In part based on demand from institutional shareholders and other stakeholders, corporate management and boards, independent board members and audit committees are expanding the role of independent legal counsel in implementing and encouraging whistleblower policies.
As a result of the passage of the Sarbanes-Oxley Act of 2002 and, more recently, the Dodd-Frank Wall Street Reform and Consumer Protection Act, it is more important now than ever for companies to ensure that they have an effective and clear whistleblower policy in place. Such policies are mandated for public companies, but are also being implemented and expanded by non-public, for profit companies, as well as nonprofit companies. In some large part, these initiatives are responding to challenges and demands from institutional shareholders and other stakeholders seeking greater comfort with governance and oversight.
A key component of any effective whistleblower policy is independence. In order to provide for objectivity and to maintain the integrity of a company’s whistleblower policy, best practices suggest that the policy provide for an independent review process that is independently administered.
Individuals are generally more likely to come forward with information if they believe that the person receiving the complaint is impartial. In maintaining this independence, companies—and their constituent management, boards, independent board members and audit committees—are increasing their use of independent legal counsel, who can play a valuable role in the administration of whistleblower policies.
Independent Counsel as a Resource to Management, the Board, the Audit Committee and Independent Directors
A company’s whistleblower policy may provide that all complaints or other information be communicated to the company’s audit committee, which is typically comprised of independent directors. If this is the case, the audit committee and independent directors should have the authority not only to investigate any claims that are raised in accordance with the policy, but they also should be permitted to retain outside legal counsel if they believe it is necessary for a thorough investigation of the claims. Audit committees and independent directors have other responsibilities to fulfill, and it may not be practical for them to handle whistleblower complaints. The ability of independent directors and audit committee members to retain outside independent counsel prevents these individuals from becoming bogged down in handling complaints.
If a whistleblower policy permits audit committees and independent directors to retain independent counsel to administer the policy and handle complaints, the independent counsel typically receives the claim and all information relating to the claim, investigates the merits of the claim fully, and acts as an intermediary between the employee and the company. Counsel administers the process, which includes providing periodic updates to both the employee and the company as to the status of the claim.
It is important to note that the independent counsel should not be the company’s outside law firm or other attorney who has provided services to the company in the past. The use of a firm or other attorney who has any relationship with the company or any of its executive officers would undermine the integrity of the whistleblower policy. The audit committee or independent directors should select the independent counsel.
One issue that can arise, however, is how to prevent the company from incurring unnecessary legal costs for retaining independent counsel to investigate claims that are trivial or have no merit. One solution is to provide that before matters are referred to independent counsel, someone at the company will review any complaints in the first instance and make a determination as to whether a potential violation meets a certain level of materiality. A downside to having company personnel evaluate claims initially, however, is that the participation of someone internal to the company in the process could harm the integrity and objectivity of the policy. As an alternative solution, many robust policies provide that all matters be fi rst referred to independent counsel, often using a paraprofessional to triage, referring back to the company any routine or trivial claims or any other matters that are more appropriately handled by the company internally. Additionally, a company can retain the services of outside companies who establish hotlines for whistleblower complaints and also provide various related case management services. These outside service providers will coordinate with independent counsel.
Independent Counsel as Counsel to the Anonymous Whistleblower
Independent counsel can also play another valuable role in the implementation of a company’s whistleblower policy. Many whistleblower policies provide that an employee who wishes to report a potential violation on an anonymous basis can have independent counsel appointed to him or her. The availability of independent counsel in this instance serves to maintain the anonymity and confidentiality of the whistleblower, as the whistleblower has the benefit of the attorney-client privilege, and would help to eliminate the employee’s fear of retaliation.
In this scenario, the company would also fund the legal fees of the attorney for the whistleblower. The whistleblower’s appointed attorney responds to the inquiries and investigation of the company’s independent counsel, described above, and receives from the company’s independent counsel reports as to the status of the investigation.
Ultimately, whether as a resource to a company’s audit committee and independent directors, or to the whistleblowers themselves, independent counsel can play an important role in creating and maintaining a strong and effective whistleblower policy.