The corporate divorce: how to let go of your executive

September 2013 | EXPERT BRIEFING | BOARDROOM INTELLIGENCE

financierworldwide.com

A newly formed audit committee at a portfolio company suspected that the CEO was misusing company funds for his personal expenses. To determine if the suspicions were true, the outside counsel of the board of directors commissioned a forensic review. The review found the CEO had used the company’s bank accounts to purchase a condominium for his family in the Caribbean; supplement the rent of an expensive New York City apartment for one of his children; and submitted corporate expense accounts for his personal residence. It was also discovered that the CEO sold stock to minority investors for cash and never reflected the stock purchase in the company’s accounting records. Finally, these actions and the CEO’s deliberate failure to pay payroll taxes and other corporate obligations put the company and the board at serious risk.

Once the findings were reported to the board, they decided, for obvious reasons, that the CEO had to be removed. Based on experience, it is always prudent to take into account a variety of possible scenarios that could potentially take place. The board also needed to ensure transparency and minimal disruption to the company and employee morale during the process.

Things don’t always go well with the executives you hire. Unpredictable issues can arise and before you know it, you are faced with a situation where your executive is threatening your company’s reputation, harassing employees or stealing proprietary information. Knowing how to tackle these delicate situations, such as the one above, is critical.

When the board of directors no longer has confidence in an executive, and a termination process is initiated, always proceed with caution to ensure company morale is not rattled and to avoid putting your company in a precarious position. Some of the steps involved in successfully terminating a problem executive in an orderly fashion are outlined below.

Conduct a background check of the executive, if not previously done, to identify any issues that may warrant additional reasons for the termination and to consider any other factors in the situation.

Conduct a forensic accounting examination of the company’s books and records to identify any unusual and/or fraudulent activity that may have occurred.

Conduct follow-up investigations to include interviews and/or investigations of employees, vendors, customers, contractors and others. Implement a whistleblower hotline for employees, vendors and others to anonymously report information concerning the executive and the company.

Develop a personality profile of the executive to determine if there is any potential threat that he poses to himself, employees, board members and other individuals as well as to the business, upon his removal from the company – knowing more about the executive’s personality also helps when negotiating the termination agreement.

Provide an armed protective detail to be present at the company on the day the individual is removed from his position, if warranted.

Provide an ongoing physical security presence at company facilities.

Provide a physical security threat assessment of company facilities to include changing locks and other access control devices at access points into the facility; changing of any passwords and access codes to alarms, camera recording devices and to any remote monitoring capabilities installed throughout the facility.

Conduct a network threat assessment to determine the vulnerability of information contained on the company’s data and email networks to include intellectual property, emails and other business records.

Conduct a computer forensic review of the executive’s business computer and other company owned devices to preserve potential evidence related to his/her activities.

Provide technical surveillance countermeasure surveys (electronic sweeps) of company facilities to include board/conference rooms, employee offices and telephone systems.

Should the executive have any health related issues that should be considered, have emergency medical personnel on standby.

Conclusion

Investors may need to remove executives from portfolio companies for various behavioural issues or mismanagement, such as fraud, intimidation, sexual harassment or self-dealing. The challenge is to address the allegation and then be able to act swiftly and quietly to have minimal disruption/morale to the workplace. This often entails getting discreet access to the executive’s computer to image it and review his emails as well as discreetly meet with cooperating employees off premises to confirm and document the board’s suspicions.

In another recent case, a private equity firm needed to remove an executive of a portfolio company who was found to be threatening employees and sexually harassing several female employees in the office. In order to establish concrete evidence that the executive was indeed challenging the morale of the company by his behaviour, it was necessary to covertly access his office computer, review his emails and covertly interview employees off-site. Following a review of the information gathered, the results were reported to the private equity firm and outside counsel. It was subsequently agreed that the executive had to be let go. Ultimately, the executive agreed to quietly leave the company and avoid any charges being filed against him (not to mention any negative exposure to the portfolio company).

Problems like these occur at portfolio companies and corporations all the time. The key is properly addressing the issues before they unravel and ensuring you hire an independent, skilled investigator to assist in resolving the problem before it adversely impacts the reputation and bottom line of the company.

Ken Springer is president and founder of Corporate Resolutions Inc. He can be contacted on +1 (212) 691 3800 or by email: kspringer@corporateresolutions.com.

Ken Springer

Corporate Resolutions Inc.