Posted on 08/19/2002 4:50:23 PM PDT by SBeck
Companies Dig Deeper Into Executives' Pasts
By ALEX KUCZYNSKI
The nation's major corporations, facing a tide of public suspicion and investor mistrust, are responding by vetting candidates for top positions as never before, looking into all aspects of their professional and private lives with an intensity usually reserved for major criminal investigations or Park Avenue co-op board applications.
Public companies are hiring accounting, security and investigative firms to pore over court documents, search federal databases and interview long-lost college girlfriends, ex-husbands and former employers.
"What we do is everything short of 24-hour surveillance," said Robert Strang, executive vice president of Decision Strategies, a security and investigation firm in New York. "We will find out if they were investigated for fraud when they were 25 years old and never charged with a crime. We will find out if they did drugs, with whom, and what. We will find out if they had an affair."
To learn all this, investigators conduct face-to-face interviews with former colleagues, business partners, spouses, secretaries, estranged children, apartment doormen and even members of the clergy.
Frank Renaud, the senior vice president at Beau Dietl & Associates, a private investigative firm in New York, who supervises checks of executives, said that the requests have poured in over just the last six months.
"There is far more interest, post- Enron and post-all these other corporate scandals, in checking people out," he said.
Until recently, it was considered bad form to ask a prospective senior executive to agree to a background check, a request that requires the signed consent of the candidate.
"It was awkward, like asking for a prenup," said Jules B. Kroll, founder and executive chairman of the Kroll Inc. security and investigations firm. Rather than calling in the gumshoes, senior executives or headhunters simply asked around. They, in turn, would tactfully tell the candidate, "I talked to a couple of guys at your golf club, and you sound like a good guy," Mr. Kroll said.
But now, nothing is off limits — in part because many executives say they believe that the check will be limited to a credit report, like the type done by Dun & Bradstreet, or calls to references.
"When executives hear the words `background search,' they think, `Hmmm, they'll do a D.& B., no big deal,' " said Mr. Strang, who was formerly with the F.B.I and the Drug Enforcement Administration. "But there aren't too many people out there who think that a background check means that a SWAT team of former federal agents will be overturning every detail of their lives."
Mr. Strang's firm, along with others that specialize in accounting, security and investigation — including Kroll, I.G.I, ChoicePoint Inc., KPMG and Controlled Risk — are getting a spike in requests for background checks on candidates at the highest executive levels.
Howard Safir, a consultant to ChoicePoint and a partner in his own firm, Safir Rosetti, which specializes in executive background checks, said that the demand for such investigations at his firm is up about 60 percent from last year.
The fee for a report on one executive can range from $20,000 to $50,000. Investigators are recruited from the legal profession, journalism, the ranks of the C.I.A., F.B.I., D.E.A. and police departments.
The firms' staffs are well connected, often with strong ties to law enforcement. Mr. Safir is the former police commissioner of New York City, and John F. Timoney, the chief executive of Beau Dietl, is the former police commissioner of Philadelphia. Kroll even employs a former New York City tabloid gossip columnist.
John K. Castle, the chairman of Castle Harlan, a corporate buyout firm, said that in one deal, it was not until investigators went out of their offices and into the courthouse that they discovered that the chief executive had been charged with battery, twice, and the victim turned out to be his wife.
That in itself would not have eliminated him, but it did lead the investigators to look at still more records, which revealed that he also had a rack of lawsuits arrayed against him.
The deal went through, though without the chief executive.
Publicly held companies used to let investment bankers, search firms or senior executives choose new top executives. Now that company board members are being held more rigorously responsible for the conduct of top executives, they often insist on bringing in the investigators. "What is driving public companies now is the fear of individual accountability," said Wilbur L. Ross Jr., who manages $1.6 billion in investment funds.
Not every firm, however, catches every bad apple before it slips into the corporate barrel. "We do everything we can, but no one in this business will tell you that they are completely infallible," Mr. Strang said. "People who specialize in fraud can be very good at it." Some firms accuse rivals of sloppiness, though they could provide no specifics.
The search for squeaky-clean executives has been spurred by some huge but belated discoveries. Last July, Becton Dickinson, one of the country's largest medical-device companies, fired Dr. Seymour I. Schlager, a top executive scientist, after learning that in 1991 he was convicted of trying to murder his wife, sentenced to prison and had his medical license suspended. But the company had not even checked the local news media, which covered the trial prominently.
Then there was the case of Albert J. Dunlap, fired as chief executive of Sunbeam Corporation in 1998 and accused of overseeing accounting fraud. A report last year revealed that Mr. Dunlap had been fired twice before because of similar charges, blips that managed to escape the attention of the executive search firm.
"Now everybody is trying to cover themselves and make sure that they don't wind up with a Chainsaw Al," Mr. Strang said.
Joseph Daniel McCool, the editor in chief of Executive Recruiter News, said that after the Dunlap news, companies started requesting deep background checks and re-examining the role of the executive search firm.
"That constituted a real scandal," Mr. McCool said. "And it pointed out problems in the recruitment process, which was that search firms are dependent on their candidate's hire for their commission. Their fee is tied exclusively to seeing their candidate ascend. So they don't necessarily want to know everything. "
Investigators look for arrests or other criminal records, a listing as an unindicted co-conspirator in a fraud case, personal bankruptcies, evidence of gambling or drinking problems, disparities in an executive's lifestyle and salary and any sexual harassment complaints, even if unfiled and unprosecuted. They especially value access, sometimes provided by former business associates and colleagues, to the hard drive on a computer the executive once used.
One investigator, looking at a prospective senior executive for a software company, said that the only red flag went up in an interview with the man's former secretary from two jobs and eight years back.
"She said he used to carve fruits and vegetables into lewd shapes and use them to taunt her," the investigator said. "We put it in the report. I don't think it stopped him from getting the job. I think it just raised eyebrows."
Investigations that used to end at the golf course now just begin there. One investigator, who asked not to be identified, said he got an initial tip about missing money involving a candidate to be a chief financial officer on the links. The investigator flew to Europe and drove several hours to a remote village to interview a former business partner, who had abandoned corporate life to run a vineyard and make goat cheese. The partner accused the executive of embezzling $5 million from their partnership. The company chairman then confronted the executive, who withdrew his candidacy.
"It pays to travel in lots of different worlds," the investigator later said.
Mr. Ross said that the cost of an investigation is relatively minimal in view of the risk. Last week, when Mr. Ross supervised the International Steel Group's $65 million deal for Acme Metals, he spent $2.5 million on due diligence checks. "When you consider that people are doing deals in the hundreds of millions of dollars, it's a small price to pay," he said.
New scrutiny can uncover what was missed before. Mr. Safir said that last year a client asked him to investigate a man who said he could find investors to provide hundreds of millions of dollars for starting a company. The man asked for a $500,000 finders fee upfront.
"It turned out this guy had done the same thing several times before, and disappeared with the money," Mr. Safir said. His client backed away. And the swindler? "Unfortunately he's still out there in the wind," Mr. Safir said.
Some advocates of privacy rights say the investigations are going too far. John W. Whitehead, the director of the Rutherford Institute, a conservative legal organization based in Virginia, said that while investigating a person's background is not illegal, the frenzy for knowing everything is dangerous.
"It speaks to where we are going in sociological terms," Mr. Whitehead said. "I think down the line we are going to pay for it in a lot of ways. People will get conditioned, and say, `Sure I agree to this. Sure, I don't mind being be monitored by cameras.' It's a fine line, balancing our freedom, security and privacy."
Mr. Strang begged to differ.
"C.E.O's these days have to think like politicians, in terms of being scrutinized by the public," he said. Alluding to people whose savings vanished when their companies collapsed, he said, "It's inevitable when people's lives change like they have, entire retirement funds gone. People want accountability."
Even if that means finding out a prospective executive has had an affair and telling his future boss?
"We don't have to tell the wife or anything," he said.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.