conflicts of interest: what’s new, what’s important, what works

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