Times are particularly litigious and reputation can rise or fall with a new scandal or questionable behaviors by key executives. The global economy has opened up a world of opportunity: new talent, supply chains, customers, locations, acquisitions, and resources. In the advent of all this, navigating between opportunity and risk has become more perilous and the need to conduct background checks on executives and business partners is crucial in protecting your company’s reputation and reducing your Board’s fiduciary exposure.
Background Checks and Executives
Hiring the right executive is extremely important to a company and numerous factors are considered, among them previously held positions, reputation of companies worked for, and education. With the rise in corporate scandals most businesses acknowledge the need for some type of background check.
Many companies, however, are not aware of why it is critical to conduct executive due diligence, relying instead on professional references, industry reputation, and on new executive hires having disclosed all pertinent information. Some even believe that the current or prior company the executive worked for has already performed the necessary background check, especially if it is a well-known or branded company. While they may default to a routine background check as a matter of course. A simple background check cannot find most of the issues you need to identify to protect your companies and employees.
While some of this information may be verified through a routine background check, these standard background checks miss many things that would be uncovered in an executive due diligence investigation.
Due diligence investigations, unlike routine background checks, are designed to detect hidden and undisclosed information not readily available in standard background checks. About 20% of executives do not check out well, and 10% of executives have serious issues that would preclude them from further hiring consideration.
Recently, Moderna hired a new CFO Jorge Gomez, who worked for only a single day, before Moderna’s Board of Directors became aware that his previous company, Dentsply Sirona, was undergoing an internal audit into possible security reporting violations that had been reported to their Board of Directors by previous and current Dentsply employees two months prior. This investigation includes potential inappropriate actions by current and former Dentsply executives. Moderna maintains that they “are confident that Moderna conducted all appropriate due diligence on this matter prior to the hiring of Mr. Gomez, based on available information,” yet an executive due diligence investigation should have uncovered this. Moderna is out $700,000 in severance pay to the 1-day CFO, the cost in onboarding, and have taken damage to their reputation.
While it is not public knowledge what type of employment background checks Moderna employed, some companies rely on routine background checks at the executive level believing that they have conducted an executive due diligence investigation. These are usually low-grade employment background checks conducted by Consumer Reporting Agencies, not investigative firms.
Unlike these routine background checks, executive due diligence investigations evaluate relationships to foreign officials, criminal history, financial and legal issues, civil litigation issues, relationships with other companies and entities, reputation issues, shell company involvement, evidence of fraud, signs of money laundering, financial impropriety, conflicts of interest, drug, alcohol and human trafficking, signs of money laundering, financial impropriety, conflicts of interest, anti-competitive behaviors and numerous other serious issues.
These executive background checks are part of a company’s first line of defense in protecting themselves and the Board of Directors from serious legal issues down the line, reputational damage, and even jailtime if something is uncovered later. Foreign Corrupt Practices Act (FCPA) investigations and fines have increased over the last few years and the U.S. continues to partner with numerous international agencies to examine acts of corporate malfeasance throughout the world. Executive due diligence on all executive hires and partners is a key step in a company protecting fiduciary exposure. Executives are not cleared of responsibility if someone within their organization is involved in a business acquisition or partnership in violation of the FCPA, at home or abroad, even when they are unaware of it.
What can be socially, and sometimes legally, acceptable in one location, may in fact, be a legal issue in another. Due diligence investigations help prevent you from forming a partnership with bad actors and from hiring or acquiring them.
Picking the Wrong Partner
Executive due diligence should be conducted when forming new business partnerships. Even a company’s Board of Directors can be fooled by bad actors at executive levels, as occurred with the high-profile Theranos case in the situation where both the CEO, Elizabeth Holmes, and COO, Sunny Balwani, misrepresented to their board and shareholders for years and were accused of defrauding investors and customers. Holmes was found guilty of fraud earlier this year. The Theranos Board of Directors was not the only ones taken in by Holmes. The Boards of Walgreens and Safeway also were. They entered into partnerships with her, without performing an executive due diligence background check. Walgreens invested and lost around $140 million. The partnership with Safeway cost the supermarket chain $400 million.
Opinions by investors, clients, or even the general public can have a heavy impact on a company. Approximately 25% of a company’s market value is directly attributable to its reputation, and 41% of companies that experienced a negative reputation event reported loss of brand value and revenue subsequent to damage to their business reputation. Executive hires and business partners can also have a negative effect on reputation by their actions and behaviors both on and off company time, matters that can be revealed through executive due diligence, but which would be missed in routine background checks.
Executive due diligence should be conducted on every new executive hire and acquisition of business partners, on a routine basis annually or every few years as events and people’s lives change. Standard background checks do not offer sufficient protection, so executive due diligence investigations need to be a standard practice in well managed companies.
Due diligence when comprehensive provides an extra layer of fiduciary protection for the board; this is even more important if any serious issues occur subsequently, and the company needs to show regulators such as the DOJ or SEC that they conducted due diligence to protect the company’s risk exposure.