Fact-Finding: Preserving Public Trust And Confidence

Friday, October 1, 2004 - 01:00

The Editor interviews William K. Slate II, President and CEO, American Arbitration Association.

Editor: Is the Independent Fact-Finding Service (IFFS) offered by AAA an entirely new concept?

Slate: Let me provide a little background. There has for years been a cottage industry consisting of public figures of great integrity who made themselves available to serve as independent fact-finders. Typically, they would be retained by organizations that needed to address allegations harmful to their reputations. This approach to crisis management proved extraordinarily effective.

For example, in 1999 allegations concerning scholarships and gifts from the Salt Lake Organizing Committee in connection with Salt Lake City's bid to serve as host city for the 2002 Winter Olympic Games could have resulted in major sponsors withdrawing their support. The United States Olympic Committee ("USOC") responded by appointing former Senator and Majority Leader George Mitchell to head a special investigation commission. His report led to a series of corrective actions. The 2002 Winter Olympics went forward with the support of major sponsors.

In 1996, allegations were made that Mitsubishi Motors Manufacturing of America permitted sexual harassment. In addition to media and congressional attention, Mitsubishi also faced consumer boycotts. As part of the company's response, former Secretary of Labor Lynn Martin was called in to investigate. Mitsubishi's response to Martin's report contributed to ending the boycotts and settlement with the EEOC.

Editor: Has AAA had past experience with independent fact-finding?

Slate: Yes. Independent fact-finding is an established aspect of alternative dispute resolution practice. We have played a fact-finder role for well over a dozen years. This is illustrated by our special rules for sexual harassment allegations. We provide a fact-finding team, typically a man and a woman, to go in and do an independent investigation to see if there is a hostile environment in the workplace. They talk to employees and employers about the situation and make personal observations about the workplace. They then deliver a report to the company that hired them. If the company receives a report whose findings suggest the need for corrective action and the company takes that action, the dispute may be resolved without the need for either litigation or use of ADR.

Editor: You mentioned that a cottage industry of independent fact-finders had grown up to investigate allegations that could cause a legitimacy crisis. What triggered AAA's interest in offering the services of IFFS?

Slate: AAA conceived of this service in conjunction with R. William Ide, III, a past president of the ABA and former general counsel of the Monsanto Corporation. Independent fact-finders had been part of a cottage industry because there was little awareness of their effectiveness. As Bill Ide, Bill Webster and others had pointed out to us, the increased sensitivity to governance and compliance issues in the wake of Sarbanes-Oxley and other legislative, regulatory, judicial and SRO reactions to the scandals has greatly increased the need for independent fact-finding. The requirements in Sarbanes-Oxley for hotlines encouraging whistleblowers and requiring that lawyers for the corporation report wrongdoing will bring to light circumstances calling for the services of independent fact-finders. The expenditures that corporations expect to make to meet the challenges posed by the new corporate governance rules give some idea of the scope of the effort being made simply to put the machinery for compliance in place. A survey by the Financial Executives International showed that corporations with sales over $5 billion expected to spend an average of $4.67 million in compliance costs for the first year alone.

The reach of Sarbanes-Oxley is not limited to public companies. It seems inevitable that the standards set by Sarbanes-Oxley and the emphasis in the Sentencing Guidelines on employee compliance training will be used by the courts to judge the performance of the directors of all public and private corporations (including not-for-profits). All corporations (including not-for-profits) are subject to Sarbanes-Oxley's whistleblowers retaliation protections as well as the Act's criminal provisions for destroying documents during a government investigation. Several states including New York have looked to extending all of Sarbanes-Oxley requirements to not-for-profits as well.

The applications of IFFS have continued to broaden. Fact-finders serving as "special masters" can assist with the resolution of important cases. Attorneys general, insurance commissioners and regulators can use fact-finders as supplemental investigative teams. Fact finders can provide credible information for public officers and candidates facing close questioning about personal conduct, political contributions and potential conflicts of interest.

Editor: Why is the involvement of AAA desirable?

Slate: When an organization faces public embarrassment, there needs to be a way that it can make available a fresh, neutral and independent look at the source of that embarrassment. In today's real time environment, news travels very fast and public trust, institutional good will and brand and corporate reputations can be shattered in days or even hours. In the past, a corporation's regular auditors could be called in to investigate financial wrongdoing. Thanks to Sarbanes-Oxley, this alternative no longer exists. Because of the burden placed on directors by the courts to see that the truth is ferreted out, they may not feel comfortable with an investigation conducted by one of the corporation's traditional law firms or even its general counsel.

A need exists to have an independent body with integrity fill that fact-finding role. AAA has been successful largely because people trust us. Our sine qua non is integrity. Belief in the integrity of a fact-finder and the report is absolutely critical to make the whole process successful.

Editor: Can a company bury an IFFS report if it is overly critical?

Slate: No. One of the advantages of IFFS is that its retention signals that the corporation is seriously interested in getting the facts and will disclose those facts when the investigation is completed. This reassurance in real time that a transparent process has been started voluntarily by the corporation may in itself avert more serious damage to the corporation's reputation and brand. In order for these immediate benefits to be available, the ultimate audience needs to know that the results of the investigation will be available to them or to a body representing their interests. Therefore, we require that the report or the final conclusions of the report be disclosed to an independent committee of the board of directors or trustees or other independent body approved by the AAA.

Editor: Tell us about the IFFS panel of independent fact-finders.

Slate: Right now it is a panel of 15 people (see the accompanying box for a current list), most of whom have already done independent investigations. We have invited these people because they are known for their broad experience and integrity. We bring them together for training sessions so that they might share best practices for conducting investigations.

Editor: How are independent fact-finders selected for a particular assignment?

Slate: Our selection procedures are similar to what we do in the selection of arbitrators, except that we explore their suitability for a particular assignment in greater detail because this is a very small panel. Although corporations are free to select any non-conflicted independent fact-finder on the list, we encourage them to let us select three names from the list from which the corporation can make its selection. This process provides an answer to the question "Why did you pick who you did?" The three names we send them have been pre-vetted for conflicts. This process is completed and the names are sent out in a matter of hours. After getting a call from the board room, we can send them three names before the board meeting concludes.

Editor: Can directors demonstrate good faith and limit their personal liability by using the services of IFFS?

Slate: There is no question about it. Every director has a fiduciary duty to protect the assets of the corporation and a director's early and immediate call for an independent examination of questionable practices would not only protect the corporation, but would reduce their own exposure to liability.

Editor: Given the role assigned to corporate counsel by Sarbanes-Oxley, isn't it likely that corporate counsel would welcome the availability of IFFS?

Slate: I believe that to be the case. Sarbanes-Oxley and the Model (ethical) Rules make it clear that although general counsel are a part of the senior management team, they have a higher loyalty to the corporate entity. Sarbanes-Oxley provides that if "evidence of a material violation of the securities laws or breaches of fiduciary duty or similar violations by the company or any agent thereof" is not appropriately responded to at lower levels, counsel for the corporation have an obligation to report the evidence to the audit committee or to another committee of the board made up solely of independent directors or to the board itself. This requirement was modeled after the Model Rules. Although the board might look to the general counsel or outside counsel to do a preliminary investigation, it should, if the circumstances warrant, have the matter investigated by an organization whose neutrality could not be questioned. Given the general counsel's obligation to act in the best interest of the corporation, it is likely that the general counsel would support this decision. It would free the corporate counsel from possible criticism while providing a report that would have great public credibility.