Legal Issues Surrounding Executive Background Checks

Corporate Resolutions President and Founder Ken Springer is a former FBI agent who has been conducting business-related investigations and intelligence gathering for more than 25 years. What follows is the second part of an e-mail Q&A I conducted with Ken on the topic of executive background checks:

Eric Krell: What do/should background checks consist of?

Ken Springer: Our objective is to confirm the subject's credentials, whether they have been involved in any significant lawsuits, if there are indicators of financial stress, if they have received media coverage, or have business affiliations that may not have been disclosed.

We also conduct similar inquiries on the company and typically find names changes or patterns of settling lawsuits two months prior to going for funding.

Our investigative reports list in detail the various sources utilized that will attest to the thoroughness of our inquiry. Our reports highlight significant findings or concerns, as well as recommendations for further investigation. Oftentimes, when we identify material discrepancies, we suggest that you introduce us to your candidate so that we can conduct a verification interview to reconcile issues surrounding these discrepancies and/or inconsistencies.

Our typical findings include:

• Lawsuits involving former employers, lenders, investors or partners relating to fraud, mismanagement, breach of contract and/or sexual harassment;
• Non-disclosed business interests;
• Criminal records;
• Adverse regulatory histories;
• Resume fraud;
• Controversial media attention;
• Indications of financial stress;
• Potential conflicts of interest; and
• Patterns of management turnover.

In short, our intent is to follow these objectives and confirm matters that identify and minimize financial and reputational risks for our corporate clients.

EK: Are the executive candidates aware of the checks when they are being conducted? Should they be informed?

KS: In today's corporate climate, most if not all executive candidates should be aware of the fact that there will most likely be a background check carried out in some form. However, it is only necessary to inform the subject if and when a consumer credit report is obtained. In that case, the subject must sign a written release in accordance with the Fair Credit Reporting Act.

Additionally, often times we are asked to interview/confront potential CEOs regarding discrepancies to resolve and document their involvement for possible future use.

EK: Are there any legal issues related to conducting the checks that boards should be aware of?

KS: Yes, of course. When engaging in elaborate background checks, we advise that corporations retain an outside counsel. There are many legal aspects that a company's board should be made aware of; and more importantly, these aspects are likely to change. Furthermore, legal issues can vary from state to state. So, a board needs to be aware of how to handle each specific case. For example, in many states a subject needs to be made aware before he is declared the "target" of an investigation. If a board fails to comply with these guidelines, they could be met with a set of legal woes that could have easily been avoided.