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Deep Dive Due Diligence: Part III – What Does Level III Due Diligence For Senior Execs Consider?

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 discussing what this level of due diligence would consider regarding senior executives. I am joined in this exploration by Candice Tal, founder and Chief Executive Officer (CEO) of Infortal Worldwide, a corporate security and investigations firm founded in 1985 to serve emerging growth and Fortune 500 clients globally in a variety of sectors including biotechnology, financial services, high-technology, manufacturing and professional services. 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.

The investigations that Boards of Directors usually consider for hiring of senior executives are routine in nature and typically include criminal history, education, verification, employment verification and, from time to time, credit histories. However, this is too limited and should only be considered a preliminary starting point. I was somewhat amazed when Tal said there is not unsubstantial problems involving aliases, which can hide a wide variety of nefarious conduct. She stated, “We see a lot of con artists, surprisingly, even in the executive levels where a hidden alias has not been checked or discovered, and so the person is cleared with their background but actually they may have many other issues that haven’t been identified and we see quite a few instances of that at executive levels in different size organizations. Certainly, in middle market companies, and in startup companies it is quite common to see people with other alias names and they’re sort of hidden in plain sight.”

More than what might simply be in the paper trail, is what would that information mean for a company going forward if it hires such a person as a senior executive? Assessing behavior history is an important component of executive level due diligence. Tal noted there are several ways to research and consider behavioral history. She said that one can research, “in terms of public records, things like litigious behavior can be important. Certainly, it does make a difference if a person is highly litigious for a wide variety of reasons.” Another insightful area for behavior is around aggression, which can be sometimes found in public records. Tal said, “Some people might be surprised to find that things like road rage for example doesn’t come up typically in the criminal record. It will come up in driving infractions. So, road rage and even evading police. I know that may sound surprising to some of your audience from time to time that have criminal histories that are more serious and evasion of police can be a component to that and, of course, would indicate behavioral issues.”

Another important area for behavioral background is around lifestyle issues in credit history analysis. She said, “if someone is very highly financially pressured we would see that fairly quickly in the credit history and again, we’re not really looking at FICO scores there. We’re really interested in how has the person behaved in terms of their credit responsibilities? So, if you’re looking at a senior executive who has 15 collections accounts there may be a few reasons that that could happen, but for the most part there are other reasons that that may be occurring; the person may be financially pressured. There may be a history of gambling. It could be drug abuse, heavy drug use or other types of malfeasance.”

It is really trying to build as rounded a picture as one can have from the available record. Tal said, “What we’re looking for are themes of information about the individual and their behaviors. Has the person usurped the presidency of a company? Has the person created a financial model if they’re a CFO [Chief Financial Officer] that might be of concern to the buyer of the company that’s being acquired? There’s a wide variety of issues that come up in terms of behavioral issues, and then of course we do sometimes see sex offender issues. Most people like to think that never could happen at the executive level but of course it does and so there’s a wide variety of issues that come up at the executive level.”

In a white paper entitled “Deep Level Due Diligence: What You Need to Know”, Tal related that “As the saying goes: “people are people”, and executives reflect most of the same issues seen in other employee groups. Most frequently the adverse issues for executives involve undisclosed business dealings that may compromise your company’s new venture, SEC violations, criminal history, no degree(s) earned, loss of professional licensure, mis-statement of personal success/wealth, fraudulent activity and multiple bankruptcies. In many parts of the world bribery and corruption are considered a normal part of business dealings. Deep-level due diligence investigations are designed to supply you with comprehensive analysis of all available public records data supplemented with detailed field intelligence to identify known and more importantly unknown conditions.”

The bottom line is that if a company is seeking to hire a senior executive or even promote an employee up to the senior executive ranks, a behavioral deep dive can help shed light on how the professional life of the executive might unfold. Tal said “then when we get into conducting reference interviews, deeper level reference interviews, which not too many companies do today but should always use reference interviews on executives, these are very different than executive recruitment interviews which are really looking at, can the person do the job technically.”

Tomorrow I will consider a deep dive, Level III due diligence in the context of third parties and in the mergers and acquisition (M&A) context.

Thomas R. Fox can be reached at: http://fcpacompliancereport.com

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