Don't Get Burned by Smiling CEO Candidates

By Scott Moritz, CFE

This article is adapted from "A Baseline of Executive Backgrounds," which appeared in the Winter 2002 issue of Directors & Boards magazine. The magazine's Web site is: - ed. 

Applicants for top executive positions may have impressive résumés and
reputations but extensive background investigations may uncover hidden, illegal activities that can hinder or destroy the organization.

When the Sunbeam Corporation board hired Al Dunlap as its CEO in 1996, it expected him to restructure the financially ailing company to profitability. Instead, it fired him 23 months later amid plummeting stock prices and allegations of fraud.

If the Sunbeam board had done a better job of checking into Dunlap's background it would have found that in the 1970s he was accused of similar fraud charges as president of Nitec Paper. Dunlap conveniently omitted all references to Nitec in the résumé he submitted to Sunbeam. But Sunbeam, which is currently in bankruptcy proceedings, could have easily found reports of his previous professional conduct on public electronic media archives.

According to the Securities and Exchange Commission (SEC), shareholder lawsuits related to the restatement of earnings grew 750 percent from 1992 to 1998. Directors' and officers' (D&O) insurance claims stemming from these complaints have surged in recent years, with some settlements exceeding $1 billion. A public company's greatest protection against these types of catastrophic losses is the integrity of its senior executives. Obviously, excessive misconduct poses a significant risk to any organization.

Organizations often overlook pre-employment screening programs as mitigating risk management tools. Screenings can assess a prospective employee's character, integrity, and historical conduct.

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