jeffrey m. kaplan/ kaplan & walker llp ecoa annual conference - october 2012

Conflicts of Interest: What’s New, What’s Important, What

WorksJeffrey M. Kaplan/ Kaplan & Walker LLP

ECOA Annual Conference - October 2012

www.kaplanwalker.com 2

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

http://www.conflictofinterestblog.com/


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


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.)


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…


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


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


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


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


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”


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


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.)


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


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


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.)


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


◦ 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.)


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


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


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.)


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


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.)


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


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


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


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.)


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


What are COI challenges that we haven’t yet discussed?

Thank you for participating!

In closing

jeffrey m. kaplan/ kaplan & walker llp ecoa annual conference - october 2012

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