conflicts of interest: what’s new, what’s important, what works
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Conflicts of Interest: What’s New, What’s Important, What Works. Jeffrey M. Kaplan/ Kaplan & Walker LLP ECOA Annual Conference - October 2012. Today’s presentation. Based on N early 30 years of dealing with COIs as a criminal lawyer and a C&E advisor - PowerPoint PPT PresentationTRANSCRIPT
Conflicts of Interest: What’s New, What’s Important, What
WorksJeffrey M. Kaplan/ Kaplan & Walker LLP
ECOA Annual Conference - October 2012
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Based on ◦ Nearly 30 years of dealing with COIs as a criminal lawyer
and a C&E advisor◦ More than a decade of teaching business ethics at NYU◦ Ten months of writing for the COI Blog(More information/links to topics discussed today can be found at www.conflictofinterestblog.com)
Will look◦ Briefly at why COIs matter so much, and at developments
in law and social science◦ Mostly at effective C&E program measures
For most topics, will ask: what do you do in your companies – and what seems to work?
Today’s presentation
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Often the most ◦ Pervasive C&E issue of substance in an organization◦ Troubling kind to resolve, given
Their personal nature No unified governing area of law
The link to C&E programs generally◦ “Organizational justice”/overall program efficacy◦ Can provide great occasions for general C&E
awareness raising Because easy to relate to issues
Question: have you seen organizational justice/COI issues at your companies?
Why COIs matter so much
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Where law and ethics meet◦ Fiduciary relationships require more than “the
morals of the marketplace”◦ S-Ox COI provisions◦ Can use to show connection between compliance
and ethics Link to other important risk areas:
◦ fraud◦ corruption◦ use of company resources ◦ insider trading
Why COIs matter (cont.)
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Frequent, due to increasing multiplicities of roles/parties
Harmful, due to increasing complexity of many aspects of modern business life◦ The more complex, the more we need to rely on
trust Harshly punished, due to increasing
intolerance of corruption and fraud◦ New focus on commercial bribery with UKBA
COIs likely to become even more…
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The winner is ….Chesapeake Energy◦ Issues
Corporate opportunities Particular importance of monitoring at high
level Shows that some COIs might not be
manageable Impact of COIs in falling stock price
◦ Useful for training directors More on this later
Legal update – the case of the year
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Wal-Mart’s FCPA matter◦ Shows how damaging COI in internal investigation
can be Cases showing courts’ low tolerance for COIs
◦ Goldman Sachs case # 1 - El Paso purchase◦ Goldman Sachs case # 2 - False claims of
ethicality can lead to legal liability◦ Southern Copper Corporation case
Question: have there been any public COI cases that you have used for training at your companies?
Runners up for case of the year
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Don’t count on disclosure too much to mitigate COIs because of:◦ “Moral licensing”◦ Recipients often
don’t appreciate information, or are reluctant to act on it
◦ Implications for C&E programs: institute strong requirements around approvals Strength in numbers More on this later
Generally: COI as a good entry point into emerging areas of “behavioral ethics”
Recent social science/research
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Studies involving dentists and lawyers COIs and compensation committees –
research from the UK The revolving door research Question: is behavioral ethics being applied
at your companies?
Other recent research on COIs
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Misalignment of incentives with risks◦ More attention to this since financial meltdown
Similar but potentially broader focus than COI one
Risk assessment implications – look closely at compensation
Monitoring implications Question: is this on the radar screen of your
company’s risk assessment? Otherwise?
A related danger – “moral hazard”
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Not a stand-alone process for most companies◦ Financial services and health care are different
Structure◦ Reasons
Motivations Misunderstandings
◦ Capacities E.g., not just purchasing but HR (and law)
◦ Impact – emphasis on reputational◦ Special issues involving third parties
Use in all aspects of program design/deployment
COI risk assessments
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Use in all aspects of program design/deployment◦ Not just training/communications and auditing◦ Focus on “local”/granular
The promise of “nano compliance” This is not just COI-specific
Questions◦ How is COI risk assessed in your companies?◦ How is information used?
Risk assessments (cont.)
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Types of COIs◦ Employment (of oneself or family members) with or
consulting for an entity doing or seeking to do business with or competing against the company
◦ Holding a financial interest in such organizations◦ Service on another entity’s board (of directors or
advisors)◦ Employment/supervision of relatives at the company◦ Corporate opportunities◦ Receiving/providing things of value (e.g., gifts,
entertainment and travel) involving any person or entity doing or seeking to do business with the company
◦ Dealings with government officials
Certifications and policies- basics
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Any other outside employment or consulting (i.e., regardless of whether it involves a competitor, supplier, etc.)
Gifts between employees Other anti-corruption requirements – e.g., union officials Charitable contributions
◦ By company◦ Solicitations by employees
Purchases, sales or leases of property involving the company
Holding government office (presumably on a part-time basis)
Relationships with the company’s external auditors
Policies, etc. – less common
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A practical suggestion: review prohibitions with key stakeholders before implementing◦ Danger of unintended consequence◦ E.g., case regarding holding shares of competitor
stocks Questions:
◦ What are key COI topics in your companies?◦ What is your approach to certification?
Policies, etc. (cont.)
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Threshold issue: who approves◦ Benefits of staff (rather than line) approach
Expertise Minimize adverse effects noted by behavioral ethics
research If allow supervisors to approve:
◦ Require that any approvals be in writing and sought before engaging in a conflict-based transactions
◦ Provide and publicize avenues for supervisors to ask questions of the C&E function when performing COI review
Review procedures
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◦ Include the issue of COI reviews in supervisor training – or, if this is impractical, providing written guidance (e.g., FAQs) regarding such reviews
◦ Check on the supervisors’ actions in reviewing or approving COIs, such as through audits
Questions: ◦ How does your company review COIs?◦ Is there anything about it you’d like to improve?
Review procedures (cont.)
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Behavioral ethics research suggests one should exercise caution in permitting COIs subject to monitoring ◦ And if do, should be done by independent persons
in the company, with relevant expertise◦ Keeping track can be difficult
A potentially good role for technology Questions:
◦ What has been your companies’ experience with this?
◦ Do you use technology? Has it helped?
Monitoring/managing
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Not stand-alone, but part of general broad training.
Topics could include◦ Personal COI risks, meaning conflicts involving the
directors themselves., e.g. “Corporate opportunities” Using company confidential information for personal
benefit – such as in insider trading (e.g., the allegation in the Gupta/Galleon case
Use of other resources (including company’s name, contacts and reputation)
Training boards of directors
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Understanding the need to monitor COIs of senior executives ◦ The Chesapeake Energy case◦ “Related party” transactions are relevant to both this
area of awareness and that concerning board members’ own COIs
Consistent with a board’s Caremark duty, train on compliance measures regarding any high-risk conflict areas – so that they can ask informed questions about such measures
Show the potentially devastating legal and other costs of COIs
Training boards (cont.)
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Start with an attention-getting hypothetical (or actual) case, perhaps showing how harmful even well-meant COIs can be
Identify generally the types of COIs most relevant to the entity ◦ Individual COIs for all, organizational ones for some)◦ Any special COI issues (such as, for certain types of entities,
the need to avoid contributing to a COI by a third party) Describe the legal and business imperatives for strong
C&E efforts in these areas Discuss how employee perceptions of COIs by
managers can undermine faith in the C&E program as a whole (“organizational justice”)
COI training of senior managers
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Review applicable company policies and procedures regarding COIs, perhaps using a hypothetical case to illustrate how they should work;
Examine particular compliance challenges for this risk area, including the tendency of individuals to rationalize conflicts-driven decision making and the frequent difficulty of challenging individuals on matters that have a sensitive personal dimension
Explain what a manager’s specific role is to ensure COI-related compliance
Identify COI-related “red flags” to help them meet those responsibilities
Connect COI issues to other risk areas of significance – such as corruption, fraud, use of company resources and insider trading/confidential information
Training managers (cont.)
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Code of conduct training should generally include some COI component
For higher risk employees consider◦ Stand-alone training◦ Creating/acquiring role based COI training
Questions How does your company provide COI training to:◦ Boards?◦ Managers?◦ Others?
Other training
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Should be regularly featured in annual communications plan◦ Possibly with extra attention for managers◦ And should connect to relevant policies and procedures
Look for opportunities based on news Make it interactive
◦ One example: COI quizzes – as a way of getting employees not only to understand the “what” but also the the “why” of COI compliance requirements
Question: how does your company communicate about COIs?
Other COI communications
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One type: auditing for violations of the policy◦ Cross checking employee and vendor data◦ Review expenditures
T&E receipts for sensitive procurement areas◦ May wish to seek information from third parties
Some companies ask suppliers to confirm that payments have not been made/gifts not given to employees (a variation on the annual holiday letter to suppliers)
Auditing – many different types
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Other meaning: auditing for implementation of the policy◦ Employees have received and signed
certifications attesting that they received conflicts policy
◦ Employees participated in conflicts training◦ Employees' awareness of internal reporting
mechanisms◦ Waivers/prohibitions applied in consistent way
Question: what does you company do to audit around COIs?
Auditing (cont.)
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Consider employee◦ Focus group questions◦ Survey questions◦ Both not stand-alone, but as part of larger efforts(Look for perceptions of double-standards)
Review overall process – and whether it meets the company’s current risk profile◦ Are lessons learned from individual COI cases
being applied to keep this aspect of the program current?
Self assessing
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What are COI challenges that we haven’t yet discussed?
Thank you for participating!
In closing