The Importance of Due Diligence in Executive Search

When an executive leaves a company, it creates a vacuum. Often, an entire division of the company is left without executive leadership. The CEO or board has lost a trusted expert to provide advice and guide the company’s operations, finances, HR, technology, or other area. However, the company should never rush the search for a new executive. These individuals do more than just serve in a leadership capacity—they also often serve as ambassadors of the company and its brand. What they do reflects on the brand, and if they have a sordid past, criminal convictions, financial misconduct, or conflicts of interest, it can negatively impact the brand.

Any company or board that is seeking a new executive needs to perform their due diligence. However, the due diligence for someone at the C-suite level needs to do more than check their work history and criminal background. You need to know if they have a criminal history overseas, if they’re highly litigious, or if they have any unreported conflicts of interest. In short, you need to do a deep dive into any candidate who makes the shortlist for the position. 

Let’s take a look at what such a deep dive entails, why it is important, and how partnering with Infortal Worldwide is the best way of protecting your company from hiring an executive who may put your brand at risk.

What Is Executive Due Diligence?

Executive due diligence goes beyond simply looking at someone’s employment history, credit history, and criminal background. Those are basic records that should be reviewed for almost any hire. With an executive, however, more information is needed. The last thing a company wants to do is hire a highly visible C-level employee only to find that they have ties to unsavory organizations, have made statements in the past that are counter to the company’s mission and vision, or have a criminal past in another country.

Due diligence includes these basic background searches, of course, but it goes far beyond that. First, all public records, including those from other states and other countries, are searched for the provided name and any aliases. Someone who has conducted business in another country may not necessarily disclose that information, and a background search in the U.S. may not reveal it, either. This is also true if the individual was involved in litigation or other court cases in other countries. Limiting a background search to the United States only often fails to provide the full picture.

Second, many companies simply do not have the time or skills needed to look into someone’s background without asking specific questions. It’s fairly easy to verify information, but it’s not as easy to see if anyone is a con artist, fraudster, or engaging with hate groups online or has family connections to criminal organizations. These types of searches often reveal that a candidate may be, at best, a PR risk, and at worst a criminal themselves. 

Infortal’s deep dive executive due diligence includes searching public records, global watch lists, domestic US and overseas criminal (where available) and civil court records, corporate board conflicts, financial pressures, behavioral concerns, and more. In the end, we provide our clients with a full picture of the candidate that includes any criminal history, court issues, concerning online activity, conflicts of interest, and other indications of risks they could bring to the business.

Infortal can help protect you from bad actors with our due diligence services

Why Due Diligence is Important in an Executive Search

When it comes to an executive, there are a number of reasons why doing deep dive executive due diligence is important. Here are a few of the risks a company faces if they fail to do their proper due diligence.

Standard background checks aren’t enough

While a standard background check can be fine for many employees, for executives, it simply doesn’t contain all of the information a company needs to make a well-informed hiring decision. Our research shows that one out of every five executive-level candidates have concerning information in their history that a standard background, credit, or criminal check will not reveal. This includes information from other states and even other countries. 

Even a basic due diligence search will only bring to light around one percent of these issues. A deep dive, however, will allow you to make a much more informed decision by providing you with a fuller picture of the potential hire.

Proper executive due diligence provides context

A background check may reveal that a candidate was named in a lawsuit, but it may not reveal the context of that lawsuit. It’s up to the company to dig into the legal documents and determine what the candidate’s involvement was. Infortal will provide that context so companies know if the candidate tends to be litigious or if they were simply named along with other company leaders or individuals. A highly litigious individual could plan to bring suit against your company by carefully creating a series of events that make them appear to be the victim. A wide variety of civil litigation disputes may underscore a history of litigious behaviors which may later cause unwanted impacts and reputation damage to your organization. 

Further, if the executive involved is an investor, or posing as an investor, they may have breach of contract and fraud claims brought by other companies seeking investment offerings which were not found because the executive was involved with other companies which had not been identified during legal and financial due diligence.  

Business connections and involvement in other companies is an important part of investigative due diligence that are frequently overlooked, but which may pose reputational harm and in many cases conflicts of interest which should be explored.

Conflicts of interest often aren’t revealed

Finding certain conflicts of interest is not always simple. For example a valued long term key executive may work directly for your rival competitor, or may even own that company as we have found in one situation. Or an individual could be a part-owner or investor in a company that has a controlling interest in other companies or could have invested under an alias that a routine background check could not find. These individuals could use their connections with the other company to falsify information, run a kick-back scheme, or influence important business decisions. The executive could be double-dipping at another employer, and even words may have been planted by a competitor to sabotage your company from within or steal intellectual property or trade secret information. Infortal has encountered all of these situations at real companies, yet most companies think this “could never happen to them”.

Background checks may not flag forged degrees or other falsified information

According to one study, only slightly over half (53%) of employers actually even verify a candidate’s degree. This means that it can be quite easy to slip falsified education through the hiring process, especially for executive candidates who have years of work experience. 

It’s easy for a hiring committee to assume a candidate who has a resume featuring well-known Fortune 500 companies and other successful businesses has earned the degrees they say they have. The case could be made that with years of experience, education no longer really matters. However, there’s another important question that a falsified degree or other credentials should raise: if a candidate has lied about this, what else have they been less than truthful about? Finding a forged degree should certainly be a red flag.  Yahoo’s reputation was damaged some years ago by a CEO, Scott Thompson, who claimed a degree he did not have, this resulted in both a stock drop and years of reputational damage. Marilee Jones Jones, dean of admissions at Massachusetts Institute of Technology, claimed she had three degrees, even though she had none. 

David Edmondson, CEO of Radio Shack resigned after falsely claiming he had two degrees when he had no degrees. In Infortal’s experience, at least 15% of employees lie or misrepresent their degrees. 

The damage from a bad hire can be substantial and long-lasting

Finally, and perhaps most importantly, failing to do due diligence for an executive can result in substantial, long-lasting damage to the company. Hiring a candidate who has a number of risks associated with them can cost the company a substantial amount of money. Companies may have to pay out on a large severance agreement, even if the executive only worked for the company for a short period of time. They could be sued by shareholders, face stiff regulatory fines, or have to pay out millions of dollars to correct improper actions taken by the executive. 

The damage done to your company’s brand can result in the loss of clients, strategic partners, government contracts, and more. Stock prices can drop, investors can sue or pull out altogether (another PR issue), , and other executives or employees could decide to seek employment elsewhere. This can take years to recover from. 

In some cases, the damage could be so great that the company has to fold. Finding out that the CEO has moneylaundering, bribery and corruption, or even murder charges against them in another country which could easily destroy the company’s reputation. A CFO with a hidden past involving financial misconduct could bleed the company dry before anyone realizes what’s happening. 

It’s very easy for one unscrupulous individual in the right position to destroy a company. There are many examples of this in recent times including Bernie Madoff’s $64 billion ponzi scheme, Jeffrey Skilling CEO’s fraud at Enron, and Elizabeth Holmes’ fraud involving fake blood testing equipment at Theranos.

Infortal can help protect you from bad actors with our due diligence services

Protect Your Business

In the end, it comes down to trust. How much trust can be put in a candidate for an executive position? A company must protect itself from risk, and that includes the risk of hiring an individual who brings with them liabilities. Putting trust in someone without doing executive due diligence is a risk that could greatly damage the company, its reputation, and its profits. Infortal aims to reduce that risk with our deep dive executive due diligence investigations on executives and other key personnel. 

We understand that a company’s first duty is to protect themselves from potential damage. While many candidates for executive positions will be honest about their past, there are approximately 20% who may not. There are even a few candidates who may not disclose something because they do not see it as a risk or as something that could potentially be a red flag for employment. While they were not maliciously hiding information, it still means the company does not have a full picture of who they may be hiring and the hidden risks they may pose. 

Infortal has over 35 years of experience in executive due diligence. We work closely with our clients to find all relevant information about a candidate so they can make informed decisions after fully evaluating the risk the candidate may represent. With our assistance, you can confidently hire into your C-suite, or your board of directors, without bringing undue liability to the company. 

To learn more about how Infortal can help you, contact us today.

            

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