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.