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The Role of Internal Investigations in Corporate Governance

In order to function, corporations must be able to govern and oversee themselves. Unfortunately, when the issue under review is the board of directors’ or other high-ranking managers’ conduct, self-governance can become more challenging. Without taking proper steps to ensure the integrity of such an investigation, it can often appear to be mere lip service to the stockholders, the regulators and the public at large.

Credibility is paramount when conducting an internal investigation of a company. Regardless of how thorough and skillful the investigators are, their findings are not likely to receive much respect unless the investigators are adequately separated from the people being investigated. That is why it is often advisable for boards to establish a special committee to conduct such investigations and retain outside counsel to assist.

With increasingly lucrative whistleblower benefits becoming available under Sarbanes-Oxley, Dodd-Frank and other legislation, a corporation’s ability to handle allegations of internal misconduct is more important than ever. When properly conducted, a thorough internal investigation can provide numerous benefits:

  • A credible internal investigation policy encourages employees and managers to report misconduct internally rather than going to outside agencies.
  • When outside agencies and regulators do become involved, the fact that a company conducted a thorough internal investigation demonstrates its commitment to transparency and fair play.
  • When allegations come from a shareholder, a reliably done internal investigation can provide a defense during any derivative lawsuit that may be filed.

These types of problems are not limited to large, publicly traded companies. Even smaller companies must be prepared to follow up on allegations of fraud or misconduct to preserve the confidence of their investors and employees. An experienced DC area corporate governance lawyer can help directors and managers respond appropriately to these types of allegations.

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