Investigative Services: Two Common Uses in Corporate Governance

Hewlett-Packard's bumbling attempt to find who was leaking confidential information from board meetings gave investigators a bad rap. Had HP's Chairman, Patricia Dunn, clearly and forcefully informed the entire board that they were all under investigation, and had the investigators used tactics that were both legal and ethical, as required by the regulatory licensing agencies, the outcome would certainly have been different.

An investigative firm knowledgeable in corporate governance can be a very valuable resource for corporate boards. The use of creative research and investigation can make the difference between relying on a “scam artist” to head up international sales, subcontracting to a supplier of inferior and defective parts, or having an ex-con on the board of directors. The key to not running afoul of the law is to know what is legally permissible and to stay within those constraints.

Having investigated executives and corporations for almost three decades, we've seen and uncovered almost everything in the book. Our highly specialized executive investigative, corporate governance, and shareholder activism services are used by corporate boards, institutional investors, and shareholders, among others.

Pro-active Corporate Governance

Boards can avoid bad press and embarrassing situations by practicing good corporate governance at the outset of any significant business transaction by looking closely at the executives and businesses involved. It is likely that if boards don't assume this pro-active fiduciary responsibility, shareholder activists may.

Prudent steps include an investigation of the executives and any associated businesses involved in a transaction. Why? Some of the most polished executives have been engaged in some very questionable business practices. An example:

A young executive who had recently sold a 49% interest in his company for $62 million, and had an additional $1 billion of financial backing at his disposal through the investment arm of a university endowment, was being considered as a business partner by a very large real estate company. His access to capital was an advantage, and his well-placed political position as a former Presidential appointee was also attractive. Despite appearances, the board decided to hire an investigator to look beneath the surface prior to signing the partnership agreement. We discovered that this executive was under investigation by the IRS, the SEC and other regulators, pertaining to potentially illegal political contributions and insider trading… activities that would never have been discovered by a simple background check.

The board considered these findings a sort of “wake up call” and voted unanimously to authorize a similar routine examination of all board members, c-level executives, major customers and suppliers, as a preventative measure.

Detecting What's Behind Underperforming Investments

Underperforming investments require close scrutiny to determine why the numbers don't look good.

Investors in a leading meat processing company were displeased over repeated low quarterly results in this highly leveraged business. The ability to pay down debt was a critical component of the business strategy. The ongoing lack of financial performance required a renegotiation of major customer contracts. As the company tried to concentrate on the most profitable, top accounts, some customers were threatened with termination or reduced services.

Unknown to the investors, the board, and the CEO, terms of the new customer contracts included an under-the-table payment to
the chief financial officer…a kick-back scheme in which he received direct payment…a percentage of each transaction from less-than-ideal customers willing to pay extra to maintain the relationship. This inappropriate siphoning of funds was initiated by the CFO as an “incentive” for customers to continue to do business with the company, and was discovered shortly after the new agreements went into effect and the CFO's life-style suddenly changed. A few board members became suspicious.

Our investigation determined that the CFO's new flashy way of living was beyond what might be supported by his salary. It included the recent purchase of a second vacation home, new cars, and other visible extravagances…suggesting other sources of income. This documentation eventually led to dismissal and prosecution of the CFO.

A company may under-perform due to a change in industry dynamics (i.e., new technological developments, outsourcing), economic factors…a variety of things. All too frequently, however, it's the result of one person. Time after time, we have investigated well-respected companies brought down by the actions of one or two executives. This happens in all types of businesses, and is preventable by early detection. We have worked with a seasoning company, a 50-year old construction company, a telecommunications company, a school supply manufacturer…companies all pulled apart by inside executive misconduct or fraud. In all cases, the dissolution, liquidation or fire-sale of these companies could have been prevented.

No-one thinks that it will happen to their company. But it can.

In short, it is a wise and relatively inexpensive investment to conduct routine examinations of board members, c-level executives, major customers and suppliers. It's good corporate governance and it makes good business sense.

Company leaders must know what's going on within their own organization. Information is power.

Olivia Robinson is President of Background Intelligence, Inc. with 27-years of research and investigative experience working with investors and corporations throughout the world. She can be reached at 916/442-8700 or through backgroundintelligence.com.


	Investigative Services: Two Common Uses in Corporate Governance by Olivia Robinson Hewlett-Packard's bumbling attempt to find who was leaking confidential information from board meetings gave investigators a bad rap. Had HP's Chairman, Patricia Dunn, clearly and forcefully informed the entire board that they were all under investigation, and had the investigators used tactics that were both legal and ethical, as required by the regulatory licensing agencies, the outcome would certainly have been different. An investigative firm knowledgeable in corporate governance can be a very valuable resource for corporate boards. The use of creative research and investigation can make the difference between relying on a “scam artist” to head up international sales, subcontracting to a supplier of inferior and defective parts, or having an ex-con on the board of directors. The key to not running afoul of the law is to know what is legally permissible and to stay within those constraints. Having investigated executives and corporations for almost three decades, we've seen and uncovered almost everything in the book. Our highly specialized executive investigative, corporate governance, and shareholder activism services are used by corporate boards, institutional investors, and shareholders, among others. Pro-active Corporate Governance Boards can avoid bad press and embarrassing situations by practicing good corporate governance at the outset of any significant business transaction by looking closely at the executives and businesses involved. It is likely that if boards don't assume this pro-active fiduciary responsibility, shareholder activists may. Prudent steps include an investigation of the executives and any associated businesses involved in a transaction. Why? Some of the most polished executives have been engaged in some very questionable business practices. An example: A young executive who had recently sold a 49% interest in his company for $62 million, and had an additional $1 billion of financial backing at his disposal through the investment arm of a university endowment, was being considered as a business partner by a very large real estate company. His access to capital was an advantage, and his well-placed political position as a former Presidential appointee was also attractive. Despite appearances, the board decided to hire an investigator to look beneath the surface prior to signing the partnership agreement. We discovered that this executive was under investigation by the IRS, the SEC and other regulators, pertaining to potentially illegal political contributions and insider trading… activities that would never have been discovered by a simple background check. The board considered these findings a sort of “wake up call” and voted unanimously to authorize a similar routine examination of all board members, c-level executives, major customers and suppliers, as a preventative measure. Detecting What's Behind Underperforming Investments Underperforming investments require close scrutiny to determine why the numbers don't look good. Investors in a leading meat processing company were displeased over repeated low quarterly results in this highly leveraged business. The ability to pay down debt was a critical component of the business strategy. The ongoing lack of financial performance required a renegotiation of major customer contracts. As the company tried to concentrate on the most profitable, top accounts, some customers were threatened with termination or reduced services. Unknown to the investors, the board, and the CEO, terms of the new customer contracts included an under-the-table payment to the chief financial officer…a kick-back scheme in which he received direct payment…a percentage of each transaction from less-than-ideal customers willing to pay extra to maintain the relationship. This inappropriate siphoning of funds was initiated by the CFO as an “incentive” for customers to continue to do business with the company, and was discovered shortly after the new agreements went into effect and the CFO's life-style suddenly changed. A few board members became suspicious. Our investigation determined that the CFO's new flashy way of living was beyond what might be supported by his salary. It included the recent purchase of a second vacation home, new cars, and other visible extravagances…suggesting other sources of income. This documentation eventually led to dismissal and prosecution of the CFO. A company may under-perform due to a change in industry dynamics (i.e., new technological developments, outsourcing), economic factors…a variety of things. All too frequently, however, it's the result of one person. Time after time, we have investigated well-respected companies brought down by the actions of one or two executives. This happens in all types of businesses, and is preventable by early detection. We have worked with a seasoning company, a 50-year old construction company, a telecommunications company, a school supply manufacturer…companies all pulled apart by inside executive misconduct or fraud. In all cases, the dissolution, liquidation or fire-sale of these companies could have been prevented. No-one thinks that it will happen to their company. But it can. In short, it is a wise and relatively inexpensive investment to conduct routine examinations of board members, c-level executives, major customers and suppliers. It's good corporate governance and it makes good business sense. Company leaders must know what's going on within their own organization. Information is power. Olivia Robinson is President of Background Intelligence, Inc. with 27-years of research and investigative experience working with investors and corporations throughout the world. She can be reached at 916/442-8700 or through backgroundintelligence.com. Back to the top with the Corporate Governance NETwork! Contact: James McRitchie All material on the Corporate Governance site is copyright since1995 by Corporate Governance and James McRitchie except where otherwise indicated. All rights reserved.