A baseline check of executive backgrounds.

• Author: Moritz, Scott
• Position: Executive Recruiting

Apply a high standard of care when considering candidates for CEO or other executive-level positions: There is no such thing as a time limitation on relevant background information.

ACCORDING TO THE SEC, shareholder lawsuits related to the restatement of earnings grew 750% from 1992 to 1998. D&O insurance claims stemming from these complaints have surged in recent years, with some settlements exceeding one billion dollars. A public company's greatest protection against these types of catastrophic losses is the integrity of its senior executives. Executive misconduct poses a significant risk to any organization. According to the Association of Certified Fraud Examiners, fraud and abuse costs U.S. businesses more than $400 billion annually.

A pre-employment screening program is an often-overlooked risk management tool that can serve a crucial role in mitigating these risks for employers. It is intended to cost-effectively assess a prospective employee's character, integrity, and historical conduct in an effort to limit the organization's exposure to the risks inherent to being an employer.

At the executive level, an in-depth background investigation of an individual that goes well beyond readily available public records requires a significant investment. Fees might range anywhere from $5,000 to $20,000 for a CEO or other senior-level candidate background investigation, depending on the number of leads that need to be followed. Given the compensation level of today's corporate management team, and the potential impact they can have on the entire organization, the risk management benefits far outweigh the costs.

When considering candidates to fill CEO or other executive-level positions, boards of directors should approach the process as they would an acquisition, joint venture, or other significant transaction involving company assets. Arguably, the risks in retaining a senior-level executive are greater than those of a transaction because there are no assets that can be recovered. Too often, because the candidate is well known in the business community, little or no background check is performed -- and the resulting liabilities can be catastrophic. Therefore, nominating committees and the boards themselves should take a no-stone-unturned approach when conducting executive background investigations.

Mitigating exposure

Certainly, Sunbeam Corp., currently in bankruptcy proceedings, wouldn't argue with the cost-effectiveness of such a policy. As...