Our firm was recently engaged by a client to conduct a background investigation for an Executive as part of their executive search process. This Executive Due Diligence Investigation brought to light a number of legal and financial reasons for conducting a thorough review of an Executive’s employment, education and financial relationships. Most importantly, a Board of Directors has a fiduciary responsibility to protect a company from the financial and reputational exposure, which could occur when an Executive intentionally misrepresents employment history or educational achievements to impress his or her new company. The potential risk is minimized when a thorough review is conducted.

According to CareerBuilder.com, the average cost for a bad hire, is estimated at $17,000, and the cost to the organization for a bad executive hire can be much higher, running about $2 million.. Both nonprofit and for profit organizations can find themselves in the midst of a situation that might have been avoidable with a small investment of time and resources to conduct an Executive Due Diligence Investigation.

Watch Out for the Padded Resume
In one high profile example, Yahoo CEO Scott Thompson was fired after it was found he padded his resume with an embellished college degree, ending his term at the company after just four months.

Be Wary of Lapses in Judgment
Citing a "lapse in judgment," for which "there can be no acceptable excuse”Bausch & Lomb CEO lied about his MBA degree, but was able to keep his position because he was deemed too valuable to fire. Ronald Zarrella had to give up his $1 million bonus when it was revealed that he never received his MBA from NYU as he claimed he did. He actually enrolled in the program, but never completed the courses.

Be Careful of Those Misstated Academic Records
In another well-known situation, RadioShack's CEO, David Edmondson, lied about having a four-year degree when he only had a three-year degree. Edmondson joined Radio Shack in 1994 and quickly advanced in the company until he became CEO in 2005. A year after attaining his new title it was reported that Edmondson had not earned degrees in theology and psychology from Heartland Baptist Bible College as he had claimed. Radio Shack's board of directors stood up for their new CEO, but Edmondson decided to resign. He said: "I clearly misstated my academic record and the responsibility for these misstatements is mine alone. I understand that I cannot now document the diploma."

The Resignation
Kenneth Lonchar joined Veritas Software Corp. through a merger in 1997. Four years later, Lonchar won CFO Magazine's Excellence Award for Managing External Stakeholders. The next year, the glorified CFO fell from grace when it was revealed that he never received an MBA from Stanford as he claimed. He never even earned the accounting degree he said he did from Arizona State University as he had stated, but instead received his degree from Idaho State. As a result of this news, Veritas stock fell nearly 16% which represented nearly $20M.

Will It Happen to Your Company?
While these samples of risk exposure all took place at well-regarded and well-known companies, this risk is not limited to large corporations. In fact, any company of any size is vulnerable.

To avoid these extremely costly embarrassments, an Executive Due Diligence Investigation can bring to light a number of key findings, such as the following:

  • Revealing possible inconsistencies in employment and education history. For example, various positions noted on the resume are not noted on the LinkedIn profile.
  • Newspaper articles denote employment positions not referred to on the executive’s resume or LinkedIn profile.
  • Education cannot be verified due to lack or attendance, falsification or completeness.
  • Criminal records highlight a less than stellar past.
  • The executive is affiliated with ABC Company, an inactive company registered in Colorado. This company is not noted on the resume or LinkedIn profile, which creates loose ends that raise more questions.
  • A search of campaign contributions denotes that the executive donated to a group that is not deemed favorable.
  • The executive is involved in a bankruptcy by former shareholders for unknown actions
  • The executive’s social media profiles denote unprofessional or unethical behavior
  • Liens and judgments against the executive present poor financial judgment.
  • There are lapsed professional licenses on the executive’s resume that no longer represent current competencies.

Although the executive in our matter presented information that was verifiable and true, giving our team and our client’s organization the confidence to eventually hire a top tier professional, recent history tells a different story for some businesses that did not exercise an appropriate level of due care.

The reputational risk to stakeholders can have a quantifiable effect the bottom-line. This risk can be mitigated through a comprehensive and professional investigation to validate the candidates presented educational and professional background as well as bringing to light red flags that would have otherwise not been revealed.

A hiring manager or a board can certainly follow up with the executive as part of the hiring process to gain clarification on any potential misunderstanding or misrepresentation to avoid a more contentious, time consuming and publicly embarrassing misstep.

Executive hiring can have a significant reputational and financial impact on a business, especially when a board or human resources team doesn’t engage a trusted advisor who helps gather the information needed to ensure that a candidate is not later discovered to be “not as advertised.”