Finding such people can be a drawn-out process and can also be extremely costly. Considering the effort put into making such significant hires, it is surprising how often the bona fides and reputation of a prospective hire are overlooked or even ignored. Foregoing this important part of the recruitment process reflects a lack of focus on the importance of involving compliance personnel and conducting effective and impartial background checks on prospective hires. As has been demonstrated on various occasions in recent times, not investing properly in this process can lead to detrimental publicity, financial losses, and bitter disputes among management and shareholders.
Certainly there have been several cases in history where companies have suffered the indignity of having to replace newly-appointed senior executives. The following cases are two well-known examples.
In June this year, leading Australian retailer Myer was put in a precarious position when it was forced to sack one of its new ‘star recruits’ on his first day. Hired as group general manager of strategy and business, Andrew Flanagan represented that he had been the former managing director and vice president of Inditex Group, which is the head company of global fashion conglomerate Zara.
It was only after being hired by Myer that it became apparent that Flanagan had provided substantially misleading and incorrect information in relation to his employment history. Despite having undergone extensive interviews with senior personnel at Myer, Flanagan had deceived the company considerably regarding his credentials. Flanagan had falsified his CV and references, with Inditex ultimately contacting Myer to deny that Flanagan had ever been employed the company.
By the end of July 2014, Flanagan was charged by Victorian police officers with fraud, involving deception ‘using a resume and providing verbal employment history and references falsely stating he had held a number of senior executive business positions’. In the aftermath of Myer’s discovery, the true nature of Flanagan began to be revealed, including a criminal history and potential falsification of other employment positions.
Back in 2012, internet company Yahoo! was forced to undertake an extensive search for a chief executive officer to help salvage its underperforming business.
Not long after the company had appointed Scott Thompson it was announced that he would be stepping down due to allegations surrounding the accuracy of his education record. Thompson’s CV listed an accounting and computer science degree from Stonehill College in the United States; however, Daniel Loeb, the boss of hedge fund Third Point (which owns 5.8 percent of Yahoo), claimed that Thompson had not graduated with a degree in computer science.
The discrepancy in Thompson’s record was deemed to be the result of an ‘inadvertent error’ by Yahoo. Loeb initiated a number of inquiries on behalf of other shareholders as to how Yahoo’s vetting process had not picked up that Thompson never graduated with a degree in computer science.
This case divided opinion as to the seriousness of Thompson’s misrepresentation, particularly as his performances in previous roles had earned him considerable acclaim. However, Yahoo had exposed itself to potential litigation by using Thompson’s degree information on regulatory filings, and the ongoing discussions about his background continued to be a distraction from Thompson becoming established in his new role.
This was so much the case that the decision was made that Thompson had to step down as CEO. Not only was Yahoo forced to undertake another expensive and time-consuming search for a replacement, but Thompson’s departure also came at the expense of the directors who were responsible for his employment. Furthermore – just as Myer experienced with the failed hiring of Flanagan – Yahoo was the focus of considerable media attention for all the wrong reasons. As a result, its board’s reputation to make decisions in the best interests of all stakeholders was tarnished.
Both of the above cases highlight some of the dire consequences of failing to conduct detailed and effective background checks.
When a company is on the hunt for a new senior executive there are many people who are under the microscope. Senior management are under pressure from stakeholders to find the right person to effect change in the business; in turn, human resources departments are under pressure from senior management.
In all of this, personnel unfortunately lose sight of the consequences of being duped and ignore the value of taking the time and committing independent resources to effectively screen a candidate.
What to include in the hiring process
Both Myer and Yahoo could very well have avoided embarrassment and legal ramifications if they:
- conducted a detailed background check to ascertain the overall accuracy of an individual’s CV, including all previous work and study credentials
- performed detailed research into the person’s profile in international media in each of the markets where they have lived, carried on business or managed people
- interviewed other colleagues, business associates and previous employers to address the overall integrity of the person in all markets in which they have worked
- interviewed the person to assess their understanding of compliance and legal risks, their approach to ethical and integrity issues, and their answers to a series of hypothetical corporate situations posing ethical challenges and testing their responses along the way
- conducted psychometric testing based on integrity issues to independently assess candidates’ responses to certain situations.
Involving compliance personnel and investing in independent background screening and integrity assessments should be an essential part of the hiring and promoting process. This is important with all new employees, but even more so with those moving into senior positions.
The incidents involving Flanagan and Thompson will for some time remain blights against Myer’s and Yahoo’s reputations in the eyes of some of their shareholders, but they will no doubt have adopted screening measures to heavily scrutinise all candidates in the future. While undertaking extensive screening operations can be time consuming and costly, it is not as damaging to an organisation as disharmony when it is discovered that a recently-appointed individual’s credentials are false.