Corporate internal investigations: balancing firm social reputation with board fiduciary responsibility

Abstract

Purpose

The subject of corporate internal investigations engenders a special challenge for the final arbiters of a company's strategy, the boards of directors. The taint to corporate reputation associated with allegations of improper business practices has widespread, and possibly long‐term, financial and legal implications for various key stakeholders of the corporation. The purpose of this paper is to develop a methodological approach to balancing firm social reputation with the fiduciary responsibilities inherent to directors in publicly‐traded companies.

Design/methodology/approach

For boards to effectively address the issues raised by threats to corporate reputation and cooperation with US government agencies in their criminal and civil investigations, a two‐stage approach of interactive/reactive engagement (based on a typology developed in 1975) provides the theoretical foundation to formulate a firm nonmarket strategy for addressing corporate internal investigations.

Findings

Recognizing the new socio‐economic reality faced by the modern firm (i.e. corporate citizenship and stakeholder engagement) requires that executives and directors balance the strategic importance of maintaining the firm's social reputation for the long term with the short‐term economic consequences of criminal and civil litigation over improper business practices.

Originality/value

The value of this interactive/reactive engagement approach is that it requires explicit managerial/board recognition of the benefits ”accruing to the corporation and its stakeholders (i.e. leniency in sentencing and fines, enhanced corporate social reputation,), while factoring in carefully measured costs” (e.g. the negotiated waiver of attorney‐client privilege and work‐product protection) that must be absorbed by the firm and its shareholders.

Citation

Hemphill, T.A. (2006), "Corporate internal investigations: balancing firm social reputation with board fiduciary responsibility", Corporate Governance, Vol. 6 No. 5, pp. 635-642. https://doi.org/10.1108/14720700610706117