Why Executive Due Diligence is Important
In many instances, executive due diligence is a legal requirement. In almost every instance, a board needs more than the standard background check to confidently make an informed hiring decision for C-suite level positions. A typical, low-level background check is very limited and simply will not return a full, comprehensive history of a candidate, their past, and the risk they could present.
Infortal’s data collected over 25 years show that 20% of executives have serious issues of concern in their history. That is 1 in every 5!
This may include a broad spectrum of issues for example serious conflicts of interest, SEC violations, forged degrees, criminal convictions such as felony fraud, IP Theft, working with sanctioned governments, money laundering, racketeering, trafficking, manslaughter, and even murder.
We may also find business ownership in undisclosed companies or conflict situations, important civil lawsuits, including breach of contract, sexual harassment, SEC violations, in addition to interstate bankruptcies, corporate espionage, con artist behaviors, and a host of other issues which are likely to be of concern.
Due diligence investigations on executives provide 5 significant benefits to a corporation. See below:
1. Protects the interests of the corporation, employees, and stakeholders
2. Adds fiduciary protections for the Board of Directors, particularly for publicly traded companies
3. Minimizes liability exposures for the company from future inappropriate activities & crime
4. Benefits corporate governance
5. Provides FCPA & Sarbanes Oxley (SOX) compliance
Another recent example of a company that conducted insufficient due diligence on an executive hire is Moderna, which recently paid $700,000 after the new CFO was employed for only one day.
A Rule Of Thumb: if you have not personally known an executive for at least 10 years then you do not know the person well, and if something is being hidden from you, you may never know of it.
Most of the laws that govern companies and how they conduct business both in the US and internationally require businesses to have conducted their own due diligence themselves prior to entering into relationships with third-party suppliers, vendors, agents, and distributors.
Many regulations also require “adequate levels of due diligence” to be performed before bringing new executives onboard. Conducting a routine background check and reference interviews is no longer considered a sufficient level of due diligence according to federal regulators.