Day 11 of One Month to a Better Board

In an article in the Corporate Board magazine, entitled “Successful Board Investigations” by David Bayless and Tammy Albarrán, partners in the law firm of Covington & Burling LLP posited seven considerations to facilitate a successful board investigation. 

1. Consider whether you need independent outside counsel 

The appearance of partiality undermines the objectivity and credibility of an investigation. That means you should not use your regular counsel. The authors cite to the Securities and Exchange Commission (SEC) analysis of how independent board members truly are to explain the need for independent counsel. They state, “the SEC considers the following criteria when determining whether (and how much) to credit self-policing, self-reporting, remediation and cooperation” which will consist of the following factors:

• Did management, the board or committees consisting solely of outside directors oversee the review?
• Did company employees or outside persons perform the review?
• If outside persons, have they done other work for the company?
• If the review was conducted by outside counsel, had management previously engaged such counsel?
• How long ago was the firm’s last representation of the company?
• How often has the law firm represented the company?
• How much in legal fees has the company paid the firm? 

2. Consider hiring an experienced “investigator” to lead the internal investigation 

Jim McGrath has written and spoken about the need to utilize specialized counsel in any serious investigation. If a board is leading an investigation, I would submit by definition it is serious. Your investigation needs to lead by a lawyer with significant experience in conducting internal investigations; a strong background in criminal or SEC enforcement; and has substantive experience in the particular area of law at issue. 

3. Consider the need to retain outside experts 

In any FCPA or other anti-corruption investigation, there will be the need for a wider variety of subject matter experts (SME’s) than a compliance professional. If there are accounting issues, forensic accountants might be needed. In this day and age, an electronic discovery consultant is often required, and can be a cost effective option for gathering and processing electronic data for review. 

4. Analyze potential conflicts of interest at the outset and during the investigation 

There are two types of conflicts of interest that may come to light during an investigation. First is the one which comes up when the law firm or lawyers conducting the inves­tigation are those whose prior legal advice has some bearing on the matters being investigated because a company’s regular outside lawyers represent the company. During an internal investigation, however, the lawyers may be hired by, and represent, the board or its committee. The second occurs when a lawyer or law firm jointly represents the board and employees at the company as regulators have become increasingly concerned with joint representations. The trickier question is what to do when there simply is a risk that representing one client could limit the lawyers’ duties to the other. So in these situations, joint representation may not be appropriate.

5. Carefully evaluate Whistleblower allegations 

Whistleblowers have become more important and taking their allegations seriously is paramount. This does not mean trying to find out who the whistleblowers might be to punish or stifle them, even if they are located outside the United States and therefore do not have protections under these laws. They can still get hefty bounties. Regulators are very wary of boards that do not satisfactorily evaluate a whistleblower’s complaint based on a perception of the whistleblower himself, as opposed to the substance of the complaint. 

6. Request regular updates from outside counsel, without limiting the investigation 

These types of investigations are long and very costly. They can easily spin out of cost control. But, by trying to manage these costs, a board might be perceived as placing improper limits on the investigation. The “goal is to strike the right balance between the cost of the investigation and its thoroughness and credibility.” To do so, flexibility is an important ingredient. The scope of what to investigate is not a static, one-time decision. It can, and usually does, evolve.

7. Consider whether an oral report at the conclusion of the investigation is sufficient

While there may be instances in which, due to complexity and the nature of allegations involved, a written report is necessary, there may be times when an oral report delivered to a board is better than a written report for “a written report may be easier to follow and appear to be the logical conclusion to an investigation, it is an expensive and time-consuming endeavor, and it comes with great risk.” The authors indicate three reasons for this position. 

The authors conclude their piece by stating, “By keeping in mind the issues addressed above, the board will be better prepared for the investigation and readily able to exercise good judgment throughout the review. A well-conducted investigation by the board may spare the company further disruption and costs associated with follow-on investigations by the regulators, or at the very least minimize the company’s exposure.” 

Three Key Takeaways

1. Retain the right counsel. Consider conflicts and appearance.
2. Carefully evaluate all whistleblower allegations and reject retaliation.
3. Consider receiving oral reports on an ongoing basis and one lengthy oral report at the end of the investigation.