How company boards should handle internal investigations
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How company boards should handle internal investigations

How company boards should handle internal investigations

Every case is fact-specific. Make sure that your board, management and counsel disclose by plan, not by misadventure

Board management

Surprises thrown up in corporate boards are aplenty across the world. And the GCC is no exception even with a skew of reforms being proposed. Markets other than the UAE are still trying to catch up with the best practices in governance even as we witness many governance issues everywhere. We may not always see a BR Shetty and NMC kind of saga, but having children of promoters taking board roles continue unabated.

Take for instance, the NMC imbroglio with the founder chairman taking a humiliating exit after the board investigation unearthed under-reporting of liabilities to the tine of billions. He had grandiose plans for making the most expensive movie in the subcontinent and just disappeared from the face of all possible media and even legal eyes.

The question is whether the shareholders had a chance to hold other board members responsible for the disaster the founder had caused.

So what if your company is facing some serious allegations – like a whistleblower accusation against the CEO, a regulatory inquiry on financial crime, an accounting fraud, a harassment case, or an allegation against the CFO?

A good governance policy and a possible legal protection should compel a board to launch its own investigation, and the number of such probes seems to rise these days. Without the government and lenders’ involvement, the NMC board would not have ordered an internal enquiry. However, boards of directors are not trained for sleuthing or sniffing work, and more often than not, commit blunders that taint the results, weaken confidentiality – and sometimes bring fresh liabilities to the company and its directors.

How can a board plan a smooth investigation without getting influenced by vested parties, whether founders and family members or the CEO?

The term “board investigation” itself is the root of many problems. Yes, you know that the board commissions lawyers or auditors (typically outside experts) to lead the actual investigation. But directors tend to meddle in the business even in bad times, and that can lead to disaster. We have spoken to a few expert investigators who worked on board investigations and they all say there has always been at least one “oops” in virtually all investigations.

We find that directors’ natural impulse to keep themselves posted on the investigation is a major source of trouble. The investigation committee members sometimes insist on communicating with counsel or external auditor on a joint basis, with several committee members being involved. This can lead to tainting the information the counsel receives.

Committee members trying to give each of their own directions to the investigation is another hassle. Then there are hidden political agendas, and conflicting anecdotes. Best move for the board is to commission the probe, and then back off, with just the investigation committee chair, or the board’s independent leader, acting as the sole liaison. It is especially important for the chairperson of the board to keep his or her absolute silence on the matter unless it is to the investigation team on their queries.

This “tainting” problem can extend its tentacles to the board itself. In many instances, the board directors communicate with one another on the matter under investigation without the counsel or auditor present, typically via email, phone or in-person. That’s a big torpedo. Aside from your intra-board chat on the issue being legally discoverable, it can also leave the impression that directors are trying to get their stories “straightened” or ”cleaned”. This is unfair to the enterprise they serve, to the directors themselves, and to the outside counsel.

Assume that as a board member, you resist the gossipy impulses above, and counsel completes a proper investigation – what then? Boards often insist on a full written report from the counsel. But this may be precisely what you don’t want.

Our opinion is that the best process for the board is not to have a written report but an oral briefing from the counsel. Written reports definitely have their plusses – they provide solid legal evidence if needed, and showcase the board in the right light of making a thorough job of the investigation. But these reports could be liable for disclosure and often not as nuanced as the counsel and board would like the matter to be. A verbal report to the board can more easily facilitate a good negotiation with the target of the investigation who may be on his or her way out for the termination terms.

One other way to mess up a board investigation is after it receives the information. In many instances, a board member will be dealing with dynamite that will explode – it’s just a matter of when and how. Should you disclose the findings to the regulator or outside investigators as a sign of cooperation? Do you waive the privilege? 
Are there public-disclosure requirements? Do you use the findings to quietly negotiate the CFO’s retirement?

As lawyers love to say, every case is fact-specific. Just make sure that your board, management and counsel disclose by plan, not by misadventure.

Ralph Ward is a global board advisor, coach and publisher, while Dr Muneer is co-founder of the non-profit Medici Institute and a stakeholder in the Silicon Valley-based deep-tech enterprise Rezonent Corp

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