There may have been a time – say, four or five decades ago – when the internal corporate investigation was viewed with suspicion, if not outright distaste. Today, however, the corporate internal investigation is the norm. Corporations investigate themselves for a host of reasons – to comply with laws and regulations, to garner favor from prosecutors and enforcement agencies, or to demonstrate “good corporate governance” to the company’s various constituents, including its shareholders, consumers, and employees.
Investigations are frequent, run the gamut from small inquiries to massive undertakings, and have fueled a lucrative industry among white-collar attorneys and their respective law and consulting firms.
Along with the growth of corporate investigations has emerged an academic literature focused on investigations and the broader corporate compliance function, of which the investigation is just one component. “When the Corporation Investigates Itself” analyzes the internal corporate investigation and the literature that has emerged in response to it.
Compliance involves not just the investigation of wrongdoing but also the generation of internal rules and policies, the education of the company’s management and employees, the fostering of a compliant culture, and the implementation of disciplinary and reporting-out measures. Nevertheless, the internal investigation is in many ways the most important component of the compliance function. Without it, the firm lacks the ability to reliably disclose wrongdoing and cooperate with government enforcers.
The legal academy’s discussion of corporate investigations divides into roughly three strands. The first is the question of inducement: How do we induce corporations to investigate themselves? The prevailing answer emerges from the law and economics literature. Firms will investigate themselves when government agencies employ the right balance of carrots and sticks necessary to encourage self-policing and self-disclosure.
The second strand focuses on the implementation of the investigation, such as interviewing employees, securing documents, and complying with a patchwork of local and international laws, privacy laws, and legal privileges. Unlike the inducement literature, implementation-focused scholarship pays greater attention to the corporate employee and her relationship with the firm.
The third and least developed strand addresses the structural relationship between the corporate investigator and the external, public enforcer: How should we optimize that relationship? Should we employ a competitive model, whereby the corporate investigator and public enforcer compete in an imaginary race to discover wrongdoing, awarding a prize to whoever touches the finish line first? Or should we encourage more cooperative behavioral models?
Tempting as it may be to view each of these literatures separately, a familiar problem ties them together, and that is the problem of detection avoidance. At both the individual and firm levels, wrongdoers seek to evade detection and punishment. The inducement literature addresses this issue at the firm level. The implementation literature acknowledges it at the individual level. And the structural literature takes into account both types of avoidance when it envisions the optimal relationship between (private) investigator and (public) enforcer.
Viewed as a whole, the three literatures illuminate the corporate investigator’s conundrum. At all times, she must be mindful of two pooling problems. First, she must distinguish law-abiding employees from individual wrongdoers. Second, she must use the investigation itself to demonstrate that her corporation is the kind of good citizen deserving of the trust, leniency, and lesser sanctions the government extends to self-policing companies. To some extent, the investigator’s success in overcoming one pooling problem (e.g., demonstrating that her company can be trusted) is dependent on her ability to overcome the other (identifying wrongdoers amidst a large employee population). Negotiating these pooling problems is difficult under any circumstance. It grows exponentially more difficult, however, when trust erodes between corporate investigators and employees on the one hand, and corporate investigators and government enforcers on the other.
Fortunately, the corporation can use a series of signals to counter the government’s skepticism. For example, a corporate defendant might engage former prosecutors and expensive white-collar law firms to demonstrate the company’s bona fides. But signals intended for one audience can sometimes get confused with signals intended for another.
When signals fail or only partially succeed, distrust prevails, and distrust can fuel a costly spiral in corporate compliance: The government distrusts the corporation, so the company intensifies its internal investigative activity to demonstrate its sincerity. That very intensity, however, fuels detection avoidance among employees, which in turn undermines the corporation’s ability to detect wrongdoing. When the corporation fails to detect its own wrongdoing, the government loses ever more confidence in internal corporate controls, and so on.
Against this backdrop, two recent developments affect corporate investigations in ways we cannot fully predict. The first is the Department of Justice’s latest attempt to secure cooperation from corporate defendants in identifying culpable employees (the so-called “Yates Memo”). The memo’s directive to prosecutors to deny “cooperation credit” to corporations that fail to disclose individual-level violations may turn out to be more bark than bite, although corporate defendants certainly cannot count on that. Of more interest is the second development: the increasing emphasis on workplace privacy in local, state, and national jurisdictions. In the long run, the workplace privacy movement may prove more transformative, as it may well upend the background assumptions that attend the standard corporate internal investigation. In the meantime, however, observers can fully expect the corporate investigation – and the industry that now attends to it—to proceed at its usual pace.
 Of course, the investigation is rarely undertaken by a single investigator, but I refer to the corporate investigator as a singular person for clarity of exposition.
This post comes to us from Professor Miriam H. Baer at Brooklyn Law School. It is based on her chapter, “When the Corporation Investigates Itself,” which is in the Research Handbook of Corporate Crime and Financial Misdealing and is available here.