Checking references (and a whole lot more) during tough times.
By Theresa B. Mack and Anna Wermuth
Board of director and executive officer candidates will be subject to heightened public scrutiny if the U.S. Securities and Exchange Commission’s (SEC) proposed amendments for increased disclosure requirements are adopted. Responding to events in the financial markets during the past 18 months, the SEC seeks to provide shareholders with additional information that will enhance voting and investment decisions. Specifically, the SEC’s Release 33-9052 sets forth proposed amendments to Item 401 of Regulation S-K that will require disclosure of “qualifications, attributes or skills” that qualify a candidate for service in a governance capacity for a particular company, based on that company’s business and structure. Currently, Item 401 only requires “brief biographical information about directors and nominees.”
In light of these proposed changes, thorough background checks will become an even more essential component of hiring than they are now. Such checks should be performed not only to prevent embarrassment and unfortunate publicity, but also to reduce the risk of legal liability. Although the SEC’s proposed changes only apply to SEC filers, private and not-for-profit companies should also use these guidelines as best practices.
The process itself hinges on what level of scrutiny the background investigation will entail. Are you considering hiring a rank and file employee or rather one with access to sensitive data and proprietary assets? No matter what the level, all potential employees should be asked to sign a waiver to allow the retrieval of their consumer credit report, both initially and routinely as the need arises. That way the waiver is in place when needed.
Additionally all applicants should prepare a thorough background information form to include all residence addresses used, all names used, and any misdemeanor or felony convictions. As long as the above requisite information is in place, a thorough background investigation can be conducted efficiently and with greater accuracy.
Knowing someone’s counties of residence is key to a thorough criminal history check. And knowing all convictions will give you a complete picture of the applicant. Often, potential felonies are pled down to misdemeanors—and without knowing the totality of convictions, you might never learn important information about your applicant. For example, if you are hiring a cashier, you would want to know if the applicant has had any problems in the past with theft. Many theft charges are misdemeanors, yet only felonies are requested on many job applications.
Employers must be cautious, however, about instituting blanket rules, such as a prohibition on the hiring of any applicant with a felony conviction. Such practices could have a legally actionable adverse impact on groups of employees protected from discrimination under the federal employment laws. In addition, some states prohibit employers from making employment decisions based solely on arrest and/or conviction records. Therefore, employers might be required to take all factors into consideration—such as the length of time that has elapsed since the conviction, the nature of the offense, and the type of job in question—before making an employment decision based on criminal histories.
The more accurate the picture of the applicant, the greater the employer’s chance of making the best hiring decision. Applicants will do almost anything to land a job in today’s economy. The competition is fierce. Therefore the application must be fine-tuned to ask all the questions an employer would want to know. Questions should be carefully written in a detailed fashion so the applicant is unable to provide vague answers.
Education questions should include not only the name of schools attended, but city, state, hours earned, name used while in school (especially important for females), and honors achieved. The more information that is requested, the more there is to validate.
Recent studies indicate that roughly 50 percent of résumés contain false information, although the level and degree of falsification varies widely. The reasons why people falsify their job applications and résumés are endless, but the reasons do not matter. What matters is protecting the company from reputational damage and legal liability that can arise from hiring someone who is not the person they hold themselves out to be. Three relatively recent incidents highlight these risks.
Gregory Probert, the president of Herbalife Ltd., lost his job last year after The Wall Street Journal disclosed that his corporate biography listed a fake master’s degree. Also late last year, Tetra Tech Inc. demoted its president, Sam Box, after Mr. Box acknowledged he hadn’t earned a bachelor’s degree he claimed. In a similar example, James DeHoniesto, chief information officer at Cabot Microelectronics Corp., left after the discovery of a fake bachelor’s degree.
And then there are those incidents that will likely never be forgotten. Ronald Zarrella, a former CEO of Bausch & Lomb, lied about having an MBA from New York University. Zarrella’s embellishment cost him his $1.1 million bonus, and gave Bausch & Lomb, a company that Standard and Poor’s had contemporaneously praised for its governance practices, a black eye.
Former Smith & Wesson board chairman James J. Minder failed to disclose his criminal record to the board during his interview. Minder, then a 74-year-old management consultant, had spent 15 years in prison for “an armed robbery spree and an attempted prison escape” before his 1969 release from prison. He said he had not disclosed his record because he “was never asked.”
Background checks are an important risk-management tool. Not only is it embarrassing when a high-ranking officer turns out to have a criminal past, legal consequences may also loom.
Employers have a duty to protect their employees, customers, and clients from harm caused by employees. If a reasonably diligent reference check and background investigation would have revealed that the applicant lied, is unfit for the position, or might pose a threat to others, then the employer’s failure to investigate with reasonable diligence might result in the employer being held legally liable to an injured party. Due diligence in validating a candidate’s claims involves a thorough investigation.
The Examination Room
Reference checking, a critical component of the hiring process, is not always easy to perform, due to potential legal ramifications. Prospective employers need to obtain as much information as possible with respect to potential new hires, including detailed checks of their references. When the position to be filled has significant visibility, involves a high degree of trust, or involves interacting with the public or other important constituents, the use of a professional who specializes in interviewing is recommended.
Interviewing is a skill that is only achieved through experience and training. A trained interviewer can often detect deception, ruses, and other schemes an applicant uses to corroborate false information. This can include individuals used as references who, in fact, had no working relationship with the applicant and are just a friend or in disguise. Again, times are tough, and applicants under stressful conditions will do almost anything to land a job, including that of falsifying references and work history.
Educational credentials are commonly misrepresented on job applications and résumés. Accordingly, all claims with respect to education (including degrees earned, honors conferred, and rank in class) must be verified. Where authorship of published works has been claimed, such claims should be verified and the works checked for evidence of plagiarism.
Certain issues should raise red flags. A degree from an unaccredited institution or a “diploma mill” is a red flag. Various agencies, including those authorized by the U.S. Department of Education’s Council for Higher Education Accreditation, can provide assistance.
Schools rarely lose student records. Thus, any claim that the records cannot be found should be checked with the institution. Claims by a candidate that his school is “out of business” should be verified with the Department of Education (DOE) of the state in which the school allegedly operated. DOE should be able to verify that the school existed, when it closed, and also should be able direct the investigator to the custodian of that school’s student records.
Embezzlement can occur at any level of an organization. Of course, this could be particularly damaging if the employee handles funds or is in a position of trust or responsibility. Obtaining financial background information on all candidates is essential.
A number of public information sites such as Hoovers.com maintain free portals. Federal bankruptcy court records should be searched in every state in which the individual has resided, and consumer credit histories can be accessed when “permissible purpose” exists. “Permissible purpose” is a term defined by the Federal Trade Commission, which is the agency that governs enforcement. An applicant’s credit history should be obtained, but employers are strongly cautioned to seek legal counsel before doing so. Violations of the Fair Credit Reporting Act and related laws can result in criminal or civil penalties.
The local assessor’s office of the applicant’s county of residence will often reveal his/her current real estate tax status. Many municipalities support an online portal that includes public records, such as property taxes and delinquencies. The information is there; one just needs to be aware of where to look.
The newly proposed SEC regulations, as well as the struggling economy, highlight the need for increasing disclosure surrounding board members and executives of SEC filers and others. The benefits of knowing more complete information about a potential employee extend well beyond public companies. A thorough investigation could reveal indicators of actions that might result in financial loss or legal liability to the employer.
In order to mitigate these risks, organizations should perform background checks of potential new hires. Applicants of every level should be scrutinized more than ever before, by at least checking references and claimed educational credentials. Depending upon the type of position involved, more scrutiny, in the form of credit checks, might be warranted.
It is not enough to simply run an applicant through a screening service that validates the name and key identifiers of the applicant. We must do more. The economy we find ourselves in forces us not only to demand more information from our applicants but also to analyze the information received as never before.
Background checks should be performed by trained professionals who have not only the tools at their disposal but also the experience to provide the most information about an applicant in the least amount of time. Employers would also be wise to check with legal counsel before making decisions based on criminal and credit records.
Theresa B. Mack is a senior manager with Cendrowski Corporate Advisors and Anna Wermuth is a partner in the labor and employment law group at Meckler Bulger Tilson Marick & Pearson.
Checking references (and a whole lot more) during tough times.