Deep Dive Due Diligence: Part II – Why Level III Due Diligence For Senior Executives?
The following article is re-posted here with kind permission from my colleague Thomas R. Fox, Compliance Evangelist and attorney.
Today, I continue my exploration of Level III, deep dive due diligence by considering why you need this type of background investigation in the context of the hiring and promotion of senior managers in an organization. I am joined in this exploration by Candice Tal, founder and Chief Executive Officer (CEO) of Infortal Worldwide, a global risk management and security company established in 1985. Tal is highly regarded as a specialist in global due diligence investigations and board advisory services. Infortal helps companies reduce their business risks globally by over 20% through improved regulatory compliance, protecting M&A transactions, more through vetting of senior executives and boards of directors to prevent PR nightmares. Tal’s extensive international experience and long-term relationships have enabled Infortal Worldwide to secure and deliver deep-level information not readily available through customary investigative channels.
Tal’s extensive international experience and long-term relationships have enabled Infortal Worldwide to secure and deliver deep-level information not readily available through customary investigative channels. She has suggested that a deep dive, Level III due diligence be used in five areas: (1) the hiring of a new senior executive; (2) that acquiring a new business subsidiary; (3) contracting with third party business parties globally; (4) the selection of new board members; and (5) the screening of corporate board of directors going forward. Today, I want to consider why a Board of Directors or other governing body should utilize Level III due diligence for the hiring and promotion of senior executives.
The reasons companies should be concerned around such issues is that screening executives is an essential part of protecting the value of the company, the shareholders from unnecessary risks and minimizing public relations disasters. The sad fact is the most routine Board background checks are insufficient. A rather startling fact revealed by Tal is that approximately 20% of all executives Tal has investigated in her years performing such due diligence have serious red flags appear in their backgrounds. The key problem is that Boards of Directors or others making such hiring decisions do not understand the difference between executive background checks and executive due diligence.
You might think that a thorough review of a candidate’s CV or resume would be a basic requirement when a company is considering bringing in a senior executive. Consider the situation of Yahoo! when the company hired Scott Thompson as its CEO in 2012. According to reports, Thompson had padded his resume “with an embellished college degree, ending his term at the company after just four months.” Tal said the cost of this was quite high as it “cost the company over seven million dollars to terminate his contract with them at the time and, of course, it resulted in many other implications for Yahoo, a lot of loss of confidence in the marketplace.”
In addition to Thompson, many other companies and academic institutions have fallen for resume fraud. Jon Mitchell, writing in a ReadWrite article entitled “10 Executives Who Lied On Their Resumes – And 2 Who Got Away With It”, provided his top ten list of senior executives who lied on their resumes and got caught. It included a college football coach at one of the country’s most prominent universities, George O’Leary, who was hired for five days at Notre Dame; Ronald Zarrella, CEO at Bausch & Lomb; Marilee Jones, Dean of Admissions at Massachusetts Institute of Technology; Kenneth Lonchar, Executive Vice President and Chief Financial Officer (CFO) at Veritas Software; Jeff Papows, CEO at Lotus Corporation; Dave Edmondson CEO at RadioShack; Patrick Imbardelli, CEO APAC at InterContinental Hotels Group; James Peterson CEO at Microsemi Corporation; Richard Li, Chairman Pacific Century CyberWorks Ltd. and Albert J. Dunlap, President at Nitec.
In addition to the very substantial PR hit companies can take when they have such a problem, this damage to the business reputation can extend over a period of years. Tal stated, “People don’t tend to forget those things, particularly if the press finds out about them before the company does, and so the company is behind the ball in terms of damage control. I’ve seen some studies that companies that get ahead of releasing information suffer much lower consequences, or less impact in terms of both stock price and consumer confidence, and it also takes less time for recovery once the reputational damage has been disclosed.” Moreover, it is not uncommon for there to be the costs beyond the termination loss. Often there is stock price drop, as was seen in the examples of Nitec and Veritas Software.
Tal explained that executive “background checks are typical employment level checks that executive recruiters often do, or the HR department in a larger corporation may run a routine background check on an executive background check on an executive level candidate. So, that would typically be criminal history. They’re often referred to as ‘criminal background checks’ which include criminal history, education verification, employment verification, social security validation and sometimes credit histories, but they’re very, very limited basic checks and there’s a lot of hidden and undisclosed information that is not taken into consideration in those types of very preliminary checks.”
Unfortunately, there is not one omnipotent database which contains all information and in some cases, records still need to be accessed in person to ensure that the correct information is reported about that specific person, not someone else of the same name. Tal explained that “Criminal records must be searched using date of birth, since the person’s social security number does not typically appear in criminal files. Additionally, “statewide” and “nationwide” criminal searches typically miss as much as 75% of all criminal convictions.”
Tal went on to note, “While routine background checks are often cheap to conduct and quick to turn around, there are many issues with using them as a sole investigative tool. These issues include: greatly varying quality and availability of data, no results being returned even though a record exists due to search criteria, and data returned on persons with the same or similar name and mistaken for the searched candidate.”
Unfortunately, there are a wider variety of issues that Tal related to that can arise during executive due diligence. In an article entitled “Catch Them If You Can: Mitigating Risks When Hiring Executives”, she related some of these issues could include “IP theft, hidden aliases, interstate bankruptcy, litigious behavior, signs of malfeasance misconduct (with or without criminal conviction), media negatives, social media negatives, undisclosed business and board level involvement, undisclosed business ownership, signs of misconduct, significant numbers of names changes, murder, manslaughter, embezzlement, bribery and racketeering, financial pressures, money-laundering, con-artists, and other negative issues.” Tal explained that “part of the reason that that doesn’t come up is that these basic background checks are not looking at the world wide web, the deep web, the historical web, even the dark web.” She noted there is “a lot of hidden and undisclosed information that most people are not finding.”
It is clear that hiring a senior manager, such as a new CEO or other senior executive or promoting such a person from the line ranks inside a company, can present significant risks to an organization. A routine executive background check is essentially the same as self-certification, your resume is correct if you say it is correct. However, that type of trusting without verification is not sufficient.
Tomorrow, I will review what a deep dive Level III, executive due diligence considers and how it can help to inform a hiring decision.
Thomas R. Fox can be reached at: http://fcpacompliancereport.com
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