Managing Risk with Background Checks and Investigations

You’re just about to offer a key management position to the seemingly perfect candidate sitting in front of you. Or, maybe you’re ready to sign a lucrative business deal that you hope will launch your business to the next level. In these situations, how often do you look just at the person’s resume or a corporation’s annual report, call a few references, and run the name past a few friends? Do you ever take the time to dig deeper? After performing traditional due diligence, it’s understandable for a busy entrepreneur to think that’s all that can be done.

But this thinking can backfire, sometimes with serious consequences, and additional tools are available that reduce risk even further. Background checks and investigations are proven tools available to help entrepreneurs make sound business decisions and manage risk. They can help you stay out of legal, financial, and public relations trouble that could cost hundreds, thousands, or even millions of dollars if not uncovered “before it’s too late.”

Companies like mine, Scherzer International (SI), provide background and pre-employment investigations for U.S. and global corporations, legal and accounting firms, private equity companies, investment bankers, and others. Professional investigations have helped clients dodge potential disasters and achieve peace of mind by:

Discovering the truth about a candidate for an HR position who gave a false name and Social Security number.
Raising the red flag about a potential business partner with a rap sheet that included bribery, illegal gambling, bankruptcy, bookmaking, and foreign legal judgments.
Giving the green light on the hire of a new board member with impeccable credentials including awards, clean civil and criminal records, and significant philanthropic achievements.

Do it Yourself or Hire a Professional?

It’s tempting to conduct your own investigation on a job candidate, potential business partner, or vendor. That approach will save a few dollars on the front end. However, in this important arena you do get what you pay for, and it’s worth considering a professional firm.

At such a firm a highly trained researcher will gather the information and interpret it for you. A firm can also offer advice and guidance based on its experience, the information gathered, and your goals and objectives. The base cost for a professional report is about $175 and can run more than $1,000 depending on how deep the researcher needs to dig. But for key positions, especially, it can be a small price to pay to identify potential problems and give you peace of mind.

To choose a reputable investigation firm, take the following steps:

Ask for references and talk to the firm’s clients.
Ask the firm to reveal its sources of information, such as the databases and public records it checks.
Look at a sample report to make sure it’s easy to read and includes an executive summary. Verify that you are not just getting an unfiltered “data dump.”

Once you identify a firm you feel confident about, consider the various types of reports and investigations you can choose from. Here are a few of the most common:

Corporate/Management Report: Ideal for vetting both companies and individuals before final agreement or engagement.

Prospective Client/Customer Report: Risk investigations are especially helpful when you have an eighty-twenty customer concentration. Knowing the history of the dominant “twenty” is valuable information.

Private Equity Investment Report: Helpful when evaluating potential investors, companies, and individuals with whom you may have a partnership in the future.

Credit/Underwriting Report: A practical component when used in conjunction with the customer investigation, especially when significant sums of money are at stake.

Board of Directors Report: Can assist with corporate governance compliance if an enterprise is a public corporation or planning to become one.

Pre-Employment Reports: Useful for nearly any position of responsibility, especially managers and senior managers.

International Background Investigation and Pre-Employment Reports: Worthwhile for global expansion in any form and limited only by the data available in each country.

Take Responsibility for Risk Management

We also recommend investigating each member of your senior management team and the company. Even if you feel your team is of excellent character and uncompromising integrity, it is still helpful to know what historical data is available from prior litigation, associations, and news reports. This type of investigation can also turn up untrue or misleading information that you or your managers will want to correct. Just as it is a good practice for you to check up on others, they might be checking up on you, too. Investigations typically take three to seven business days to complete, and minimal information is required to initiate the process.

Background investigations are effective due diligence ingredients in your risk management program along with interviews, reference checks, and gut-level impressions. Ideally, investigations should be used for all major decisions when transacting and hiring. While the chances of finding negative intelligence are slim, the one time you don’t investigate will be the one time you wish you had. These strategies represent a fraction of the cost of a given risk and the potential negative consequences.