Leadership and Management s1

[Leadership and Management]

Smart Business: Problems in Executives' Backgrounds

Hed: Crime and Lies in the Corner Office

Deck: As dot-coms rushed to hire top executives, they inadvertently touched off a gold rush for the dishonest and unsavory.

Summary: Executives who applied to dot-coms were four times as likely to have troubled pasts as those in other fields, one study shows. Who will these characters target next?

Pull quote: "They'll go on to the next scam. I have no idea where they're going to pop up again." -- Betsy Blumenthal, San Francisco managing director, Kroll Associates

When Andrew Maltin started Exotics.com, a site for rich peoples' toys, he had a bad feeling about a lot of the consultants and potential financiers who seemed to circle around, looking for a bite of his business.

Although he managed to avoid any disastrous liaisons, Maltin says he was burned several times by shady characters and was shaken enough by the experience to do something about it. He's now the CEO of RepCheck, a site where people can go to tattle on folks they do business with -- or check up on someone they're considering hiring or taking investment money from.

"As an entrepreneur, you get so many people that are promising you so many things, and there's really no way of checking on that," he says.

Maltin's paranoia seems to be justified. A recent study by business security and investigation firm Kroll Associates found that top officers and directors at dot-coms were four times as likely to have skeletons in their closets as their peers in other businesses. Out of a group of 70 people applying for top positions at Web companies, Kroll found 27 had lied on their resumes or had SEC violations, ties to organized crime, undisclosed bankruptcies or similar misdeeds in their past.

While it provided the first solid evidence of tainted executives' rush on dot-coms, the Kroll study doesn't surprise experts in the executive hiring business. The opportunity was too tempting, says John Zambito, general manager of the Management Recruiters International office in Columbus, Ohio. "If you look at a dot-com company, most of them were started by highly entrepreneurial people," he says. "They're going to do things quickly, not thoroughly."

Now that many dot-coms have lost their luster, some of the same unsavory executives and investors have bailed out and are probably on the hunt for new opportunities, says Betsy Blumenthal, who conducted the Kroll survey and oversees the company's San Francisco office. "They'll go on to the next scam," she says. "I have no idea where they're going to pop up again." Cheat, Lie and Steal The detailed background checks conducted by Kroll and its competitors may have filtered out many of the shady executives who applied to dot-coms. Among firms funded by top Bay Area venture capitalists, due diligence remained strong enough even through the Internet gold rush to "filter out the type of garbage that you're talking about," says Bill Rusher, a partner in the San Francisco executive search firm Rusher, Loscavio and LoPresto.

But Blumenthal and other experts are certain that many people with tainted backgrounds secured executive jobs or board seats at companies that didn't invest in rigorous checks.

A handful of stories have surfaced to back them up. In one high-profile case, the founder of video-streaming firm Pixelon was ousted last April after investors discovered he was a convict on the run and operating under a pseudonym. They'd already given him $35 million, much of which he allegedly blew on a single promotional party.

And last summer, the co-founder of a Web-related software company, Luna Information Systems in Oakland, Calif., admitted when confronted by the San Francisco Chronicle that he made up degrees from Harvard and Columbia. The company has changed its name to Provato and installed a new CEO.

Beyond those juicy tidbits are all the cases that never make the newspapers.

Barry Nadell, CEO of InfoLink Screening Services in Chatsworth, Calif., says his background checking company stopped one of Hollywood's top entertainment companies from hiring a new CFO after it discovered the applicant's last job -- at a venture capital-backed startup -- had ended in a hushed-up legal settlement. "It turned out he had embezzled the venture-capital money," says Nadell. With companies eager to cover such incidents up before they stir bad press, he says, "I guarantee you there are a lot more problem cases out there."

Vulnerable Targets That should be enough to make small businesses reconsider how thoroughly they vet potential executives and investors. "I think (people with background problems) are used to the fact that they're going to have to go into companies that don't have sound or standardized procedures," says Zambito. "A lot of those are small companies."

What should you do to protect yourself in this new environment? The need for background checks is nothing new -- the cost starts at about $5 for the most basic and runs up to about $500 for all the bells and whistles. It should be a given in any executive search. Beyond that, however, experts do have some specific suggestions that may help you keep your candidate list clean.

First, watch out for the job-jumpers. These are the execs that always "needed a new challenge" -- every six months or so. The belief among dot-coms that "we like people that are taking fast moves because it shows they have initiative" should give way to a more rational sense of suspicion about executives who couldn't commit to their jobs, says Zambito.

Many tainted executives at dot-coms had tenures so short that they never had a chance to cause damage, or at least to get caught, Blumenthal says. "Many of these businesses crashed before someone could get their hand in the cookie jar," she says. Another good idea, Zambito says, is to alert candidates that you do background checks when they first start the interview process. Combine this with a job application that makes a point of asking specific questions about SEC violations, bankruptcies and crime convictions. "If somebody knows they have issues with any of those things, they'll all of a sudden become not interested in the opportunity, and it'll save everybody a lot of time," Zambito says.

Nadell has a six-page application for anyone who wants to work at InfoLink Screening. It's so thorough he's started selling it to clients. The point is to get a candidate on the record about every potential problem in his or her background. Then, if discrepancies are found during a background check, you know the person has been dishonest with you.

Dishonesty often shows up under the education heading of resumes, says Rusher, who finds that ironic. "If you're a VP running a $2 million division, it is moot whether you got a college degree or not," he says. "But it is relevant whether you lie about it."

Also, you should make some reference calls yourself, Zambito says. With lawsuit-conscious employers reluctant to bad-mouth the people who worked for them, he says it's more crucial than ever to hear the tone of voice on the other end of the line. By picking up on this, "I've been able to ask additional questions that have led me not to recommend a candidate," Zambito says.

Lastly, watch those temps. Many employment agencies now provide executive talent, and they've become an attractive place for people with troubled backgrounds to hide out, Nadell says. "Agencies generally will check references, but often won't check criminal background and those sorts of things," he says. He suggests asking for the agency's policy on background checks before accepting an executive-level candidate from one.

If you're still unsure about a hire, you can always try Andrew Maltin's RepCheck site. Although his database just went online in December, Maltin says 25,000 people signed up to read or post information in the first 10 days.

With RepCheck, Maltin's hoping to provide a forum that gets to the heart of peoples' reputations, by letting associates vent their spleens in public. Whether or not his venture succeeds -- he hopes to generate revenue by licensing the underlying technology -- the very fact that RepCheck exists testifies to the risks facing small businesses.

Related Links Kroll Associates Management Recruiters International InfoLink Screening Services RepCheck

SOURCES:

Betsy Blumenthal Managing Director, San Francisco Kroll Associates 90 New Montgomery St. San Francisco, CA 90105 (415) 495-2200 [email protected]

John Zambito General Manager, Management Recruiters International of Columbus Downtown Management Recruiters International 555 South Front St., Ste. 100 Columbus, OH 43215 [email protected]

Barry Nadell President and CEO InfoLink Screening Services Inc. 9201 Oakdale Avenue, Suite 100 Chatsworth, CA 91311-6520 (818) 990-4473 [email protected]

Andrew Maltin CEO RepCheck 8484 Wilshire Blvd. Ste. 700 Beverly Hills, CA 90211 (310) 488-5885 (mobile) [email protected]

Bill Rusher Partner Rusher, Loscavio and LoPresto 142 Sansome Street 5th floor San Francisco, CA 94104 (415) 765-6582 [email protected]