will vet a potential investment for its track record, management quality, and growth potential before recommending it to clients.

The word vetting is also used informally in many other situations outside of finance. A refugee seeking asylum is vetted as part of their application process. Candidates for government security clearance are vetted to make sure they don't have checkered pasts. A lawyer vets a contract to find any potential pitfalls in the fine print. These are just a few examples of vetting.

Requirements for Vetting

A vetting process might begin with a confirmation of facts. Is the job candidate's resume accurate in describing all the skills and experience that are claimed? Does a contractor called Worldwide Shipping have actual experience shipping worldwide?

The process continues with the verification of information. Every degree, award, or certification claimed by a candidate is checked for accuracy.

Whether it is a person, a company, or an investment that is being vetted, the process gets deeper, and potentially more intrusive, from this point on. Credit history checks, criminal background checks, and personal interviews with past and current associates all are fair game in the vetting process.

The High Cost of Vetting

While vetting is important to make sure quality options are chosen and poor options are discarded, the process can also be time consuming and expensive. As such, a balance must often be struck between the costs and benefits of vetting. According to jobs website Glassdoor, the average organization in the U.S. spends about $4,000 and 24 days to fill a position with a fully-vetted and qualified candidate.

Heavy reliance on vetting by governments around the world has raised some concerns related to both the high cost and the long delays they can cause. The U.S. government has issued a series of guidelines to streamline the vetting process and cut down on costs. One recommendation is to review the costs of each vetting procedure and place less expensive portions, which tend to disqualify a higher number of candidates, at the beginning of the process.

According to Australian newspaper reporting, some 350,000 people doing work for the Australian government undergo vetting processes to get their jobs. The cost to the government ranged from $300 for a minimum clearance to about $1,500 for a top security clearance. Job openings requiring vetting included a museum coordinator, a librarian, and a veterinarian.

How to Vet an Investment

Vetting a potential investment is known as due diligence. This vetting process involves collecting data and facts about a firm or issuer of securities and reviewing available financial records. Past company performance is also considered and should be referenced against competitors; anything else deemed material should be reviewed, such as key personnel and the names of other large investors. Due diligence is primarily a way to reduce exposure to risk and to ensure good decisions are made with available funds. The process ensures that investors are aware of all the details of a transaction before they agree to it, including potential risks or downsides.

For individual investors, doing due diligence on a potential stock investment is recommended but voluntary. For a venture capitalist (VC) firm making a professional investment in a startup company, on the other hand, due diligence is essential—especially when it comes to understanding the startup's growth potential and exit strategy.

Due diligence can be categorized as "hard," which is concerned with taking a deep dive into the numbers on financial statements, and "soft," which is more concerned with the people within the company, its brand image, and its customer base.