Eusebio Leal Spengler died last week. That name is not well-known in the US but he was the person who led an effort to preserve Old Havana, transforming that historic district from a forgotten slum into an architectural jewel and tourist destination. According to his New York Times (NYT) obituary, “Cuban leader Fidel Castro, whom Mr. Leal had befriended, gave him unprecedented authority to collect taxes and profits from tourism in the old center. Through a state-run company, Habaguanex, Mr. Leal plowed money into construction projects. He restored elegant 18th-century plazas, baroque cathedrals and restaurants and hotels, including the pink-washed Hotel Ambos Mundos, where Ernest Hemingway wrote “For Whom the Bell Tolls.” Paradoxically, Old Havana became a capitalist success story: The restored buildings drew foreign tourists, whose money then paid for more restoration work.”
Most Americans either forgot or never knew that Havana was the Eastern Capital of the Spanish Empire in North America. They constructed a great city center in Havana. Although it may seem strange that a Communist government would want to honor its colonial heritage, it was clearly a priority to Castro. Old Havana was designated a UNESCO World Heritage site in 1982. I had the chance to tour Old Havana when I went to Cuba before Trump closed off tourism to the island. It is truly worthy of its international historical significance and the UNESCO designation. Leal said of his work, “What we’re doing here is trying to preserve the patrimony, the memory of the Cuban nation. Building by building, block by block, he continued his preservation efforts until the end of his life. One of his last and most ambitious projects was the restoration of the National Capitol Building, which, with its domed roof and neoclassical architecture, resembles the United States capitol. It opened in 2018 after eight years of work.”
This detail to historical work and preservation informs today’s topic, what is the role of a Board of Directors in hiring senior executives, Chief Compliance Officers (CCOs) and even other Board members? I explored this issue with Candice Tal, who began by noting, that bad senior executive hires can cost a company much more than simply dollars. She related, the “financial costs in day-to-day operations easily can quadruple that of a regular employee, but it can also impact the company’s corporate governance and board of directors if that executive hire was found to be involved with unethical and illegal activities. Not even a signed contract can protect a company if an executive hire’s unethical actions come to the attention of the national media. Fiduciary risk and exposure for the board of directors cannot be overlooked.”
She pointed to the example of Yahoo! and its hire of Scott Thompson. It turned out that Thompson had incorrect information on his online biography regarding his academic credentials. The “implications went beyond the activist shareholder accusations to reflect on the Board of Directors for not vetting his background more carefully. The company may have been exposed to claims of providing false information to the SEC and potential stockholder lawsuits. Thompson’s 120-day tenure at Yahoo! cost the company over $7 million and seriously tarnished the company’s reputation in the business community.”
A more recent example is the former Chief Executive Officer (CEO) of McDonald’s, Steve Easterbrook. He was terminated for having an inappropriate relationship with a subordinate which was consensual, yet non-physical. During the investigation that led to his downfall, he was apparently asked if he had engaged in other, similar behavior with other McDonald’s personnel. He denied any such relationships but some 9 months after he was terminated when a whistleblower came forward with such evidence. A more thorough internal investigation confirmed other inappropriate relationships. Now McDonald’s and Easterbrook are involved in a very messy and public lawsuit, where the company is trying to clawback his massive severance package.
Whoever is at fault around the initial investigation, which led to Easterbrook’s termination; such behavior does not appear out of thin air. The point is that a more thorough due diligence in the hiring process, can help keep a company out of trouble later. Whether that trouble is a #MeToo claim, clawback lawsuit or suit against the Board of Directors for a haphazard internal investigation.
The key is that a company engages in an executive due diligence investigation rather than simply a routine or even executive-level background investigation. Tal explained that an executive background search, is “typically limited to a five-component review of: criminal records, employment verification, degree or education verification, social security validation, address verification and sometimes credit history.” Such searches are “very limited searches.”
Conversely, executive due diligence, “looks in-depth at all available public records sources: criminal history, civil litigation issues, financial and legal issues, relationships with other companies and board advisory positions, reputation, misrepresented education and overstated work history, behavioral history (for example litigiousness), and, in particular, undisclosed or adverse issues.” While it is generally “more costly than executive background checks and takes more time, the information gathered is extremely valuable and can save a company substantially more. A high-quality due diligence review can find important information which would not be returned in a routine executive background check.”
Infortal Worldwide has found that up to 20% of executive search candidates fail a deep-level due diligence investigation. Now consider how many senior executive slots your company has and add to that Board of Directors seats and you can quickly see the risk of failure to consider an executive due diligence search when promoting or hiring. Moreover, you need an executive level due diligence in other business situations as well, including the senior management of new business acquisitions brought into your organization through a merger or other acquisition, selecting new Board members, screening corporate Board of Directors and, of course, for third party business partners and other agents in the sales and supply chain channels.
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