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YOU MAKE THE CALL: Are You Responsible For Knowing That This Executive Hire Was About to File Bankruptcy?

Let's say you're leading a CEO Search for a company that does $48 Million in Revenue and prints $24 Million in Net Income annually.  Are you responsible for knowing the hire you made was in financial trouble?

Is that your responsibility?  Is that your business?  Would the Board of Directors expect that level of vetting?

A company recently missed along these lines, getting surprised by their CEO filing for bankruptcy just months after he was hired.  Whether you agree with it or not, I'm thinking there's no way the company makes the hire if they knew their candidate was carrying such heavy financial woes.  Here's the details of the CEO's situation, which are public record:

"_____ recently filed for Chapter 7 bankruptcy, and documents filed today in federal court show that he has only some $1.2 million in assets, compared to more than $25 million in liabilities. He's making $850,000 as part of his 10-month contract to _____, so it would appear ______has quite a long-term problem here.

He has just $300 in cash on hand and $500 in his checking account, the bankruptcy documents show.

_____ estimates the only real property he owns as worth $2,000 from a "1/4 interest in deceased parents real estate — 8 acres in Iona, Idaho worth $8,000.00 (total).

The latest court filing shows the extent of those difficulties. The biggest claim against him is $20 million from Terra Springs LLC, in Louisville. Republic Bank and King Southern Bank in Louisville claim $2 million and $902,000 respectively. American Express is claiming $10,810.

Chapter 7 bankruptcy is used to liquidate debts. Among the other assets ____ lists are: $5,000 in home furnishings, $2,500 in memorabilia rings and watches, $900 in books and pictures, $950 in clothing and accessories and $200 in golf clubs and a shotgun."

Hit me in the comments and tell me two things:  1) Was it the lead HR exec's responsibility to know this data about the candidate, and if they knew, should they have made the hire?

PS - the CEO in question is embattled Arkansas football coach John L Smith.  Click here for details.

Comments

Erin

Absolutely. High-level positions require a detailed level of background checking (including credit).

Earl

Definitely, but was HR involved? Sometimes it is the VP of Sales, the CEO, or the lead booster that makes the "handshake hire" without any HR knowledge or involvement. Not that it is right, but that may explain the lack of a credit check for this level of a position. HR should have stepped in to cancel or postpone the deal, but obviously they did not. Just don't let him run the car wash:

http://www.youtube.com/watch?v=OjSmSXblWRM

Beth

It was pretty common knowledge that he was about to file bankruptcy when they hired him. Sadly (speaking as a Razorback fan and alum) they made the hire anyway. And obviously University of AR's HR department is not in ANY loop (see: Bobby Petrino).

Sandrine

I find this question interesting because it is typically US.

In my country of origin, credit checking is considered as potentially leading to discrimination during the hiring process. One's financial situation is also considered as private. As such, checking on the financial situation of a candidate or an employee is illegal and we don't even really have such credit rating organisations.

Personal bankruptcy is also alien as a concept to us - people can't accumulate debt and walk away from it starting anew. They have to face the consequences of their financial decisions. There are stricter regulations as to theamount of borrowing and debt you can have compared to your income so such extreme situations as the one you describe are virtually impossible.

Throughout my career in various countries in the EMEA region I have never encountered a company that even considered checking the financial situation of the candidate, even if that was not illegal in some countries.

In 18 years in Compensation & Benefits, I have had to intervene only once in the case of a senior employee who had abused corporate credit cards because of his personal financial liabilities. We had a control process and became aware of that pretty early through Internal Audit, and I was able to put in place a plan that recovered the sums, protected the company and supported the executive.

From that standpoint, given the tens of thousands of employees that I have been in cahrgeof, I consider that the risk is pretty low - we lost a lot more through employees stealing company product in our manufacturing plants for example.

So I guess it's my cultural background, along with experience, that makes me say that it is not the company's business to investigate the financial profile of a candidate.

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