How a skilled board should manage an internal investigation: as the fates of these contrasting boards illustrate, there is much to be lost in shying away from a robust, independent investigation when warranted by the circumstances.

• Author: Anderson, Paula
• Position: LIABILITY AND LITIGATION

With the recent uptick in global enforcement efforts, boards of directors are increasingly adept at managing internal investigations and navigating potential land mines that could increase the litigation exposure of both the company and the board. An internal investigation, whether triggered by a whistleblower, shareholder complaint, or government investigation, need not be a harbinger of doom for a company or its board. However, mishandling an internal investigation, particularly in the early stages, increases the probability of legal exposure, regulatory and/or criminal penalties, and reputational damage to the company and its board members. Because most damage occurs early and can quickly spiral out of control, it is crucial that boards swiftly take the reins and proactively manage any material internal investigation.

A tale of two boardrooms

A comparison of recent enforcement actions against Wal-Mart and Ralph Lauren illustrates how a board's response to allegations of misconduct critically influences the scope and severity of potential consequences. Ralph Lauren, in a case involving bribes allegedly paid by an Argentine subsidiary in violation of the Foreign Corrupt Practices Act (FCPA), secured the first non-prosecution agreement (NPA) from the SEC

in an FCPA matter. Almost immediately upon learning of the alleged misconduct, Ralph Lauren initiated an internal investigation and voluntarily reported its findings to the SEC and DOJ within two weeks of uncovering the potential violations. While Ralph Lauren ultimately paid approximately $1.6 million in fines and disgorgement to the SEC and the DOJ, it was able to quickly wrap up the entire ordeal, avoiding significant media scrutiny and preventing further litigation. The company was praised by the government for its "extensive, thorough, real-time cooperation" and for fortifying its compliance program.

The experience of Ralph Lauren and its board stands in stark contrast to the plight of Wal-Mart, which expended in excess of $439 million over a two-year period in costs related to possible FCPA violations. According to public reports, Wal-Mart was alerted to allegedly illicit payments to government officials in Mexico, but did not undertake a credible investigation until after learning of a scathing (and Pulitzer Prize-winning) New York Times article asserting that the company buried the results of an internal investigation and ignored advice from outside counsel to expand the scope of its investigation.

In addition to shareholder lawsuits, an ever-expanding and costly internal investigation, and...