Wednesday, July 20, 2011
Internal Investigations and Special Committees
Too many practitioners blindly adhere to well-known internal investigation protocols instead of asking practical questions of whether such procedures are actually needed. It is easy to follow the prescribed steps. But sometimes lawyers need to think outside the box and ask the hard questions, especially when it comes to the appointment of special committees.
In certain situations an independent board committee may be needed. One situation which is relevant to compliance is the use of a special investigation committee to supervise the investigation of alleged wrongdoing and determining how the corporation should respond to the alleged wrongdoing.
The advantage of an independent special committee is its credibility within the company and with the government. In the face of serious allegations of misconduct and potential involvement of higher management, or even board members themselves, a special investigation committee can help a company navigate and survive serious scandals.
A special investigation committee needs the support of the overall board of directors. Such support is reflected in a resolution adopted by the entire board outlining the purpose of the special committee, and its resources, duties, responsibilities and powers.
The membership of the special investigations committee can consist of outside individuals or independent board members. The members must be free from any interest in the matter to be investigated. The Justice Department and the SEC require such independence as a prerequisite to consideration of any internal investigation supervised by the special investigation committee.
The need for special investigations committees may rise in response to the anticipated increase in whistle-blower complaints by employees, increased government enforcement, and the growing role of audit committees and/or compliance committees to ensure overall compliance.
In response to an allegation of wrongdoing, a board must act quickly to determine whether a formal internal investigation is required; and whether such investigation can be handled by internal management and attorneys or a special investigations committee. Most investigations can be handled internally and there is no need for a more sophisticated, cumbersome special investigations committee. When serious and significant allegations arise, and when management may be allegedly involved, then a special investigations committee may be appropriate.
The value of the independent investigation will be created by its ability to conduct a thorough, impartial and fair investigation. It is imperative to start with a clear board mandate as to the responsibilities, authority and resources of the special investigation committee as well as the scope of its investigation. Along the way, it is important to create a record of the activities of the special investigation committee and its advisors and to preserve pertinent evidence developed during the investigation.
In the end, credibility of an investigation is the hallmark value of its findings. An independent inquiry conducted by experienced outside counsel with the assistance of outside professionals can give the company several arguments to government prosecutors for why a specific resolution may be appropriate.