The recent scandal at Yahoo over former CEO Scott Thompson’s allegedly falsified resume offers a veritable cornucopia of tabloid-worthy tidbits, as well as some moderately interesting legal issues. The details behind Thompson’s hiring raise corporate governance, CEO succession and director fiduciary duty issues. On the crisis management front, Thompson’s reaction and excuses were seen as evasive and ill-advised, and Yahoo’s reaction, both internally and externally, did not inspire confidence. Even a “duty to disclose” issue came to light as the story unfolded and it was revealed that Thompson had not told the board about thyroid cancer surgery he had undergone just weeks before the crisis.
This article focuses on the politically tricky question, “What sort of due diligence should be done on CEO and director candidates?” An answer that falls anywhere short of thorough, direct and impartial due diligence would be ignoring today’s corporate governance climate. A resume scandal at the highest levels of a company carries dire consequences for all involved. The likely fallout includes loss of leadership, loss of credibility in the marketplace, wasted time and money, distraction from strategic goals, loss of employee morale and potential shareholder litigation.
There can also be a domino effect within the company. In the case of Yahoo, the director that led the CEO search did not stand for re-election. While her decision was prompted by a request from the board of the company where she served as CEO, many observers believe her departure was inevitable given the circumstances. In another twist, it was revealed that the very same director’s resume also contained an alleged embellishment, albeit a far less serious one than Thompson’s.
The process behind a CEO or director search is rooted in the fiduciary duty of care and should not begin when a vacancy occurs. The CEO search actually begins with prioritizing ongoing CEO succession planning, rather than treating it as a throw away item on the board’s agenda. Succession planning identifies critical personal and professional attributes for the next CEO and makes the ultimate search easier and more efficient. Succession planning should actively engage the current CEO and his or her knowledge of the company’s culture, prospects and long-term challenges. The chairman or lead independent director should have an active role and provide regular reports to the independent directors and the full board. A similar process should be ongoing for potential director candidates so that board vacancies can be filled in a careful and timely manner, especially in light of the new director qualification disclosure rules.
Beyond the need for good succession planning, what other lessons should we take away from the Yahoo debacle?
- Exhaustive Due Diligence: The due diligence process for a CEO or director candidate, or any other executive officer, should be extremely thorough. Do not assume that another board or a present employer did the appropriate legwork. Your review should include traditional tasks such as resume verification, reference checks and electronic and social media searches as well as deeper vetting such as legal searches and background checks. The nominating and corporate governance committee or other directors should lead the internal effort.
- Experts: Independent third-party experts should be employed. An executive search firm can assist with preliminary searches on all candidates, but specialty search firms should be retained for the background and legal searches for the “short-list” candidates.
- Transparency: Personal friendships and other relationships can make the required due diligence awkward and company directors or the candidates themselves may push back on the process. The best way to combat these political pitfalls is to formalize the process before the next CEO or director search occurs by creating appropriate internal guidelines. Be up front about the vetting process from the very beginning so that no one is surprised.
- Confidentiality: The due diligence process and the search itself are sensitive matters and should be treated with the utmost confidentiality. Leaks during the Hewlett-Packard board scandal in 2006 and, more recently, reported board leaks from Yahoo raise serious legal issues of breach of fiduciary duty and poor corporate governance.
Careful preparation often allows a company to avoid, or at least mitigate, a corporate crisis. Finding the right CEO or director is a critical task for the board and has a profound impact on a company and its success. A scandal arising from such an important task can have correspondingly devastating effects. Good succession planning and proper, objective due diligence can help keep your company from becoming the next headline.
Additional Articles from the Summer 2012 Public Company Forum:
Doug's Note: A Moment of Sanity?
Class Action Liability For High 401(k) Fees
Shedding Light on Blackout Periods
Dodd-Frank Act Progress Report: Summer 2012 (with a JOBS Act Update for Good Measure)