Let us start our discussion with an area of broad consensus: A company’s board of directors has a duty of care to respond to and investigate allegations of wrongdoing by officers and/or employees of the company. But what happens when a board member is the one in the investigatory hot seat? Do the same investigative rules and techniques apply when, for instance, a director has been accused of insider trading or leaking confidential information? And what are the best practices companies should consider proactively implementing so that they are best-positioned to effectively investigate alleged board member misconduct if and when it occurs? We will try to provide some time-tested, common sense — but oft overlooked — guidance to help you prepare for these not-so-uncommon eventualities.

The Basics: Hire Outside Counsel Carefully, Task Specifically -

Once grounds justifying an investigation have been identified, the company (typically through a special committee of the board headed by uninvolved board members) should, in the board resolution creating the committee and counsel’s engagement letter, clearly define the scope of the investigation and the investigatory objectives so as to avoid any ambiguity concerning what is within the outside investigators’ charter. Companies, moreover, are also well-advised to retain experienced (and probably independent) outside counsel; being able to demonstrate little prior involvement with the company or board members can be a plus. Tasking outside counsel with the job of conducting a full and independent investigation will not only help give counsel’s ultimate investigative findings additional credibility with company stakeholders, but it will also be a factor considered if and when the authorities (such as the Securities and Exchange Commission or the U.S. Department of Justice) step in and review the investigative findings.

Originally Published in Corporate Counsel Weekly Newsletter, 28 CCW 144 - May 1, 2013.