In the November 7, 2019 edition of The Legal Intelligencer Edward T. Kang, managing member of KHF wrote “When to Hire Outside Lawyers to Conduct an Internal Investigation.”
The call for an internal investigation, not unique in the wake of the #MeToo movement, is not simply confined to the media and entertainment industries—although we may know more about them due to the high profile of many of those involved.
Recently, a number of high-profile female journalists associated with NBC News called for its parent company, Comcast, to begin an internal investigation to address alleged sexual harassment within the news network’s workplace. As one of the country’s most successful corporations, Comcast, based here in Philadelphia, is faced with a need duplicated by many Fortune 500 companies—hiring outside counsel to investigate an internal matter.
Megyn Kelly and Gretchen Carlson, key figures in exposing the decades of misconduct by the late Roger Ailes, have been vocal in their support of the need for an internal investigation. In that case, Fox failed to address complaints aimed at the former chair and CEO of Fox News. The allegations detailed in Ronan Farrow’s current best seller, “Catch and Kill,” not only reveals the depth of the issues, but highlights the potential damage to the profile of a successful business. The letter signed by Kelly and Carlson reiterated claims of a “corporate culture of widespread sexual harassment and abuse.”
The call for an internal investigation, not unique in the wake of the #MeToo movement, is not simply confined to the media and entertainment industries—although we may know more about them due to the high profile of many of those involved. Harassment and other inappropriate behavior are present at many workplaces and in all types of industries. These sorts of problems are also present within the legal profession, as well. The current litigation concerning DLA Piper is just one example. Vanina Guerrero and a few other women came forward concerning the alleged misconduct of Louis Lehot, a co-managing partner of the firm’s Silicon Valley office. She alleged the firm did nothing about it despite her reporting the misconduct. DLA Piper recently filed a response to Guerrero’s Equal Employment Opportunity Commission complaint, alleging that Guerrero instead orchestrated her relationship with Lehot to advance her career. This situation has escalated into a very heated and public one, which has also had effects on the reputation of DLA Piper.
The situations that warrant internal investigations include more than just misconduct relating to sexual harassment. There are many cases where financial misconduct, fraud or other unsavory business practices can be the subject of an internal investigation. An investigation in this kind of matter would be done by those experts focusing on business litigation or corporate governance. Rampant financial misconduct will degrade a company’s reputation in the business world and will discourage others from investing in or otherwise doing business with a company. Quelling this type of behavior is thus essential for a company’s finances and integrity to remain intact.
In re Caremark International Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996) left long-lasting implications in corporate law regarding internal controls and corporate governance. The shareholders of Caremark alleged that the directors breached their duty of care by failing to establish adequate control systems—a failing that allowed employees to violate the law. The court issued an opinion that described what plaintiffs must show to prove that directors breached their oversight duty, which is within their duty of loyalty. Caremark was recently cited with approval in Marchand v. Barnhill, 212 A.3d 805 (Del. 2019), which held that Blue Bell Creameries board of directors “failed to implement any system to monitor Blue Bell’s food safety performance or compliance.” Although varying situations, these cases show the duty of directors to maintain oversight and remedy situations, which are violations of the law. Internal investigations are precisely a method of doing just that.
A poorly conducted or opaque internal investigation, although perhaps smothering the issue at the moment, almost always is a ticking time bomb for a company. If an employee feels their complaints have been ignored—and especially if the behavior in question continues—a company is only setting themselves up for future troubles. The employee(s) in question may pursue a lawsuit or otherwise publicly speak out, which will hurt both a company’s finances as well as their reputation. The recent developments regarding NBC exemplify the ramifications of this. The company’s insistence on the validity of their former, internally conducted investigation in the light of continued allegations has only further damaged their status in the public’s eye.
So when does a company decide that a third-party investigator is needed as opposed to an internal one? One might assume that a company’s internal people, whether in management or human resources, would have a better understanding of the company’s dynamics and thus could provide a better-reasoned opinion about the situation at hand. At the same time, this proximity to the people involved in the matter is exactly what often causes problems. The people tasked with conducting the internal investigation may find people they like or dislike involved, coloring their impressions and judgments. They may feel pressure from certain parties, especially from those higher in rank, to put out a certain judgment, and that pressure may make them fear for the security of their job. This is especially the case if the issue involves many higher-ups within the company. They may also just not have the expertise needed to handle complex issues. These requirements are the same factors that may convince a company to hire an outside expert to investigate the matter at hand.
One might ask why, under all these circumstances, which would encourage a company to hire professional investigators, highly sensitive and potentially explosive situations are often handled by nonexperts or those who cannot be objective enough to come to a fair investigatory finding. The ethical and responsible line of action is often clouded by personal interests, internal corruption, and a short-sighted view of how events will develop in the future.
Take, for example, The New York City Employee’s Retirement System v. Page, a recent case filed in the Delaware Court of Chancery in April (case number 2019-0280). This derivative lawsuit, filed by four New York City pension funds (The New York City Employees’ Retirement System, The Teachers’ Retirement System of the City of New York, The New York City Fire Department Pension Fund and the New York City Board of Education Retirement System) alleged that Alphabet Inc.—the parent company of Google—allowed for a workplace environment filled with sexual harassment and misconduct to thrive. Instead of addressing numerous complaints, employees alleging harassment were often indirectly punished and saw the perpetrators receive no punishment.
More alarmingly, high-level perpetrators often received severance packages in the sums of millions instead of being fired for cause for their behavior. Behavior like this was subject to protests last year. Besides awarding perpetrators for misbehavior, the lawsuit also claimed that these compensatory packages were breaches of fiduciary duty. Instead of changing an internal problematic structure, the perpetrators are “removed” but with a reward or the whistleblowers also get a severance package that buys their silence. Removing the perpetrators or buying the whistleblowers’ silence would provide a temporary fix to the permanent problem. Consequently, it does nothing to resolve the root of the problem—further exposing a company to even more costs when someone decides their problems should be addressed in a court of law.
For major companies like Google, it might initially seem that throwing money at a problem until it disappears could be a viable option. But, that is short-sighted, especially when considering the costs associated with a loss of the public’s faith and trust. A company’s survival ultimately depends on the public’s use of their product or services, and thus retaining a good reputation is vital. Recent events, as evidenced by Uber, Fox News and NBC, have also only proven that no company or person is too big or has too much money, to be immune from these problems.These image problems can discourage people from not only using a company’s goods and services but also become a hindrance to hiring employees. Especially for potential employees who come from underrepresented backgrounds, a company with a background of unaddressed sexism, racism or other forms of discrimination will not be an enticing place to work. This is also true for young people in general, who highly value equality and fairness in the workplace.
What all these situations have shown is how much things could have been different if the company retained an outside investigator to conduct an internal investigation. Many of these situations have only festered in severity after allowing unallowable behavior to continue for too long, with “remedies” that only exacerbate existing issues and damage the workplace environment. The number of people subject to harm—whether that was due to discrimination or to financially fraudulent behavior—could have been reduced. Damages to a company’s finances and its reputation could have been minimized. It is often tempting to not turn to an outside party, because it admits you have a problem, especially for public companies who have reporting requirements with the SEC. At the same time, addressing a major problem sooner rather than later would likely ensure less damage. Very rarely do matters such as these simply blow over.
Overall, the value of an internal investigation cannot be understated. Hiring dedicated professionals who can work with the expertise, objectivity, and diligence needed to handle a problematic situation will pay off tenfold in not only helping address the problem early on but also potentially avoiding bigger and more public lawsuits. Some small internal problems can be resolved internally. But for matters that are more complex and sensitive, turning to outside professionals will be a far more effective use of resources and will help avoid bigger problems down the line.
Edward T. Kang is the managing member of Kang Haggerty & Fetbroyt. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at firstname.lastname@example.org.
Reprinted with permission from the November 7, 2019 edition of “The Legal Intelligencer” © 2019 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or email@example.com.