Jeffrey M Kaplan Kaplan amp Walker LLP ECOA Annual Conference October 2012 Based on N early 30 years of dealing with COIs as a criminal lawyer and a CampE advisor M ore than a decade of ID: 657442
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Slide1
Conflicts of Interest: What’s New, What’s Important, What Works
Jeffrey M. Kaplan/ Kaplan
&
Walker
LLP
ECOA Annual Conference - October 2012Slide2
Based on N
early 30 years of dealing with COIs as a criminal lawyer and a C&E advisor
More than a decade of teaching business ethics at NYUTen months of writing for the COI Blog(More information/links to topics discussed today can be found at www.conflictofinterestblog.com) Will lookBriefly at why COIs matter so much, and at developments in law and social scienceMostly at effective C&E program measuresFor 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 P
ervasive C&E issue of substance in an organization
Troubling kind to resolve, given Their personal natureNo 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 raisingBecause easy to relate to issuesQuestion: 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 provisionsCan use to show connection between compliance and ethicsLink to other important risk areas: fraudcorruptionuse of company resources insider tradingwww.kaplanwalker.com4
Why COIs matter (cont.)Slide5
Frequent, due to increasing multiplicities of roles/parties
Harmful
, due to increasing complexity of many aspects of modern business lifeThe more complex, the more we need to rely on trustHarshly punished, due to increasing intolerance of corruption and fraudNew focus on commercial bribery with UKBAwww.kaplanwalker.com5COIs likely to become even more…Slide6
The winner is ….Chesapeake Energy
Issues
Corporate opportunities Particular importance of monitoring at high levelShows that some COIs might not be manageable Impact of COIs in falling stock priceUseful for training directorsMore on this laterLegal update – the case of the yearwww.kaplanwalker.com6Slide7
Wal-Mart’s FCPA matter
Shows how damaging COI in internal investigation can be
Cases showing courts’ low tolerance for COIsGoldman Sachs case # 1 - El Paso purchaseGoldman Sachs case # 2 - False claims of ethicality can lead to legal liabilitySouthern Copper Corporation caseQuestion: have there been any public COI cases that you have used for training at your companies?www.kaplanwalker.com7
Runners up for case of the yearSlide8
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 itImplications for C&E programs: institute strong requirements around approvalsStrength in numbersMore on this laterGenerally: COI as a good entry point into emerging areas of “behavioral ethics”Recent social science/researchwww.kaplanwalker.com
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Studies involving dentists and lawyersCOIs and compensation committees – research from the UK
The revolving door research
Question: is behavioral ethics being applied at your companies?www.kaplanwalker.com9Other recent research on COIsSlide10
Misalignment of incentives with risks
More attention to this since financial meltdown
Similar but potentially broader focus than COI oneRisk assessment implications – look closely at compensationMonitoring implicationsQuestion: is this on the radar screen of your company’s risk assessment? Otherwise?A related danger – “moral hazard”www.kaplanwalker.com
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Not a stand-alone
process for most companies
Financial services and health care are differentStructureReasonsMotivationsMisunderstandingsCapacitiesE.g., not just purchasing but HR (and law)Impact – emphasis on reputationalSpecial issues involving third partiesUse in all aspects of program design/deploymentCOI risk assessmentswww.kaplanwalker.com
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Use in all aspects of program design/deployment
Not just training/communications and auditing
Focus on “local”/granularThe promise of “nano compliance”This is not just COI-specificQuestionsHow is COI risk assessed in your companies?How is information used?www.kaplanwalker.com12Risk assessments (cont.)Slide13
Types of COIsEmployment
(of oneself or family members) with or consulting for an entity doing or seeking to do business with or competing against the
companyHolding a financial interest in such organizationsService on another entity’s board (of directors or advisors)Employment/supervision of relatives at the companyCorporate opportunitiesReceiving/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 employeesOther anti-corruption requirements – e.g., union officialsCharitable contributions By companySolicitations by employeesPurchases, sales or leases of property involving the companyHolding government office (presumably on a part-time basis)Relationships with the company’s external auditorsPolicies, 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 stocksQuestions:What are key COI topics in your companies?What is your approach to certification?www.kaplanwalker.com15Policies, etc. (cont.)Slide16
Threshold issue: who approvesBenefits of staff
(rather than line)
approachExpertiseMinimize adverse effects noted by behavioral ethics researchIf 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 reviewReview 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 auditsQuestions: How does your company review COIs?Is there anything about it you’d like to improve?www.kaplanwalker.com17Review procedures (cont.)Slide18
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 expertiseKeeping track can be difficultA potentially good role for technologyQuestions: What has been your companies’ experience with this?Do you use technology? Has it helped?www.kaplanwalker.com18Monitoring/managingSlide19
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 caseUse of other resources (including company’s name, contacts and reputation)Training boards of directorswww.kaplanwalker.com
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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 COIsConsistent 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 COIswww.kaplanwalker.com20Training boards (cont.)Slide21
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 dimensionExplain what a manager’s specific role is to ensure COI-related complianceIdentify COI-related “red flags” to help them meet those responsibilitiesConnect COI issues to other risk areas of significance – such as corruption, fraud, use of company resources and insider trading/confidential informationwww.kaplanwalker.com
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Training managers (cont.)Slide23
Code of conduct training should generally include some COI component
For higher risk employees consider
Stand-alone trainingCreating/acquiring role based COI trainingQuestions How does your company provide COI training to:Boards?Managers?Others?Other trainingwww.kaplanwalker.com23Slide24
Should be regularly featured in annual communications plan
Possibly with extra attention for managers
And should connect to relevant policies and proceduresLook for opportunities based on newsMake it interactiveOne example: COI quizzes – as a way of getting employees not only to understand the “what” but also the the “why” of COI compliance requirementsQuestion: how does your company communicate about COIs?Other COI communicationswww.kaplanwalker.com
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One type
:
auditing for violations of the policyCross checking employee and vendor dataReview expenditures T&E receipts for sensitive procurement areasMay 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)www.kaplanwalker.com
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Auditing – many different typesSlide26
Other meaning: auditing for implementation of the policy
E
mployees have received and signed certifications attesting that they received conflicts policyEmployees participated in conflicts trainingEmployees' awareness of internal reporting mechanismsWaivers/prohibitions applied in consistent way Question: what does you company do to audit around COIs?www.kaplanwalker.com26
Auditing (cont.)Slide27
Consider employeeFocus group questionsSurvey
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 profileAre lessons learned from individual COI cases being applied to keep this aspect of the program current?www.kaplanwalker.com27
Self assessingSlide28
What are COI challenges that we haven’t yet
discussed?
Thank you for participating!www.kaplanwalker.com28In closing