Dos and don'ts for a board investigation: worried about renegade fellow directors in your midst acting without authority and seeking advantage? Proceed cautiously in your zeal to protect the company and yourself.

• Author: Stamboulidis, George A.
• Position: LIABILITY AND LITIGATION

THE DUTY OF A DIRECTOR of any business is to protect the company and its shareholders' interests. The task involves discharging fiduciary obligations and complying with a potentially complicated set of laws, regulations, and corporate policies. This article seeks to guide directors through this process and avoid the traps that appear in the accompanying scenario (see box) that many corporate stewards may find themselves confronting.

At their most basic, the instructions for thriving as a director can be reduced to the imperative: "Protect your company; protect yourself." If directors follow these two rules and remember that the second includes obeying the law, they will be fine every time. They will fulfill their fiduciary obligations; they will steer the corporation on its correct course; and they will affirm the shareholders' decision to trust them with their investment. We can apply these principles to the hypothetical by listing the "dos" and don'ts" that Mr. Loyal should follow.

Do: Consult in-house counsel

The first thing a director should do is recommend that the board consult with the company's general counsel. An internal investigation--especially one that necessarily involves invading the sanctity of the corporate boardroom--is sensitive, difficult, and dangerous. Unless the company's general counsel is believed to be involved in the alleged wrongdoing, he or she must be the first person that the board calls. Outside counsel experienced in handling such matters should be the second.

Do: Retain outside counsel

Few issues are as sensitive as the board's decision to take the company private that its directors serve. This article does not opine on whether going-private deals are fair to shareholders. Rather, we stress that if the board considers the topic at all, or if it finds itself responding to potentially rogue members soliciting financing for such a deal or otherwise having to consider commissioning an investigation of its members, the board must retain experienced outside counsel immediately. The fiduciary duties involved are too important to forgo receiving counsel for every decision that the board must make. Retaining an outside firm is the first step in charting the best course for the company and reducing the board's potential exposure in responding to the crisis.

Deciding to retain counsel is easy; choosing the right adviser is less so. Given the threat to shareholder interests, the board must respond correctly to directors who act without authority. Moreover, the board must be must be able to justify the course it chooses. The board's or company's usual outside counsel may be a logical choice because the firm knows the board and the company. Yet, for the same reasons, this firm may not be the best choice. Retaining an independent firm with no connection to the company helps prevent the appearance of any conflict or bias. Directors must act knowing that every decision they make can face intense scrutiny. Involving independent counsel can help the board create an umbrella of rectitude that shields the directors from inquiry. In the above hypothetical, the rewards that retaining independent counsel can bring probably outweigh any risks inherent to bringing counsel up to speed on the company...