For corporate boards, the first 72 hours of a crisis are critical. Here’s what to do
Howard Levitt: Difficulties arise because directors underestimate the significance of their early decisions
At the outset, the board likely does not know. What it does (or should) know is that the next several days may determine not only the future of the chief executive, but of the board’s own credibility and whether it or any of its members should best resign.
Directors often assume that their greatest challenge will be determining whether the allegations are substantiated.
The more immediate challenge is ensuring that the organization responds appropriately before that determination can even be made.
The first 72 hours are rarely remembered for what the board did right. They are remembered for what it failed to do.
The difficulty is that complaints against senior leadership arrive burdened with uncertainty. The facts are often incomplete. Emotions run high. Rumours spread quickly. Directors find themselves under pressure to act decisively while possessing only fragments of the information they require.
In such circumstances, the greatest risk is not making the wrong decision. It is making a premature one.
One of the first questions is deceptively simple: Who should receive the complaint? If allegations concern the chief executive, management cannot investigate itself. The matter must immediately move beyond the normal reporting structure and into the hands of independent directors, typically through the board chair, lead director or an appropriate board committee.
This might seem obvious. Yet some of the most significant governance failures begin when a complaint remains with management for too long. A board cannot exercise oversight on a matter it is unaware of.
The second question is whether outside counsel or outside investigators should be retained.
Boards sometimes hesitate. Independent investigations are expensive, disruptive and often uncomfortable. Directors may also believe they can assess the issue internally before involving external advisers.
That instinct is understandable. It is also frequently misguided.
The decision to retain outside counsel, which should always occur, is not solely about legal advice. It is about independence, credibility and process. Employees regulators, shareholders and courts may be willing to accept an unfavourable outcome. They are far less willing to accept a process that they perceive as compromised.
Another difficult question arises almost immediately.
Should the CEO remain active while the investigation proceeds? There is no universal answer.
Some allegations may not justify any interim action. Others may require restrictions on authority, limitations on access to personnel or information, or temporary leave pending the investigation’s outcome.
What matters is not necessarily the conclusion it reaches. What matters is that it confronts the question directly rather than avoiding it. A decision not to act is still a decision.
Evidence preservation presents another challenge.
By the time directors learn of a complaint, relevant emails, messages, documents and electronic records may already be at risk of alteration or deletion.
The board’s obligation is not merely to investigate. It is to ensure that the evidence necessary to conduct a fair investigation remains intact. Organizations often underestimate how quickly this information becomes critical.
The same can be said of communications. Silence creates a vacuum. Vacuums invite speculation.
Yet excessive disclosure creates its own risks. Employees want reassurance. Investors want confidence.
The media may demand answers. Regulators may seek information.
Boards frequently discover that communicating too little or too much are both capable of causing damage. The objective is neither secrecy nor transparency for their own sake. It is preserving confidence in the integrity of the process.
Public companies face an additional consideration. At some point, directors may need to determine whether the allegations or the
investigation itself trigger disclosure obligations. That analysis depends upon the facts, the nature of the allegations and their potential impact on the corporation.
What should never occur is allowing disclosure considerations to influence the investigation itself. The board’s first responsibility is to discover the truth. Its disclosure obligations flow from that responsibility, not the other way around.
Over the years, I have observed that the greatest challenges for boards rarely lie in the allegations themselves. More often, difficulties arise because directors underestimate the significance of their early decisions.
A complaint is treated as a personnel matter rather than a governance matter.
Its investigation lacks independence.
Potential evidence is not preserved quickly enough.
Communications are improvised rather than planned.
Most commonly of all, directors assume they have more time than they do. They usually do not.
The ultimate findings of an investigation may vindicate the CEO, justify discipline or lead to dismissal.
In the first 72 hours, however, those outcomes remain unknown.
The board’s responsibility is not to predict the conclusion. It is to ensure that when the conclusion eventually arrives, it is one that the organization, its employees, its shareholders and the public can trust.
In governance, credibility is not established when the investigation ends.
It is established in the first few days after it begins.
Howard Levitt is senior partner of Levitt LLP, employment and labour lawyers with offices in Ontario, Alberta and British Columbia. He practises employment law in all provinces and is the author of six books, including the Law of Dismissal in Canada.