The Dangers of Ignorance: Avoiding an Internal Investigation
I would rather have my ignorance than another man’s knowledge, because I have so much more of it. – Mark Twain
One should never underestimate the power of inertia. Corporate directors and senior managers sometimes cling to inertia in the hope that potential problems will disappear or fade into the sunset. Differences in corporate responses often reflect corporate governance strategies and practices.
Foreign companies, which are frequent targets of FCPA investigations, face real challenges. Corporate governance principles in other countries are not necessarily sensitive to all of the risks of operating in the United States. Companies based in France have a far different risk appetite than those based in the United States.
When faced with suspicions of potential foreign bribery, directors and senior managers have to take an important step – acknowledge a potential problem, adopt a proactive strategy, and build an internal consensus to move ahead.
Let’s face it – it is much easier for the directors and senior managers to ignore the problem and hope that it does not come up again. In many cases, directors and managers are trying to preserve their own skins by avoiding a risky, internal investigation, which may result in major problems and potential management changes.
The sea-change in FCPA enforcement has increased corporate sensitivities to potential issues. It is not clear whether the increased awareness of FCPA issues has led to changes in corporate internal policing.
Companies which try and brush potential problems under the rug are only creating greater risks. In the fast-paced business world, it is hard to stop, allocate time and resources to an internal investigation and then, depending on the results, deal with the consequences – possible enforcement, disclosure and remediation. Internal inquiries are viewed as antithetical to the corporate desire to grow the business and maximize profits. This is a very “ignorant” or short-sighted view of corporate operations.
With the increase in potential reporting to government enforcement agencies – i.e. disgruntled employees or whistleblowers – companies face an increased risk of detection of potential corruption. The whistleblower bar is growing and becoming more sophisticated in screening potential cases and pursuing SEC rewards. Employment attorneys know how to use allegations of improper payments and other legal violations to gain leverage in a contentious employment dispute.
Board members and senior managers face increasing risks of liability. Ignorance is not necessarily bliss – it can cost a company large amounts of money and reputational damage that may take years to overcome.
Companies need to develop protocols to identify potential enforcement and compliance risks, to respond to the risks in the most efficient way, and to ensure careful review of initial suspicions. The threshold for such internal inquiries should be properly balanced to avoid unnecessary inquiries into matters that are better left to the internal auditors, compliance officers and attorneys, while making sure that significant risks are reviewed and appropriate steps are taken to investigate the matter.
An Executive Compliance Committee consisting of senior managers critical to the compliance focus can play an important role in this process. The Committee can supervise an initial review of an issue, conduct a preliminary inquiry and recommend further steps, if any. The Committee should have significant authority and direct reporting lines to the CEO and the Audit or Compliance Committee.
In the end, companies have to promote the importance of compliance to the company’s mission, and companies have to make sure they have in place the structure and procedures to carry out its compliance mission.
If issues within the company cannot be resolved immediately, they will become bigger until the company can no longer resolve it. Big things start from small things, as they say. I also believe that if the people in the company can face the smaller problems, surely they will be ready to face the bigger ones.
I would go one further, internal investigations need to be under the oversight umbrella of an empowered independent CECO who is a member, and probably chair, of the compliance committee. The opposite of this transparency can be observed in firms that place the CECO under the GC, which is too often a not-well-disguised bid to keep a lid on “sensitive” investigations. Exhibits A&B: WalMart and Pfizer.