Due Diligence as a Catalyst for Growth

Both funders and nonprofits have long seen due diligence as a vetting exercise that primarily supports decisions to fund organizations or not. Yet, when funders set about due diligence in the traditional way—assessing financial health, governance structures and legal compliance through rigid, standardized procedures—they can overlook the realities in which nonprofits operate. This approach, which stems from a widespread corporate mindset, perceives risk primarily as a threat that funders should identify and mitigate, if not avoid.

It also exposes a fundamental contradiction in the sector: Funders that adopt due diligence practices of the corporate world are often reluctant to embrace the same level of risk that profit-driven organizations take in pursuit of financial return. Due diligence then becomes a binary risk assessment based on criteria that are detached from the environments in which grantee partners operate, when it should be a meaningful exploration of organizations’ potential. And while its intent is rightly rooted in accountability, it has evolved into an overly complex process, particularly for grassroots organizations operating in resource-constrained or politically sensitive contexts.

As the philanthropic and development sectors' awareness of these limitations has grown, so has consensus that funders need to fundamentally rethink the purpose and value of due diligence frameworks. What if funders viewed due diligence principally as an opportunity to develop deeper relationships with grantee partners? By shifting the focus from scrutiny to support, could philanthropy use due diligence as a catalyst for nonprofit growth? What would this transformation require from philanthropy? And what kind of practical changes could funders apply to their own compliance processes to ensure that their funding is effective and delivers meaningful impact?

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