By Hayes Hunt and Arthur Fritzinger
Companies in every industry—private and public—struggle with the difficult task of promptly identifying employee wrongdoing and responding appropriately. The National Football League continues to be embroiled in a controversy arising from its reaction to the off-the-field conduct of its players. Penn State University continues to make attempts to repair its reputation after the Jerry Sandusky scandal. Lloyds Banking Group recently dismissed eight employees and sought to recoup millions in bonuses after it was revealed that they, along with employees of at least two other British banks, had attempted to manipulate benchmark interest rates from 2006 to 2009. Even government organizations struggle with this issue: Last month, Philadelphia Municipal Court Judge Joseph C. Waters Jr. resigned amid an investigation by the FBI that has lasted more than a year.
A company’s delayed reaction to potential wrongdoing can impose serious costs. Lloyds was ordered to pay 226 million pounds—more than $360 million—as part of a settlement with U.S. and U.K. authorities. The NFL has enlisted the services of ex-FBI Director Robert Mueller to investigate its disciplinary procedures, and has donated millions to domestic abuse prevention groups as a mea culpa for its handling of the Ray Rice controversy. It is difficult to calculate the damage that these scandals have had to the brand of the NFL or Penn State, or the public’s trust in the banking system or the Philadelphia judiciary.
These recent headlines should remind corporate management and general counsel of the importance of having clear policies in place to quickly root out potential wrongdoing and thoroughly investigate issues that arise within the organization. Employee wrongdoing may be unavoidable within a large organization, but every company has the ability to limit its impact.
Most importantly, companies must have clear procedures for reporting wrongdoing. No company can take steps to investigate or manage improprieties it knows nothing about. Every company should have written procedures and periodic training on internal reporting procedures. Employees should understand the personnel to whom issues should be raised, and they should be encouraged to speak up when they have concerns about malfeasance. Often, it is necessary to have both a separate department tasked with handling these concerns as well as a clear chain of command within each department.
When a substantial issue arises, a company should work with its general counsel to make a plan to thoroughly investigate it. General counsel should work closely with executives and board members to define the initial scope of the investigation based upon the nature of the suspected wrongdoing and the ultimate use of the end product. Procedures should be put in place to keep track of evidence. If necessary, a litigation hold should be issued immediately to preserve relevant documents and suspend any routine destruction of email or other records. A hold is crucial anytime an issue may give rise to a government investigation or litigation, but it is equally important to allow the company to conduct its own investigation.
Anytime a substantial investigation is necessary, a company should also strongly consider the use of outside counsel. While smaller matters may not be resolved in-house, government regulators often (perhaps unfairly) question the objectivity of general counsel. The use of an outside firm gives independence to the investigation since counsel is not employed by the company and is less likely to be influenced by management.
Outside counsel may also be beneficial if the issue concerns executives or employees who have worked closely with in-house lawyers. An outside firm will not be concerned with maintaining long-term relationships with employees, and can often be more direct when conducting interviews during the investigation.
Other business considerations may also justify the use of outside counsel. Investigations often involve reviewing thousands of documents and interviewing dozens of employees. Using in-house counsel for these tasks can place an enormous burden on a company’s resources. Depending upon the scope of the investigation, it may be cost-effective for a company to hire an outside firm and allow its in-house attorneys to focus on the legal issues that arise during the normal course of business.
Finally, the use of outside counsel better ensures that communications regarding the company’s investigation will remain privileged. General counsel often provide both privileged legal advice and nonprivileged business advice to a company. The use of outside counsel to conduct internal investigations will avoid future litigation about whether communications were made for legal or business purposes.
As an investigation uncovers more information, counsel and the company’s management should begin to form a plan for the potential release of information to government agencies or the public. It may be that the investigation proved the allegations of wrongdoing to be unfounded. However, even if improprieties are uncovered, knowing that information before it becomes public can be extremely valuable. Voluntary disclosure of wrongdoing to the government often leads to a nonprosecution agreement, the most lenient disposition a company can enter into. Maintaining control over how news of wrongdoing is delivered to the public can also substantially limit its impact on the company’s image. Indeed, it can be used by the company as an opportunity to show that its internal reporting and investigation procedures are effective.
Regardless of what an internal investigation may uncover, it is better for the company if counsel and management know about the issue before it becomes public. By establishing clear procedures for reporting and investigating these issues, counsel can prevent the creation of an additional crisis arising from the mishandling of employee wrongdoing.
Originally published in The Legal Intelligencer on October 22, 2014.
It is unfortunate that throughout this article, the discussion is about “employee wrongdoing,” instead of “allegations of employee wrongdoing.” It appears, perhaps incorrectly, to display a bias from the outset.