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Money Talks | Executive background checks are essential, voyeuristic, and misunderstood

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December 05, 2018

Money Talks is our ongoing educational series to demystify the finance and investing industry for our community of translators, transcribers, and interpreters. If you are a practitioner in the finance and investing industry, you may even learn a thing or two as well! Bolded words are ones we especially recommend adding to your glossary.

One of the most awkward jokes I've ever made in my career was about executive background checks. Years ago, I was the junior analyst on a deal team conducting due diligence on a company whose founder was still the CEO. The founder, a brilliant Iranian academic-turned-enterpreneur, consented to a background check by a investment consortium where my boss' boss was an incredibly smart Israeli lawyer-turned-financier. If memory serves, the Iranian asked for a reciprocal background check on my boss' boss.

The cringe-worthy joke was about how an Israeli and an Iranian don't need to do background checks on each other because they've never had any trust issues with one another. I'm amazed they kept me on the deal team!

Anyway, as our clients navigate the world of due diligence and our translators help them along, we thought it would be valuable to shine a light on this opaque industry: executive background checks.

I won't show you mine if you won't show me yours

A major step in due diligence is assessing the quality and integrity of a management team. If a private investment is being made that is larger than, say, $25M, it is common practice in the West to conduct a background check on one or more members of the management team.

Companies are navigating through contentious, often litigious waters. The stoic, sometimes toxic sensibilities of decades past have gone by the wayside as firms must continually arm themselves against formidable challenges -- both seen and unseen, expected and unexpected -- that can quickly bring even the most powerful of organizations to their knees. In an M&A environment, such dynamics can be enormously dangerous to buyers and sellers alike.

Firms that fail to adopt background checks for all key employee hires or merger partners are essentially courting disaster with cascading implications that impact M&A and beyond.

One needn’t look much further than headlines over the last few years for evidence of such destructive powers. Hollywood, never exactly the torchbearer for sound business decisions or the ethical high ground, has provided a salient example to enterprises of all shapes and sizes for the need to proactively protect their interests.

The Weinstein Clause, indeed a sign of the times if there ever was one, has become a recent addition to an already complicated M&A environment that’s meant to protect buyers from the devastating effect of unforeseen misconduct allegations and litigation.

Step 1: Use Google, Step 3: Invest, Step 2: ?

I remember reading the first background check that may old company commissioned. I felt like a voyeur.

Not only did I get the usual criminal and civil sections, but even things like what was being said on social media about the executive's family. And what was being said by the family: in one case, the background check flagged that the executive's daughter wrote publicly about battling eating disorders.

It felt very uncomfortable to read, but it did, strictly speaking, make me feel as if a thorough vetting had been done. Executive background checks go well past the precursory efforts of a standard investigation, taking a far more granular approach than simply checking databases for criminal activity and past offenses. Using a variety of tools that span everything from digital technology to traditional interviews and fact-checking, an executive background check is more than just merely checking qualification standards but delves into the moral character and decision-making for talent that plays pivotal roles within organizations.

Social media profiles, extensive checks of both provided references as well as backdoor references, thorough vetting of all educational and employment accomplishments, and even deep web searches are all routine components of an executive background check that empowers companies with the information needed to make sound, well-informed decisions.

Even the people who conduct these investigations have intimidating names

Kroll and Blackpeak are two industry leaders in the field, both employing far-reaching, often sophisticated techniques to vet executives before undisclosed information leaks that can damage shareholders, investors, and brand reputations. While such efforts don’t eliminate the need for Weinstein Clauses or other protective measures in the often volatile M&A environment, companies like Kroll and Blackpeak can help steer companies from such dangerous waters to start with.

In a dynamic, contentious environment, something as simple as an executive background check can be the difference between a successful M&A process or one that ultimately does more harm than good.

About the author

Matt Conger

CEO of Cadence Translate. Spent several years doing due diligence at Bain & Company and Hudson Capital Management. Lifelong learner currently focused on Salesforce, Python and Hearthstone. Lived/studied in Philadelphia, Palo Alto, New York and Beijing.

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