ALLEGATIONS OF MISCONDUCT, fraud and corruption are everywhere lately, with nearly every news cycle surfacing a tale that seems to bear investigation. Just last month, charges of sexual misconduct by CBS CEO Les Moonves surfaced, coming shortly on the heels of the news that Papa John’s besieged founder and chairman, John Schnatter, had been unseated by his latest alleged verbal transgression.

Massive data breaches, accounting fraud, corruption, harassment – whatever the scandal du jour, internally, the task of sussing out just what happened and where any fault may lie falls to the board. It’s a gargantuan responsibility- one made more difficult by the speed with which crisis-fueled events unfold and the level of scrutiny they spawn.

A well-handled internal investigation can go a long way toward mitigating the potential fallout of alleged wrongdoing, helping to restore a company’s reputation and reduce the risk of legal exposure and material impact. Here’s a three-step approach to navigating that process.

Should You Investigate?

From a whistle blower report of wrongdoing to an auditor bringing a serious lapse to your attention, any number of red flags might suggest an investigation could be warranted . It’s your job to decide if this issue requires the board to step in, rather than a response from the executive team.

Ask yourselves, “Is the company’s ability to conduct an independent investigation impaired?” Assurances from the C-Suite alone should not suffice. CEO Ken Lay conducted an investigation at Enron and reported that nothing was amiss. We know how well that worked out.

In certain circumstances, the potential for liability comes into play. For example, when a shareholder derivative suit is underway, a special committee investigation may be warranted to address the  charges in the suit and help immunize the company against liability. Both the company and the board have a legal obligation to actively monitor and ensure legal compliance and internal controls.

Who Should Investigate?

If the board opts to investigate, an independent committee of  the  board  should be formed. That committee should be chartered by the board as a whole with a specific mandate, powers and timeline.

While you can empower your current audit or governance committee, a dedicated sub committee of the board has advantages and lets you shape mem­bership to address the unique problem at hand and to write its own charter for investigation. In this charter, you should:

  • Spell out the matters to be investigated and make clear the committee’s powers.
  • Name the members of the committee.
  • Set a scope and timeline.
  • Define the outcome sought. Is the committee charged solely with investigating or will it also be recommending action to the full board or taking that action itself?

Understand that throughout this process, you will be second-guessed by management, the media and stakeholders.  Though ground work, rigorous planning and strict protocols will help insulate the investigation from these outside pressures.

How Should the Investigation Be Conducted?

This is no process for amateurs.  the committee should hire independent, nonaffiliated corporate counsel to structure the investigation for maximum legal protection.  Counsel or other investigatory professionals from out side the firm should be brought in and charged by the commit tee to do the actual digging. Counsel can suggest and advise on who with in or outside the company may need to be “quarantined” from the investigation, or even from their current functions.

The more serious an allegation and the higher up in the organization culpability may extend, the more likely an outside law firm should carry out the investigation .

Work with counsel to keep as much of the investigation and findings legally privileged. The board should keep its hands out of the actual investigating

After counsel and independent external resources (accountants, professional investigators, etc .) Look into the matter, they should report back to the committee.  Process is important here – the sleuthing investigators should not report to or share information with management. In some cases, even a formal written report is unwise. Instead, investigating counsel could present its findings to the committee in an oral report. The committee will then report to the full board, which may question the committee and counsel at a full board meeting. The board should ask probing questions of those who make the report.

Assuming the investigation turns up some misconduct, the board will face tough questions. Should a formal report be written? When and how should the CEO be briefed on the findings? Should the company make voluntary disclosures to the government or regulators in hope of leniency? How much should be disclosed, and when? Advisers can help guide you through these decisions.

Ultimately, circumstances and context will factor into the investigation process.  However, in today’s scandal-strewn corporate environment, all directors need an understanding of the best practices for conducting investigations.