How Not to Bungle Your Internal Investigation

By DirectorCorps

October 29, 2019 All Industries Crisis Management

The C-suites at Nissan Motor Co. have been in flux, keeping the auto maker’s board busy.

Former CEO Carlos Ghosn has been arrested and his successor has been ousted because of another compensation scandal. The board must now contend with “substantive concerns” about conflicts of interest during its own internal investigations that were raised by its general counsel, Ravinder Passi, according to an article from The Wall Street Journal.

The report alleges that the head of the legal department Hari Nada may have been involved in some of Ghosn’s actions that were investigated, and has subsequently agreed to cooperate with prosecutors in exchange for not being charged. Some members of the legal staff believe Nada should be excused from continuing to direct the legal affairs of the company, according to The Wall Street Journal. Additionally, the law firm that handled the internal investigation may also have participated in executive compensation discussions that are now under question.

Nissan has responded to the concerns. “Nissan executives and employees, including Mr. Passi, were mindful of the risk of potential conflicts of interest throughout the investigation process,” the company said in a statement sent to The Wall Street Journal and included in the Sept. 23 article. “We believe that the investigation was conducted rigorously and appropriately.”

Companies that undergo an internal investigation must juggle multiple issues, including the possibility of conflicts of interest jeopardizing the investigation.

“Outside counsel who have not previously represented the company are viewed by the government as more independent than the company’s usual outside counsel and may have more credibility if the company later decides to share the findings of the investigation with the government or other third parties,” wrote Jones Day attorneys in a report called “Corporate Internal Investigations: Best Practices, Pitfalls to Avoid.”

It may be necessary for a board committee to take over supervision of an outside investigation if the company’s own legal department has a conflict of interest of some sort.

“When an internal investigation focuses on conduct that potentially implicates corporate management, it is especially important that the investigating attorneys be viewed as independent. They should not be from the same firm as the corporation’s regular outside counsel; indeed, regular outside counsel may themselves be percipient witnesses to the conduct under investigation,” the attorneys wrote.

Outside counsel can be more expensive to hire in conducting an investigation than internal counsel, but can also be more objective, according to a paper by Morrison Foerster. “Sometimes, a too-close relationship of outside counsel and the client removes many of the benefits of having outside counsel conduct an internal investigation. This is conventional wisdom after Enron and Global Crossing,” the lawyers wrote, referring to the energy company and telecommunications firm that went bankrupt over a decade ago.

Other issues for directors to consider are ensuring that attorney-client privilege is maintained during the investigation and avoiding problems when there are too many “chefs in the kitchen” directing the investigation.