When a company is preparing to conduct an internal investigation, among the first issues it faces is the selection of counsel to conduct the investigation.
The principal options are:
- To conduct the investigation internally
- Retain independent counsel: counsel who has no present relationship with the company
- Retain outside counsel: counsel who has a relationship with, and knowledge of, the company from regularly performing services for the company
Whether to use inside counsel, outside counsel or to go further to independent counsel is best based on a balancing of all of the factors that impact the success of an investigation. The key factors are:
1. Measuring the independence of counsel
In limited situations, having absolutely no prior relationship with the company and its management is a requirement, but these situations are rarer than many appreciate. Independence cannot be measured scientifically, but there are reasonable indicators.
When outside counsel’s reliance on the company for revenue is small based on the size of the law firm and its revenues, having some relationship is most often not a problem. One key measure of independence is the percentage of the law firm’s revenue received from the company over the past several years—10 percent or more should be considered as affecting independence.
Another key measure is the subject of the investigation. Obviously no lawyer, whether in-house, outside or independent, can credibly investigate a subject in which that lawyer, the firm or (in the case of in-house counsel) the company’s legal department are involved.
A third key measure is personal relationships. Personal relationships with senior managers, including directors or the general counsel, can be a major advantage because a level of trust is already established, as is ease of communication. To balance against this advantage, a company must consider the risk that inside counsel or outside counsel will shade their conclusions to avoid directly or indirectly criticizing management.
Investigations of directors or senior managers, especially those who have a relationship with the company’s outside counsel, will call for independent counsel. When the targets of the investigation are lower level managers or officers of subsidiaries who do not have such relationships, this is a less important factor.
3. Regulatory agencies
The government most often judges reporting about the investigation based upon the manner in which the investigation is conducted and its transparency—not the label attached to the investigating lawyers.
The speed of the investigation is a critical factor. When speed is important, outside counsel’s familiarity with the company can permit them to begin and conclude the investigation quickly. Investigations by independent counsel take significantly longer because the firm lacks knowledge of the company.
When the investigation involves general practices of the company or conduct of directors or senior managers, the cost is generally not a major factor because of the critical impact on the enterprise. However, when the investigation is of more isolated conduct, events in a subsidiary or conduct by less senior managers, cost is appropriately a major consideration. Outside counsel, with their knowledge of the company, can most often conduct investigations far less expensively than independent counsel.
Maybe the most important factor in the decision is the experience of counsel, whether outside or independent, in the conducting of investigations. Independent auditors, regulators and other constituencies are most interested in the expertise of the counsel in conducting the investigations, and experience is necessary to navigate the discretionary judgments required to conduct a successful investigation.
Rarely is there just one “right” answer. Professional judgment is required to balance all of these factors. In many instances, a hybrid approach using a combination of inside counsel, outside counsel and independent counsel working together in various phases of the investigation may be the best option on balance.