Corporate Scandals. What Happens When Executive Due Diligence is Overlooked

Executive management is the heart of any company. Their leadership dictates its present operations and steers the way into the future. But what happens when that leadership is flawed? We look at some of the recent biggest unethical corporate scandals and how they might have been avoided.
By Peter Gorne
December 21, 2021

Greatest Internet Scam in History

In October 2018, Pakistani authorities arrested Shoaib Shaikh, the chief financial officer of the software company Axact in what is known as one of the biggest Internet scams on record. Shaikh was sentenced to 20 years in prison for issuing fake online academic degrees to individuals worldwide worth $140 million. Axact has been accused of taking money from over 215,000 people in 197 countries—a third of them from the United States.

This scandal came as a shock to many, considering its stark contrast to Shaikh’s presumed benevolent character. Directing a proposal to provide education to millions of Pakistani children and proudly displaying an Axact company flag in his office, Shaikh was thought of as the picture-perfect philanthropic patriot. So how was this CFO and so many other executives’ fraudulent activities so easily overlooked?

Examples of executive misconduct and corporate scandals

The ever-increasing number of corporate scandals seems insurmountable. Yet, it seems as though the wake of another CEO calamity makes its way onto the front page of the newspapers every few weeks.

Take, for example, Trevor Milton: Former CEO Nikola. Mr. Milton was indicted on three counts of fraud and released on a $100 million bail in July 2021. The indictment was a swift fall from grace for the former Chairman and Founder of Nikola, which worked to develop electric semi-trucks and was once valued at $20 billion.

Nikola was accused of falsifying their technology, going as far as to push a truck down a bill for a promotional video to make it appear that it was running on their system. At the indictment, the prosecution argued that “ to drive investor demand for Nikola stock, Milton lied about nearly every aspect of his business.” Milton had owned a number of failed businesses before starting Nikola. He also sold a company for a figure that his business partner later disputed. With multiple companies behind him, there was evidence that might have given investors cause to reconsider his suitability as a CEO.

Another famous example is Martin Winterkorn, former CEO of Volkswagen. Mr. Winterkorn paid his former employer a stiff penalty of 11.2 million Euros (about $13.7 million), in June 2021, for ‘breaches of due diligence following the carmaker’s emissions scandal, strongly implying his role in the cover-up.

Winterkorn resigned when the scandal broke in 2015, but questions remained about how much he knew, and when, about the software that cheated emissions tests for diesel-powered VW cars. Volkswagen’s move to seek damages settlements from former executives showed the company’s willingness to publicly accuse the former executive team of their part in the fraud.

This shows how the well-being and future of the company are entrusted to the executive team and their ability to make good decisions and judgments in business.

In addition to misleading information and unethical behavior, corporate executives have also had their fair share of conveniently ‘hiding’ their job history and performance backgrounds.

One such example is Albert Dunlap, the famous former CEO of consumer appliance company, Sunbeam and the best-selling author of the book “Mean Business.”

When applying to Sunbeam, Dunlap omitted two prior job positions, which ended prematurely due to his performance. He was subsequently fired from Sunbeam and was accused of accounting fraud.

Another famous case is David Edmondson, the former CEO of RadioShack, who resigned following allegations that he falsified the institution from which he obtained his academic degrees. The supposed school at which Edmondson received his degree had no record that the CEO finished his studies there.


 

Could these corporate business scandals have been prevented?

One of the biggest questions in each of these cases is whether investors could have seen them coming. The difference in these scandals is that the character of the executives involved was called into question.

Research has suggested that one of the best indicators of one’s future behavior is one’s past behavior.

According to a study conducted by the University of Florida, participants’ perceptions of their past behavior influenced their decision to repeat the behavior in the future. The more pieces of information that a job search committee can compile about a candidate’s past, the more accurate it will be in assessing the individual. In order to avoid these scandals and prevent negative corporate brand equity, it is worthwhile for companies to go the extra mile and invest the additional resources into conducting exhaustive background checks on not only employees but especially CEOs.

One might argue that investigating the past actions of each executive would help reveal insights into their character. But many times, this search is, at best, superficial. Companies hire for what the executive has done in the past five or ten years. On many occasions, it doesn’t matter for someone at this point in their career what they did at the age of 25. Besides, the anonymity that existed before the advent of social media made it easier for prospective employees to embellish their resumes.

Another explanation that can be attributed to the lack of prevention of these scandals is the concept of confirmation bias. This could explain why small, cohesive hiring committees engage in flawed decision-making to quickly produce a result to show conformity and agreeableness with the group.

The best, and most recent example of the catastrophic effects of confirmation bias is the demise of Theranos, the once disruptive technology company that was set to democratize health care as we know it. Notable investors included Walgreens, Rupert Murdoch, and the DeVos family. All fervently trying to bring the Theranos technology to market, the investors became entangled in an unwanted network of fraud and corruption allegations imposed on the company until Theranos was forced to cease all operations. In this context, executive board committees or chair members could have engaged in groupthink when making CEO hiring decisions to conform to group norms.

Don’t Exempt the Exec.

While it may seem flagrant now, just because an individual holds a well-respected title does not mean they should be exempt from a comprehensive background check and pre-hiring screening process. As history proves, even management and top-level executives are not blameless and have to be held responsible to the highest degree for their actions.

In some cases, a standard background check might have uncovered information that would have called into question their suitability to be a C-suite team member. Traditional background checks would likely have revealed the failed businesses in Trevor Milton’s past. But if someone has questionable moral judgment, they might likely be less than totally honest in the hiring process.

Trust has long been seen as an essential part of the hiring process. Sadly, providing false information is all too common. According to a study conducted by CareerBuilder, 58% of resumes consist of misleading or false information such as incorrect education details and inaccurate job titles and seniority levels. A survey by HireRight found that 85% of resumes contained false statements.

The increasing use of LinkedIn for hiring, where all information is self-declared, only adds to the problem. A recent analysis by Intelligo found that 36% of executives had failed to provide their entire employment history on LinkedIn, and 14% had deleted some previous work experience from their LinkedIn profile.

Learn how to spot LinkedIn manipulation >>

 

How to get the complete picture to prevent corporate scandal

The best chance to prevent executive corporate scandals is to have a complete view of an individual’s history and character. This cannot be provided by a traditional background check which is likely only to review sources provided by the candidate and a few other public sources.

For investors, having a 360° view of an executive’s past conduct is one of the most powerful indicators for their future conduct.

The advent of AI-powered automated background checks allows investors and hiring managers to receive an unprecedented level of information on an executive candidate in the hiring process. By harnessing the capacity of AI to review tens of thousands of data points in a matter of minutes, background checks can now include a whole array of additional information including legal filings down to the county level, cross-checking all variations of a person’s name, financial filings, bankruptcy claims, and any conduct across social and traditional media. For investors, having a 360° view of an executive’s past conduct is one of the most powerful indicators for their future conduct.

Conclusion: Looking ahead

As ‘to err is human,’ we can expect to see more examples of corporate scandals in the year ahead. The final judgment on many of these corporate scandals and white-collar crime cases is still to come. But even as these cases wind their way through the courts, new ‘villains’ will likely appear in the corporate world. The only way that companies can protect against these unethical business scandals is to perform the most thorough background check and executive due diligence possible to weed out those executives whose character is questionable.

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