My second post in this discussion concerns the pre-appointment/pre-nomination vetting process for Executive Branch office holders nicknamed “sex, drugs and rock and roll.”

As its nickname suggests, much of this process concerns matters that could embarrass the President, but that may have little bearing on a nominee’s ability capably and faithfully to carry out the duties of his or her office. Still, in a scandal obsessed political culture, these matters are important.

Here how it works (see pages 84-89 in Chapter 3 of my book). The White House ethics lawyer (that was my job from 2005 to 2007) talks to a potential nominee about his or her investments, for-profit and non-profit board memberships, and other entanglements that could create problems under conflict-of-interest rules. The candidate then talks with a different lawyer, the White House clearance counsel, about his or her educational record, police record (if any), driving record, professional licenses and employment record, marriages, lawsuits, personal life and similar matters. In short, after the ethics lawyer’s “money talk” there is a “sex talk.”

After a preliminary decision to appoint or nominate someone to a position, an FBI background investigation is begun to confirm what was said. The candidate also agrees to release his or her tax returns to the White House. The White House sends these over to the Treasury Department for review.

I know of one instance in the eight years of the Bush Administration when this part of the process went wrong, badly wrong. That was the Bernie Kerik nomination as Secretary of Homeland Security. Some blogs reported that I was the person who vetted Kerik. That is not true, as he was nominated and the nomination was withdrawn months before I began work at the White House. Fact is that nobody vetted Bernie Kerik, which was the problem. Never again, I believe, was the vetting process short circuited and clearance counsel left out of the loop. Lesson learned.

The new Administration has not been so fortunate. I admire our President, and I am inspired by his vision of a more ethical Washington. He is too smart, however, not to know that a poor vetting process quickly leads to poor appearances, and that poor appearances give opponents a chance to score quick political points. Most of the vetting problems for nominees were while he was President-Elect, but the President needs to fix the process now. He cannot afford more mistakes.

Never mind the Treasury Secretary who didn’t pay his taxes (if he makes it past April 15, he probably gets to keep his job). Never mind the failed attempts to fill cabinet posts at Health and Human Services and the Commerce Department. Let’s look at another issue that was under the radar screen and apparently not part of the vetting process.

When I was at the White House, we looked carefully at corporate directorships. Membership on the board of a company with serious corporate governance problems was a strike against a potential nominee.

This makes sense. People who cannot run private companies should not help run America.

Corporate board members are responsible for hiring, supervising and compensating the CEO and other senior officers. Many corporate board members do their job well. A few do not. These few are not the strongest candidates for high level government jobs that require the public trust.

How then could a high ranking position it the State Department in 2009 go to Richard Holbrooke who was a director of AIG between 2001 and 2008, who was on AIG’s compensation committee, and who resigned from AIG in the summer of 2008 just as things were falling apart? Holbrooke is a talented if controversial diplomat with a track record in Kosovo, and he brings this experience to his present position as liaison between the United States and parties interested in the War in Afghanistan. Nonetheless, news reports suggest that the White House did not think about AIG when appointing Holbrooke, and did not consider whether a man who could not keep AIG’s risk prone management in check can effectively deal with a geographic region riddled with corruption, not to mention Al Queda and the Taliban.

And there is more. Holbrooke left the Clinton Administration for investment banking. The Department of Justice Public Integrity Division later charged that he violated post-employment conflict of interest rules by representing back to the State Department on behalf of an investment bank. The charges were settled with payment of a $5,000 fine. Details are in an August 14, 2000 memo titled 1999 Conflict of Interest Prosecution Survey sent by the Office of Government Ethics to designated agency ethics officials:

http://www.cs.indiana.edu/sudoc/image_32000000478091/32000000478091/DAEOGRAM/00/Do00029.pdf

In 2001 Holbrooke became a director of AIG. According to the Associated Press, SEC filings indicate that AIG paid Holbrooke hundreds of thousands of dollars in cash and stock in 2006 and 2007 (2008 compensation figures are not yet available).

One could argue perhaps that AIG was a good corporate citizen in its charitable contributions. These also, however, were in one respect problematic. AIG and the until recently AIG-affiliated Starr Foundation contributed a lot of money over several years to the American Academy in Berlin, itself a good cause. Dig deeper, however, and one finds that the American Academy was founded by none other than Holbrooke who also served as its Chairman. Is it pure coincidence that Holbrooke was one of AIG ‘s outside directors who helped decided how much money AIG’s senior executives got paid? Conflicts of interest of this sort are not per se illegal (perhaps they should be) but they do not reflect well on corporations or the directors who run them.

So far, the White House response to Holbrooke’s involvement in AIG has been tepid at best. According to the AP, the White House said that Holbrooke was “unaware” of the big retention bonuses handed out by AIG to its key employees. That’s my point. A company’s directors should be aware of how much executives get paid because its part of their job to be aware.

President Obama has observed that, “[n]obody here was responsible for supervising AIG and allowing themselves to put the economy at risk by some of the outrageous behavior that they were engaged in." The President probably meant to say that somebody had that responsibility at AIG, and that somebody did not do their job.

The White House may decide that, despite these concerns, Holbrooke should remain in his current post as liaison to Afghanistan. Many factors, not just his role in AIG, are relevant to appointing and retaining an official in such a position. Holbrooke may have good intentions; he may just not be very careful. Nonetheless, the White House should make it clear that these concerns are not trivial and that in general how well one does as a fiduciary for a public company is a very relevant factor in predicting how well one will do as a fiduciary for the public.