The privilege to serve on a corporate board is no longer the cushy experience of our forefathers. The increase in enforcement actions has led to a dramatic change in the role – and the risks – facing corporate boards.
Companies dread hearing lawyers recommend the need for an internal investigation. Alarm bells and whistles go off and corporate board members have to take a deep breath and get ready for a ride on the legal landscape. It is a dangerous landscape.
Almost three-quarters of all publicly-traded companies have disclosed at least one internal investigation in the last year. Ten years ago, maybe one –third of all companies disclosed an internal investigation each year. This has had a major impact on board members and the role that they need to play when supervising an internal investigation.
As soon as the decision is made to conduct an internal investigation, board members need to consider retaining an attorney to represent their individual interests, especially if they played a unique role in the matter being investigated. A board committee – e.g. audit, governance or compliance and ethics – which is assigned responsibility for managing and overseeing the internal investigation has to retain an attorney to represent the committee’s interests during the internal investigation. In some situations, even the entire board may hire its own attorneys to represent its interests in the handling of the internal investigation.
There are a number of scenarios where a board member, an Audit Committee or the entire board’s interests may not coincide. It is easy to imagine and hard to reconcile how this is supposed to work but lawyers are good at that, especially in complex situations involving board supervision of an internal investigation.
It becomes even more complicated, however, when you remember that the lawyers retained to conduct the internal investigation have to report to senior management and to the supervising committee. In many cases, the need to report to the full board may not be necessary, but there are situations where full disclosure may be required. In reporting to the board, the investigators are subjecting themselves to second-guessing and close questioning as to information that was learned, why decisions were made to focus the investigation in certain areas, and the manner in which it is being conducted.
The risks in these situations are multiple. The last thing an investigator needs is to have board members questioning the conduct of the internal investigation. Such scrutiny can undermine the value of an independent internal investigation but may be necessary for the committee to exercise its oversight responsibilities. It is better to iron out any differences while the investigation is being conducted so that everyone – senior management and the board – are comfortable with the internal investigation and will defend its findings and recommendations.
To the extent that the investigators and the committee differ, each is opening themselves up to second-guessing by the government and potentially by shareholders and even other board members. These situations can quickly devolve into nightmare scenarios.
It is important, therefore, to develop an investigation strategy early, to keep the board and its committee fully apprised as to the conduct of the internal investigation, and invite questions, suggestions and strategy discussions. The more the issues are ironed out, discussed and resolved, the better for everyone.