Inside the Boardroom During a Crisis: Director and Officer Decision-Making Under Investigation

The most difficult conversations I have had as a defense lawyer have not been with prosecutors or regulators. They have been with directors and officers of companies under investigation, who arrive at the conference room with a set of assumptions about their roles that the situation has just rendered obsolete. The director who has served on the board for fifteen years and assumed his role was strategic and oversight-oriented learns that the SEC investigation has named him as a recipient of allegedly material adverse information. The officer who has executed every transaction at the direction of senior management discovers that the Department of Justice is examining her decisions for personal criminal exposure. The board that has functioned smoothly through the company’s growth confronts the question of who, exactly, the company’s lawyers are representing in the inquiry that is now consuming everyone’s attention.

These are difficult conversations because the answers are not the ones the directors and officers want to hear. Their interests have diverged from the company’s interests. Their privileges may have diverged from the company’s privileges. Their decisions about cooperation may differ from the company’s decisions. And the legal advice they have relied on for years — from in-house counsel and outside counsel they trusted — may no longer be advice they can rely on without separate representation. The board and the executive team that navigate this transition well preserve their ability to defend themselves. The ones that do not, find their defenses constrained by decisions they made in the first weeks of the matter, when they did not yet understand what the matter would become.

The Duty Framework During a Crisis

The fiduciary duties of directors during a corporate crisis are not different in kind from their duties in ordinary times, but the application of those duties intensifies dramatically. The duty of care requires informed decision-making. The duty of loyalty requires that directors act in the corporation’s best interests, not their own. The duty of oversight — the so-called Caremark duty — requires that directors implement and monitor systems reasonably designed to detect and respond to legal compliance issues.

In a crisis, each of these duties is tested. The duty of care requires that the board be informed about the investigation, the company’s exposure, and the strategic response. A board that does not request and receive regular briefings during the matter is a board whose subsequent decisions can be attacked as uninformed. The duty of loyalty requires that the board’s response be calibrated to the corporation’s interests, not to the personal preferences of the directors. A board that fails to authorize a thorough internal investigation because the directors are uncomfortable with what it might find is a board that has prioritized its own interests over the corporation’s. The Caremark duty requires that the board’s response include not just resolution of the immediate matter but assessment and improvement of the systems that allowed the underlying conduct to occur.

The directors who understand these obligations and act on them establish a record of careful, informed, loyalty-based decision-making that protects them individually and protects the company they serve. The directors who treat the crisis as a matter for management or for outside counsel to handle without active board engagement create vulnerabilities that plaintiff lawyers will exploit in the derivative litigation that often follows.

The Special Committee Decision

In serious matters, the board will face the question of whether to establish a special committee — a committee of independent directors with delegated authority to investigate and respond to specific allegations. The special committee structure is one of the most powerful tools available to the board in a crisis, but it must be implemented correctly to produce its intended benefits.

A properly constituted special committee is composed of directors who are independent of the conduct under investigation and have no disabling interests in the outcome. It is granted explicit authority by the full board to investigate, retain its own counsel, and make recommendations to the board. It conducts its work through counsel of its own selection, separate from the company’s regular outside counsel. Its findings and recommendations are presented to the full board for action, with the special committee’s independence preserving the credibility of its conclusions.

The benefits of a properly constituted special committee are substantial. The committee’s investigation can satisfy the board’s Caremark obligations and the duties owed in the Delaware demand-refusal context. The committee’s findings can frame the company’s response to regulators and prosecutors. The committee’s recommendations can provide the basis for personnel actions, governance reforms, and remediation measures that demonstrate the board’s response to the matter.

The risks of an improperly constituted special committee are equally substantial. A committee composed of directors who are not actually independent — who have personal relationships with the executives under investigation, who participated in the conduct at issue, or who have other disqualifying interests — produces conclusions that will be attacked and may be disregarded. A committee that does not retain truly independent counsel — that uses the company’s regular outside counsel, who has its own institutional relationships with management — produces investigations that will be challenged as compromised. A committee that does not have actual delegated authority, or that operates as a rubber stamp for management’s preferred outcomes, produces findings that will be discounted by every external stakeholder.

The board that establishes a special committee in a serious matter must therefore approach the structure with the seriousness it requires. The composition matters. The grant of authority matters. The selection of counsel matters. The committee’s actual conduct of the investigation — its independence from management, its rigor, its willingness to follow the evidence where it leads — matters most of all.

Individual Director and Officer Exposure

The directors and officers of a company under investigation face individual exposure that is separate from the company’s exposure and that requires separate evaluation. The exposure may take the form of SEC charges naming the individuals as respondents, criminal investigation by the Department of Justice, civil claims in shareholder derivative actions, or claims in securities class actions naming the individuals as defendants.

The first step in managing individual exposure is recognizing that it exists. Many directors and officers operate on the assumption that the company’s counsel is also their counsel, that the company’s defense will protect them individually, and that their interests are aligned with the company’s. These assumptions are often wrong, and they are wrong in ways that affect the individual’s ability to defend himself or herself.

The company’s counsel does not represent individual directors and officers absent an explicit joint representation. The privilege between the company and its counsel does not protect communications between the individual and the company’s counsel against later disclosure to the company. The company’s defense strategy may require it to take positions adverse to individual directors and officers, particularly under the cooperation frameworks that many regulators and prosecutors apply.

The directors and officers facing serious exposure should retain personal counsel. The cost of personal counsel is real, but the cost of not having personal counsel is greater. The individual whose interests are separately represented from the beginning of the matter has options. The individual whose interests are not separately represented has the options the company’s strategy permits, which may not include the options the individual would have chosen.

The Cooperation Conflict

Government cooperation in corporate investigations creates a structural conflict between the company and its individual executives. The cooperation framework that has evolved since the original Holder Memorandum, refined through the Thompson Memorandum, the McNulty Memorandum, the Filip Factors, the Yates Memorandum, and the subsequent revisions, generally rewards corporations for identifying and cooperating against individual wrongdoers. The corporation that fully cooperates may receive a deferred prosecution agreement, a declination, or substantial penalty reductions. The individuals identified in that cooperation may face prosecution that would not have occurred had the corporation not cooperated.

This conflict cannot be wished away, and it cannot be navigated by a single defense team representing both the corporation and the individuals. The decisions that maximize the corporation’s defensive position may damage the individuals, and the decisions that protect the individuals may foreclose cooperation benefits the corporation values. The board that is making decisions about the cooperation strategy must understand that the individuals affected by those decisions may have interests that the board’s decisions do not serve.

The structural response to the cooperation conflict is separate representation, structured cooperation strategies that protect individual rights where possible, and common interest agreements that preserve coordination where the interests align. The substantive response requires that the board’s cooperation decisions be made with full awareness of the implications for individual executives, and that the executives’ separate counsel be involved in the decisions that affect them. This is not a matter of obstructing cooperation. It is a matter of ensuring that cooperation occurs through a process that respects the legitimate interests of every constituency affected by the corporate decisions.

D&O Insurance and Indemnification

Directors and officers facing serious matters rely heavily on the D&O insurance program and the corporate indemnification provisions that backstop their defense costs and ultimate exposure. The D&O insurance landscape has become more complex over the years, with coverage limitations, exclusions, and conditions that often produce coverage disputes at exactly the moment the coverage is most needed.

The first practical step in managing the insurance issues is notice. Most D&O policies require prompt notice of any potential claim, and the failure to provide timely notice can produce coverage disputes that the insureds cannot afford to lose. The notice should be given as soon as the matter becomes serious enough to potentially trigger coverage, even if the formal claim has not yet been filed.

The second practical step is engagement with the insurance carriers. The carriers have their own interests in the defense, including interests in defense counsel selection, settlement decisions, and reservations of rights. The relationship with the carriers is not adversarial in the ordinary sense — the carriers are paying for the defense — but it is not aligned in every respect, and the insureds must have counsel who can manage the relationship effectively.

The third practical step is understanding the limits of indemnification. Corporate indemnification provisions typically require that the director or officer have acted in good faith and in a manner reasonably believed to be in the corporation’s best interests. Conduct that does not meet these standards is not indemnifiable, even if it is not ultimately determined to be unlawful. The director or officer whose conduct may not qualify for indemnification has a different relationship with the corporation than the one who is clearly within the protection, and that distinction may affect every strategic decision in the matter.

The Long View

Corporate crises end. The investigation concludes. The litigation resolves. The settlement closes. The press cycle moves on. But the consequences for individual directors and officers can extend for years. Reputational damage that affects future board service. Disqualification from future executive positions in the financial industry. Personal financial exposure that exceeds the limits of insurance and indemnification. Family stress and personal toll that the matter imposed and that do not vanish with the formal resolution.

I tell directors and officers facing serious exposure that the matter requires their personal attention in a way that distinguishes it from the ordinary obligations of their corporate roles. The company has lawyers, advisors, and resources to manage the institutional response. The individual has a more limited set of tools and a more personal set of stakes. The director who delegates the management of his individual exposure to the company’s defense team is the director who later discovers that the individual interests were not separately protected when it mattered.

The boards and executive teams that navigate corporate crises with their reputations and their futures intact are not the ones who got lucky. They are the ones who recognized early what the matter could become, structured their personal defenses with the seriousness the stakes required, and made decisions throughout the matter with attention to both the institutional and the individual consequences. That is the discipline this category of practice requires, and it is the discipline directors and officers should expect from the lawyers who advise them when the crisis arrives.

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Otto K. Hilbert, II is a Trial Attorney with AEGIS Law. He brings over 36 years of first-chair trial and appellate experience to representing clients in complex commercial litigation, securities defense, and regulatory enforcement matters. He has tried cases in 23 states and is admitted before the United States Supreme Court and multiple United States Courts of Appeals.

This article is provided for general informational purposes and does not constitute legal advice. Readers facing specific legal matters should consult qualified counsel.