Yesterday I began an exploration of a recent 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. In Part I, I reviewed the authors’ five key objectives, which they believe a board must pursue to ensure a successful investigation. Today, I will look at the authors’ seven considerations to facilitate a successful board investigation.
1. Consider whether you need independent outside counsel
The authors consider that 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:
As Andre Agassi might say, ‘perception is reality’.
2. Consider hiring an experienced “investigator” to lead the internal investigation
Noted internal investigation expert 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. The authors say that 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. The traits are needed so that your designated counsel will think like an investigator, not like an in-house lawyer or civil litigator.
3. Consider the need to retain outside experts
In any Foreign Corrupt Practices Act (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. The authors correctly recognize that “ 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.” These types of investigations will most probably be cross-border as well and this will require other varieties of expertise. The authors caution that, “The lowest bid may not necessarily be the best for a particular investigation. While cost is important, understand the limitations of each consultant and, with input from your investigator, determine which consultant best meets your goals.”
4. Analyze potential conflicts of interest at the outside and during the investigation
The authors see 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. Moreover, “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
With the advent of Sarbanes-Oxley (SOX) and Dodd-Frank, 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. The authors recognize that companies can come to grief when “companies run into problems when whistleblower allegations are discounted, if not outright dismissed, especially if the whistleblower has a history of causing trouble or is perceived as incompetent. When this type of whistleblower makes a claim, it is easy to presume ulterior motives.” While such motives might exist, it does not matter one iota when it comes to the investigation, as “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, the authors advise that flexibility is an important ingredient. A board can begin the project with an agreed upon initial scope of work and then “revisit the scope of work as the investigation progresses. If conduct is discovered that legitimately calls for expanding the scope of the investigation, then the board can revisit the issue at that point. Put another way, the scope of what to investigate is not a static, one-time decision. It can, and usually does, evolve.” By seeking regular updates and questioning counsel on what they are doing and why, directors can manage costs, while at the same time ensuring that the investigation is sufficiently thorough and credible.
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, the authors believe that 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.
First, it is much easier to inadvertently waive the attorney-client privilege if a written report is created and in the wrong hands, such a written report may well create “a road map to a plaintiff” in any shareholder action. Second, once those findings and conclusions are written they may become “set in stone. If later information comes to light that impacts the report’s conclusions, altering the conclusions may undermine the credibility of the entire investigation. So, retaining flexibility to change the findings if further information is later learned is a real advantage of an oral report.” Third, and finally, “it takes time to prepare a well-written and thorough report. When an internal investigation must be conducted quickly, spending time to prepare a written report may not be an efficient use of time.” For all of these reasons, and perhaps others, an oral report presented to the board and documented in the Board of Director meeting minutes may be sufficient.
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.” I would only add that by following some of the prescriptions set out by Bayless and Albarrán your Board might also avoid the fate that befell Lord Carnarvon and the Curse of the Mummy’s Tomb.
Visit the FCPA Compliance and Ethics Blog, hosted by Thomas Fox, for more commentary on FCPA compliance, indemnities and other forms of risk management for a worldwide energy practice, tax issues faced by multi-national US companies, insurance coverage issues and protection of trade secrets.
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© Thomas R. Fox, 2014
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