By Hayes Hunt and Arthur Fritzinger
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
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.
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
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.