Investigations

In this section of the blog we will cover two largely unrelated areas: a) challenges in investigating COIs and b) independence issues in C&E-related investigations generally.

Independent Investigations (Part Four): Motivated Blindness

In the first posting in this series we described two types of independence criteria in investigations – one having to do with an attorney’s relationships with the company and the other  her involvement in the subject matter being investigated. The second posting discussed independence issues regarding board members supervising investigations and the third reported on the then-just-breaking story about the Wal-Mart FCPA matter – and particularly the role of an apparently un-independent investigation in those unfortunate events.  In this fourth post we return to the issue of attorney independence to make a seemingly small but – at least for some cases – potentially important point that is based in part on behavioral ethics.

Balzac famously said, “Behind every great fortune there is a crime,” and, less famously, many C&E professionals have noted that behind many crimes in companies there is a supervisor asleep at the switch. (Indeed, our most recent prior post was about a case of this sort – where the “supervisors” were the members of the board.) What does this (meaning the part about supervisors – not Balzac) have to do with independent internal investigations?

In assessing an attorney’s independence vis a vis a contemplated investigation it is obvious that one should weigh her relationship with the target(s) of the inquiry. Less obvious, one should consider her relationships with anyone else at the company whose interests could be adversely affected by the outcome of the matter – including by the possibility of an investigative showing that a target’s supervisor was negligent in her supervision.

In an earlier post on behavioral ethics,  I observed that the phenomenon of “motivated blindness underscores the importance of the Sentencing Guidelines expectation that organizations should impose discipline on employees not only for engaging in wrongful conduct but ‘for failing to take reasonable steps to prevent or detect’ wrongdoing by others – something relatively few companies do well (and some don’t do at all).”   Given the difficulty that many organizations have traditionally faced in imposing this sort of discipline, they should do whatever is reasonably possible to maximize the likelihood of success.  And in some situations, that includes selecting a lawyer for an investigation who is sufficiently independent not only of the target but also of those who could be reasonably faulted for not having prevented or detected the target’s misdeeds.

 

Independence and internal investigations (Part Three): Wal-Mart

The first two posts in this series    gave an overview of the legal landscape regarding independence expectations for internal investigations. Today, I want to draw readers’ attention to a jaw-dropping piece that has just appeared in today’s NY Times about how Wal-Mart allegedly used an utterly un-independent internal investigation to cover-up bribery by its Mexican operation. 

I won’t try to recount all of what’s in the Times piece, which – in my view – every C&E professional should read.  But this excerpt will give a flavor of it:

In one meeting where the bribery case was discussed, H. Lee Scott Jr., then Wal-Mart’s chief executive, rebuked internal investigators for being overly aggressive. Days later, records show, Wal-Mart’s top lawyer arranged to ship the internal investigators’ files on the case to Mexico City. Primary responsibility for the investigation was then given to the general counsel of Wal-Mart de Mexico — a remarkable choice since the same general counsel was alleged to have authorized bribes.  The general counsel promptly exonerated his fellow Wal-Mart de Mexico executives. When Wal-Mart’s director of corporate investigations — a former top F.B.I. official — read the general counsel’s report, his appraisal was scathing. “Truly lacking,” he wrote in an e-mail to his boss. The report was nonetheless accepted by Wal-Mart’s leaders as the last word on the matter.

Rather, I write to make a general point that might otherwise be missed in what I imagine will be a flood of follow-on stories  about Wal-Mart’s woes, but which should be of keen interest to C&E professionals. That is, engaging in sham compliance measures – investigations and other – can itself be considered a crime, at least in some circumstances.  For more on that, see this prior post in the FCPA Blog, about how “I once represented two lawyers who were suspected by a federal prosecutor of having deliberately conducted a half-measure internal investigation for deceptive purposes. No charges were brought (and, from my perspective, none were even close to being warranted). But with the wrong set of facts the result could be different in a case involving compliance program half-measures – especially if, as I believe will happen, there is a generally decreasing tolerance by prosecutors for Potemkin programs.”

In a somewhat related vein, another commentator has asked whether Wal-Mart’s lawyers violated their S-Ox 307 duties.

Wal-Mart’s statement issued in response to the Times piece can be found here.  And, I should emphasize that I am not suggesting that Wal-Mart personnel engaged in a sham investigation.  Rather, like many posts in this blog, I am using the news of the day to provide what is hopefully helpful general COI-related information to C&E professionals.

Independent Investigations (Part Two): Board Conflicts

Part One of this series provided an overview of the issue of  attorney COIs in internal investigations. In this next posting we consider relationships at the board of directors level that can adversely affect an inquiry’s independence or the perception thereof.

COIs in the context of internal investigations most often involve the attorneys tasked to conduct the inquiry.  But independence can also be at issue with respect board members (or executives) designated to oversee the attorney’s work.

For instance, last year, News Corporation was criticized for tapping an inside board member to oversee the internal investigation of allegations of phone tapping and other questionable practices:  “‘That is not standard practice,’ said Charles M. Elson, an expert on corporate governance at the University of Delaware. ‘You cannot be seen as objective if you are inside.’” More recently, however,  an article by Ben Heineman in The Atlantic  suggests that notwithstanding this unusual reporting relationship the investigation is in fact functioning in an independent manner.  Presumably, once this high-profile inquiry is completed and its results known,  the extent of its actual independence can be more fully assessed.

Another noteworthy matter involving director independence in an internal investigation  arose several years ago in a case brought by the shareholders of Oracle. There, the Delaware Court of Chancery ruled   that a board special litigation committee consisting of two Stanford professors could not be considered independent in an internal investigation concerning alleged insider trading by fellow board members, because the target directors had close ties to that university: “It is no easy task to decide whether to accuse a fellow director of insider trading” the court wrote, and for the company to have compounded “that difficulty by requiring [special litigation committee] members to consider accusing a fellow professor and two large benefactors of their university” of a criminal act was “inconsistent with the concept of independence recognized by our law.” While somewhat unusual, the Oracle case serves as a useful reminder of the need to think broadly when it comes to ensuring that independent investigations are, in fact, free from compromising relationships.

Part three of this series will return to the issue of attorney independence in the investigative context.

 

Conflicts of Interest and Internal Investigations (Part One)

The topic of COIs in the practice of law is largely beyond the scope of this blog, but the area of independent investigations is an exception, since it is as much as much about organizational COIs as those based on professional standards.  In this first post in a series we’ll review some of the history that gave rise to the two main expectations regarding conflict-free investigations.   The second posting will examine board-level independence issues concerning investigations,  the third some important practical considerations in maintaining investigative independence and the fourth a different (from the two principal tests) way to look at independence – which is independence of process.  Finally, we will take up the related issue of seemingly forgotten COI-related mandates of Sarbanes-Oxley Section 307.

First, a page of history – that will likely be familiar to those working in the field since the early part of the immediately preceding decade, but may be less well known to others.

It was an internal investigation at Enron conducted by one of the company’s principal outside law firms that, as much as any other event, gave rise to the modern expectations regarding conflict-free investigations.  The inquiry was criticized due to the larger relationship between the firm and the company and also due to the firm’s claimed involvement in  matters being scrutinized.  In other words, there was said to be two discrete types of conflicts – one relational and the other subject-matter based.  Around the same time, an investigation into allegations of wrongdoing at Global Crossing by a partner at a law firm was strongly criticized in a bankruptcy court proceeding because that lawyer also served as the company’s general counsel. The heightened focus on independence expectations was expressed in a widely read report from this time  – issued in 2003 by the Conference Board’s  Commission on Public Trust and Private Enterprise – which stated:

In the event an independent investigation is reasonably likely to implicate company executives, the board — not management — should retain special counsel for this investigation. Special investigations of company activities that may implicate the conduct of company executives require independence from management.  Typically, lawyers and law firms are in the best position to conduct investigations, and care must be taken that these investigations are conducted thoroughly, vigorously, and objectively. It is important, therefore, that investigative counsel be chosen by, and report directly to, the board. To ensure that special counsel’s interests are not aligned with, or influenced by, management, the Commission believes that special counsel should not be one of the corporation’s regular outside counsel or a firm that receives a material amount of revenue from the company.

Finally from this period, independence expectations regarding internal investigations acquired something akin to the force of law in the mandate of Sarbanes-Oxley § 301 that only corporations with audit committees that have certain characteristics can be publicly listed, including the following: “Each audit committee shall have the authority to engage independent counsel and other advisors as it deems necessary to carry out its duties; and. . . .  [E]ach issuer shall provide for appropriate funding, as determined by the audit committee . . . for payment of compensation . . . to any advisors employed by the audit committee.”   Similar requirements can be found in the New York Stock Exchange and Nasdaq’s corporate governance related listing requirements.

Now, many years after this formative period, independence has become a settled expectation.  Certainly it is expected by the government when issues of serious wrongdoing arise.  And, I believe that employees – who are increasingly sophisticated about C&E matters – may have that expectation, too – particularly those who report suspected wrongdoing.

 

 

Behavioral Ethics and Management Accountability for Compliance and Ethics Failures

As discussed in the initial post in this series, behavioral ethics can help C&E officers prove important things about their programs that they already know anecdotally but which others might not accept in the absence of scientific data.  (The second post addressed what behavioral ethics teaches us about conflicts of interest and  third  described certain behavioral ethics implications for C&E communications.)  In this post we explore what behavioral ethics research can help to prove about what has long been an area of great challenge for many C&E programs: the need to hold managers responsible for the C&E transgressions of their subordinates.

A key tenet of behavioral ethics is “motivated blindness.” As described by Max Bazerman and Ann Tenbrunsel in a piece from the Harvard Business Review Blog Network : “mounting research shows that we often fail to notice others’ unethical behavior if it’s in our interest not to notice. This failure of oversight — called ‘motivated blindness’ — is unconscious and common.”  

Bazerman and Tenbrunsel recount the apparent impact of motivated blindness on what was one of the most jarring business ethics stories of 2011:  how “Warren Buffett, known for his embrace of ethical business practices, failed to understand the unethicality of [an important subordinate’s] actions when he learned of them, and intervene.”  They also argue that motivated blindness may have played a role in “the failure of major accounting firms to see the corruption in the books of the firms that they audit” and “the failure of security rating agencies to accurately gauge the riskiness of the instruments they rate…”

From the perspective of a C&E program, motivated blindness underscores the importance of the Sentencing Guidelines expectation that organizations should impose discipline on employees not only for engaging in wrongful conduct but “for failing to take reasonable steps to prevent or detect” wrongdoing by others  – something relatively few companies do well (and some don’t do at all).

To meet this important expectation, companies may wish to take the following measures:  

– build the notion of supervisory accountability into their policies – e.g., in the managers’ duties section of a code of conduct;

– speak forcefully to the issue in C&E training and other communications for managers;

– train investigators on the notion of managerial accountability and address it in the forms they use so that they are required to determine in all inquiries if a manager’s being asleep at the switch led to the violation in question;

– publicize (in an appropriate way) that managers have in fact been disciplined for supervisory lapses;

– have auditors take these requirements into account in their audits of investigative and disciplinary records.

Taken together, these steps will doubtless be seen as strong medicine – at least by some companies.  But behavioral ethics teaches that motivated blindness is a strong disease.

Our next post in this series  will be on behavioral ethics and C&E risk assessment.  And,  for a discussion of  an important book on behavioral ethics by Bazerman and Tenbrunsel – Blind Spots – please see the initial post in this series.