The importance of due diligence when recruiting senior management

Senior management appointments can have a significant impact on a company. As well as affecting profits, the personnel hired can influence everything from company culture to market perception. However, many companies are failing to do the requisite due diligence when recruiting for C-suite positions. 

The prevalence of applicants stretching the truth

In 2017 a private equity firm appointed a Monaco-based entrepreneur as its chair believing that their new hire brought to the role “over 35 years of experience in the financial services sector”. However, it transpired the individual was actually a Swedish butcher on the run for tax evasion and fraud from Dutch and Swedish authorities, facts that emerged when he was arrested when traveling to London. 

Stretching the truth on CVs and job applications is not new. A fifth of candidates change their employment dates to remove gaps according to Reed, while strategic alterations to titles, responsibilities, or reasons for leaving are also pretty commonplace. Other sources suggest such practices are even more prevalent. According to CareerBuilder 58% of CVs contain some misleading or false information, while HireRight estimates this at 85%. Unvetted platforms such as LinkedIn are also widely used in recruitment. 

Such a prevalence of misinformation has pushed UK Government to legislate to curb such falsified information. The worst offenders could face up to 10 years imprisonment under The Fraud Act 2006. However, data suggests that numerous deceptive applicants are undeterred. Worryingly, a high proportion of these are at a seniority in which businesses cannot afford a mismatch – the C-suite.

The right senior management team is critical 

As well as providing strategy, leadership and guidance, senior management affects a company’s culture, governance, reputation – and can even impact it share price.

Jill Jenkinson, who heads up t-three consulting and Kiddy & Partners, explains how crucial the leadership team is: “The right senior leaders can inspire growth, energy, and effort but the wrong people can do the opposite,” she says. “In the worst cases, they can create a toxic environment in which bad behaviours become the norm. It’s important to remember that senior leaders not only signal what is encouraged, but also what is tolerated.”

Any former illegal or problematic behaviour by a new senior hire can impact a company legally and financially, regardless of whether they were aware of it when the individual was hired. In addition to the risk of sanctions, penalties and reputational damage, companies face the substantial costs of severing ties and sourcing a replacement once any issues have come to light. 

Jorge Gomez, Moderna’s ‘one-day CFO’, is a high-profile example of this. After revelations of an internal accounting investigation by Gomez’s former employer, Moderna announced his immediate departure after just one day in the role. Moderna had to pay a substantial severance package, cover Gomez’s onboarding costs, and pay to bring its former CFO back to the company and out of retirement.

Company’s need to be aware of a myriad of potential issues when recruiting into crucial C-suite positions that could prove detrimental to the organisation, including any potential conflicts of interest. For example, we helped one of our clients evaluate a potential new senior hire via undertaking public record searches. Even though we were not privy to confidential records, we identified two issues for concern: an undisclosed senior position, and a significant undisclosed shareholding. Further investigations revealed that the prospective hire was also accused of fraud and financial misrepresentation. 

Undertake checks and references

Recruitment can often be an expensive and time-consuming process. The ongoing talent shortage has led many businesses seeking shortcuts. According to research by Robert Half, 61% of senior decisionmakers had settled for candidates who didn’t match the skills requirements of a role, and over half were rushing the recruitment process. But can they really afford to?

Most C-suite employees will have access to sensitive and confidential data, including financial information, payroll or client details. Over the course of our work, we have seen numerous examples of senior leaders exploiting their position, whether through stealing client databases for use in their own business ventures or providing insider knowledge to contacts in the stock market.

While useful, references in themselves are not enough to properly understand an individual and their potential impact on a business. Usually, the referee details are provided by the individual in question, who is likely to give preference to contacts who either have only positive things to say, or are willing to substantiate the individual’s own story. In fact, an investigation into a pool of executives conducted by Infortal revealed that 20% present some form of issue, while 10% revealed something more serious.

Thorough due diligence

It is important to examine your senior recruitment strategy to ensure you are not over-reliant on information provided by the applicant and to identify what sources you have available to find out more information.
As a starting point, thorough due diligence will investigate that a person is at least who they say they are. The Swedish butcher case above may be an extreme example, but it serves to show that even names and identities can be forged for the benefit of a job application – particularly one with a highly appealing remuneration package. Thorough due diligence should also identify potential red flags that can then lead to further lines of enquiry. Simple steps such as confirming employment dates or qualifications may reveal previously undisclosed information.

Good due diligence isn’t just a case of fact-checking information – it enables a comprehensive understanding of an individual’s history, experience, values and ethics. Confidentially consulting former employees, employers, and even competitors, can provide a wide range of perspectives on a person.

In the same way that the Disclosure and Barring Service checks are used to prevent unsuitable people from working with vulnerable groups, corporate due diligence can also be used to check those applying for C-suite positions. It can identify any previous convictions or allegations, particularly those that may have a direct impact on the business (such as bribery, money laundering, embezzlement, conflicts of interest or sexual harassment). 

Negative publicity can also provide a useful indication of relevant issues. When a client asked us to research a founder’s financial standing prior to a potential share acquisition, for example, we noted that the founder had been criticised by the media for excessive spending of corporate money on entertainment. While discreet source enquiries stated that this wasn’t the result of financially questionable activities, it did help the client to understand how their relationship with this founder might translate in terms of future reputation.

CVs and LinkedIn profiles featuring senior titles and big company names are impressive, but they don’t give a full picture of the individual you may be hiring. To truly ensure that an individual will bring value to the business and its employees, you need to understand who they are and what they stand for – beyond what they may have chosen to disclose. Effective due diligence is one of the most effective ways to introduce quality control into the recruitment process.

*Article amended from the original published here.