The first 48 hours: no board missteps: avoiding catastrophe in the early stages of an internal investigation.

• Author: Tuttle, Jonathan R.
• Position: LIABILITY AND LITIGATION

CORPORATE INTERNAL investigations, brought to the forefront of crisis responses in the post-Enron, WorldCom, and Sarbanes-Oxley era, seem to have exploded in the wake of the stock option backdating scandals, the resurgence of the Foreign Corrupt Practices Act, and seemingly endless corporate financial restatements. The actual numbers of such investigations may be even larger than the anecdotes would suggest: according to a recent law firm survey, more than one-half of U.S. companies surveyed over 2007 and 2006 reported having undertaken at least one internal investigation requiring the use of outside counsel (Fulbright & Jaworski LLP, Fourth Annual Litigation Trends Survey Findings-, 2007).

Unfortunately, as the number and reach of these investigations grows, so do the opportunities for criticism of the investigations, the investigators, and those responsible for overseeing them.

Most often, criticism of the investigations, though driven by the findings (or lack thereof), centers on a range of issues and decisions that arise at the outset of the investigation. In fact, it is in the first hours and days of these matters--when facts are least certain, when trust of management and existing controls seems most warranted, when distrust of the motives of whistleblowers and other critics is highest, and when the instinct to "defend" rather than investigate the company pulls the hardest--that present the most risk for companies, boards, and management. The decisions made in these critical, but chaotic, first 48 hours can either set a path toward resolution or create additional exposures when they are later examined, as they always are, with perfect hindsight by shareholders, the media, plaintiffs lawyers, and government enforcement authorities.

Although there is no "one-size-fits-all" approach to guarantee an investigation that critics cannot assail, there are common questions that arise in such circumstances, the answers to which should provide a reasoned basis for decisions that can survive scrutiny. In connection with each of these questions, the key to avoiding catastrophe lies not strictly in getting the answer right (if there is such an answer), but in the ability to demonstrate, after the fact, that the decision was informed and reasonable given the facts and circumstance reasonably available to decision makers at the time.

Investigation or no investigation?

Most often, the first question facing board members in a potential crisis is whether...