Topics:   Risk Management

Topics:   Risk Management

October 1, 2020

Boards Can Protect their Companies by Better Vetting Leadership

October 1, 2020

As spotlighted by recent stories critical of boards’ handling of high-profile, involuntary CEO and other senior-level exits, failure to properly vet board and C-suite appointments may pose serious risks to a company’s reputation, stock price, and bottom line. What may be less apparent is that board members put their own reputations and their futures as corporate directors at risk when they fail to conduct thorough due diligence on new board members or senior executives. Whether obviating a #MeToo allegation or verifying a senior executive’s credentials, companies may find themselves expending considerable time and resources to address public relations issues and, even worse, potential litigation or regulatory exposures.  

Only a comprehensive understanding of a company’s senior leadership team—warts and all—will provide the information needed to anticipate vulnerabilities and maintain control. Effective vetting should include at least these four broad categories: any legal or reputational issues, any inconsistent public representations, credentials (including—most importantly—those potentially fabricated), and all individuals connected to the candidate.

Legal or Reputational Issues

A thorough background investigation should identify litigation, criminal or civil, as well as regulatory actions or accusations of misconduct in which the candidate has been involved. The candidate’s relationships or affiliations with individuals or entities that may be adverse to a company, such as activists, can also pose problems. Such complications are even more worrisome if not fully disclosed by the candidate; if a potential hire is not transparent about the past, he or she may not be forthright moving forward. As an example of such complications, in connection with a proxy battle at a technology company that will remain anonymous, an in-depth background investigation found a range of undisclosed issues for directors on the proposed dissident slate, including charges or allegations of sexual harassment, hostile retaliation, and insider trading.  

Public Representation

Companies and their boards should conduct thorough background investigations in order to uncover and be aware of any past public statements—either in the media or in securities filings and other public records—by candidates that are untruthful, create a conflict of interest, or are otherwise at odds with a candidate’s new role. Shifting stances or uncouthness may not be a dealbreaker but, given the current climate in which perceived hypocrisy from senior leadership can lead to public relations scandals or even boycotts, companies are better off being in the know and making informed decisions.  

Credentials

Incredibly, many companies do not take the simple step of verifying the basic qualifications of potential senior hires or board candidates. Any evidence that an individual has omitted, exaggerated, or even fabricated information concerning his or her education or professional qualifications is a red flag—whether of future reliability or the candidate’s trustworthiness, or because it renders the candidate vulnerable to negative press or an activist attack. In one recent case, an investigation found that a senior executive, who had already been hired at the company in question, had lied about having a college degree. 

Personal Connections

The company one keeps is also important. Targeted research into the immediate family and other relevant friends and associates of potential senior leadership hires or board candidates may also expose red flags (such as personal integrity issues, or associations with extremist ideologies or other groups that do not align with a company’s culture). The social media posts of the children or spouses of potential leaders can pose particular reputational challenges for board and C-suite candidates as anything questionable may—fairly or unfairly—taint the candidate in the public eye. 

Given the global nature of modern business, any thorough vetting should include a comprehensive review of available public records in all the jurisdictions in which someone has lived or worked—not just in the United States. Where public records are lacking, discreet conversations with trusted contacts of the candidates can provide additional insights, either by providing further details on information gathered from open sources or by uncovering elements that have not yet made it into the public record. If the #MeToo movement proved anything, it is that some well-founded rumors may be widely known across an industry but only discussed in hushed tones behind the scenes, not published for the world to see.

Comprehensive due diligence may not prevent future scandals from arising but, especially when done on a regular basis and with each candidate in the leadership pipeline, it can certainly help companies mitigate risk and buy time to develop a plan to navigate a scandal before it potentially becomes costly. Just as importantly, a thorough vetting process will go a long way in protecting the reputation of the company, the board, and individual directors who, when subject to scrutiny themselves, do not want to be forever linked to the discredited acts of others.

Lucy Fato is executive vice president and general counsel of AIG and Rose Marie Glazer is senior vice president, corporate secretary, and deputy general counsel of AIG. Fato and Glazer acknowledge with gratitude the assistance of Sabina Menschel and Allison Everhardt of Nardello & Co. in the preparation of this article.


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Comments

ROSE CunninghamOctober 10, 2020

COVID 19 ERA REPUTATIONAL RISK WILL HAVE SIGNIFICANT IMPACT ON ORGANIZATION REGARDLESS OF SIZE. IT'S UNCOMFORTABLE TRANSPARENCIES, WILL CAUSE THIS TO BE UNAVOIDABLE.
THE MINDFULNESS OF SELECTION OF BOARD MEMBERS, AND LEADERSHIP, CANNOT BE OVEREMPHASIZED.

Lucy Fato and Rose Marie GlazerOctober 07, 2020

Thank you. We agree that comprehensive due diligence refreshed periodically can help mitigate risk and may be less costly in the long run.

Norman WilloxOctober 02, 2020

Very well done! Wanted to get your thoughts on continuous evaluation (CE) as it relates to some of the criteria. As you well know a transactional vetting report is static and historical only. CE mitigates on going risk as well. Thanks

Best,

Norm Willox
202-821-2090 c