Independent investigations A director’s perspective

Independent investigations are not mentioned in the UK Corporate Governance Code, which is the go-to governance reference for many boards, even those that are not listed on the London Stock Exchange.

There is a passing reference to them in the Guidance to the Code, where it states that “It is the responsibility of the company secretary to ensure that directors, especially non-executive directors, have access to independent professional advice at the company’s expense where they judge it necessary to discharge their responsibilities as directors of the company.”

However, despite this lack of emphasis, independent investigations do form an important part of the governance tool kit of directors and it is certainly something that we talk about as part of the IoD’s professional training programme for directors, the Chartered Director Qualification.

Investigations are potentially of great benefit to the board when worrying issues arise, helping them to find out what is actually going on within an organisation, identify key risks and also potentially heading off regulatory or reputational damage.

For directors, an independent investigation can provide an essential piece of evidence to demonstrate that they have taken seriously their legal duties as a director and have sought to promote the best interests of the company.

However, there are various issues for the board to navigate if the investigation is to achieve its intended purpose.

Not least, the risk exists that the investigation is not viewed as reliable by stakeholders and is effectively being used by the management or the board to whitewash the situation. This can easily occur if the investigation is viewed as biased or lacking in objectivity.

Such a perception may arise from concerns about the substance of the investigation itself, a lack of transparency concerning its findings and also from doubts about who is conducting the investigation.

Perhaps the worst criticism that can be levelled at an independent investigation is the accusation that it is, in fact, not independent. It has been conducted by investigators who have not pursued the process with an open mind, but in fact have an underlying interest or perspective in reaching a pre-defined outcome.

In those circumstances, an independent investigation may do more harm than good. Far from allaying concerns, it may heighten suspicion that the organisation has something to hide, and is therefore worthy of even greater scrutiny from external agencies and stakeholders.

Furthermore, a poorly conducted internal investigation will not get to grips with the underlying issues, and therefore fail to uncover key risks to which the organisation is exposed, leaving it vulnerable.

We have seen numerous examples of such ‘failed’ investigations in recent years. In fact, they seem to be arising with increasing regularity.

In January, Linklaters was criticised when it was commissioned by its client, Endeavour Mining, to investigate the behaviour of ousted chief executive Sébastien de Montessus.

Critics argued that the firm’s relationship with Endeavour and its previously close relationship with Montessus undermined the independence of the investigation. Linklaters denied this, but the optics of the situation were not good.

In February, Red Bull said that a KC had cleared its Formula One team boss Christian Horner of claims of inappropriate behaviour towards a female employee, but refused to name the lawyer or publish their conclusions.

Red Bull said it was “confident that the investigation has been fair, rigorous and impartial”, but external observers had no way of verifying this.

In April, the Post Office exonerated its chief executive, Nick Read, from misconduct allegations following a barrister probe, without disclosing the report or its findings. Again, this lack of transparency was not helpful in alleviating external concerns.

In fact, the Post Office scandal illustrates how independent investigations can easily backfire on an organisation – especially if the organisation is not serious about conducting a genuine investigation, but is just seeking to obtain ‘ammunition’ to buttress its perceived interests or existing claims.

In the decade leading up to the 2019 High Court case, the Post Office commissioned half a dozen reports and reviews by external lawyers, auditors and consultants into the robustness of the Horizon IT system and the safety of previous prosecutions of subpostmasters.

Several of the reports produced findings that made extremely uncomfortable reading for various parts of the organisation. They contained things that they did not want to hear.

What we have since heard from the Public Inquiry is that these reports were typically ignored, buried or not shared with the board as a whole. As a result, the organisation made poor decisions, and continued along its disastrous path.

Of course, once a critical report has been written, it cannot be unwritten. It can easily come back to haunt those who suppressed or ignored it – and this is what we are seeing happening now at the Post Office as a consequence of the court cases and Sir Wyn William’s public inquiry. Hence boards should not undertake an investigation if they are not serious about establishing the truth!

Going forward, boards need better guidance on how to oversee the process of conducting investigations.

When is an independent investigation desirable? Who should conduct the review? What should be its objectives? Who should have access to its findings and how should they be communicated to external stakeholders?

Earlier this year, the Solicitors Regulation Authority published guidance for lawyers on how to approach internal investigations. It provided helpful advice to those advising boards, covering issues such as the importance of having clear terms of reference, the effective management of the investigation process, and the circumstances in which the findings should be reported to regulatory authorities.

However, directors also need to have their own more strategic understanding of investigations, enabling them to better apply their own judgement and moral compass.

Ultimately, directors are responsible for the organisation, and best placed to take a holistic view of the investigation – balancing legal risks with other factors such as reputation, ethical standards and the overall impact on the organisation.

Investigations are not just a purely legal matter – but something that directors need to have a grip on. They shouldn’t allow themselves to be placed in the position of passively going along with what their legal advisers tell them to do.

Let me mention three areas where directors need to be able to take an informed and deliberative approach.

One of the most critical decisions for directors is to determine whether internal staff can reasonably be expected to investigate an issue or if an external investigation is needed.

Normally, the board will prefer, wherever possible, to look to internal departments such as management control functions, internal audit or the in-house legal team to take on the role.

This is because they know the business best and also because the retention of independent outside counsel can be costly and disruptive to the business. Its very existence can also unhelpfully signal that significant problems may exist

However, clearly there are instances where an internal investigation is not credible or appropriate – such as when the concerns relate to the conduct of senior management or the board itself or if the organisation lacks the necessary investigative capabilities.

In other instances, an independent external review may be a clear expectation of regulators or law enforcement authorities. The board needs to have a clear understanding of the circumstances in which an independent investigation is needed.

Another tricky issue that often arises is determining ‘the client’ for the investigation. Is it the company, the board, the Chair or someone else? This is an important decision, as it will determine who has the right to share privileged information from the investigation.

This is a crucial consideration that directors often lack awareness of. It was brought into spotlight during the course of the Post Office scandal.

One external investigation, the 2016 Swift Review conducted by Jonathan Swift QC, called into question the strength of the evidence that POL had used to secure past convictions of subpostmasters, including their persistent denial that remote access to the Horizon IT system was possible.

However, Tim Parker, Chair of POL, was advised by lawyers not to share the report with the board – on the grounds that the findings of the review were legally privileged.

Reflecting on this decision during the Public Inquiry, Parker agreed that it was a mistake: “I felt erroneously that legal privilege meant that the report effectively was circumscribed”. He accepted that if the Swift report had been discussed at board level it could have led to a “different approach” by the Post Office when contesting the 2019 lawsuit in the High Court.

The IoD recently convened a working group to look at the Post Office scandal from a governance perspective. Participants observed that ‘legal privilege’ was routinely “used or abused” throughout the Post Office scandal.

According to one professor of law in our working group, “One of the lessons for directors from the scandal would be to advise them on whether that’s ever a justifiable argument – that information can’t be shared with the board because of this issue of legal privilege.

“In most cases, it’s clearly inappropriate that legal advice shouldn’t be shared with the board, because the board … are effectively the company, and the advice is for the company.”

Directors need better guidance on where to locate the ownership of the investigation process – including the possible use of special committees of non-conflicted directors to oversee the investigation.

Finally, directors need to develop a clear perspective on who should conduct an independent investigation. Are there any circumstances where law firms or other advisers with existing relationships with the organisation are the right people for the job? In most instances, the answer will probably be no.

The partial exception to this might be if the adviser is being engaged by the board or management in a consultancy type role – for the purpose of improving organisational effectiveness, e.g. by examining the organisations controls, policies or processes and making suggestions for improvement. Pre-existing advisers are likely to be a good choice for this role as they already know the organisation and can provide a relatively efficient service.

However, if the motivation for the investigation is to determine the integrity or conduct of senior individuals, or is associated with legal or reputational consequences, then the case for a fully independent investigator becomes compelling. As I have said, anything less could actually do harm to the organisation rather than help it move forward.

To conclude, independent investigations are an important feature of good corporate governance. And if anything, their importance is likely to grow in the future. However, they need to be managed appropriately by the board and other key staff.

Although the ‘brand’, prestige or perceived expertise of the firm or individual conducting the investigation will always be important aspects of credibility, the independence and transparency of the process is if anything more important. Directors need to up their game in understanding and managing these issues.