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

1. Conflicts of Interest: What’s New, What’s Important, What Works Jeffrey M. Kaplan/ Kaplan & Walker LLP ECOA Annual Conference - October 2012

2. Today’s presentation • 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? www.kaplanwalker.com

3. Why COIs matter so much • 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? www.kaplanwalker.com

4. Why COIs matter (cont.) • 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 www.kaplanwalker.com

5. COIs likely to become even more… • 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 www.kaplanwalker.com

6. Legal update – the case of the year • 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 www.kaplanwalker.com

7. Runners up for 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? www.kaplanwalker.com

8. Recent social science/research • 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” www.kaplanwalker.com

9. Other recent research on COIs • 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? www.kaplanwalker.com

10. A related danger – “moral hazard” • 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? www.kaplanwalker.com

11. COI risk assessments • 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 www.kaplanwalker.com

12. Risk assessments (cont.) • 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? www.kaplanwalker.com

13. Certifications and policies- basics • 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 www.kaplanwalker.com

14. Policies, etc. – less common • 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 www.kaplanwalker.com

15. Policies, etc. (cont.) • 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? www.kaplanwalker.com

16. Review procedures • 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 www.kaplanwalker.com

17. Review procedures (cont.) • 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? www.kaplanwalker.com

18. Monitoring/managing • 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? www.kaplanwalker.com

19. Training boards of directors • 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) www.kaplanwalker.com

20. Training boards (cont.) • 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 www.kaplanwalker.com

21. COI training of senior managers • 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”) www.kaplanwalker.com

22. Training managers (cont.) • 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 www.kaplanwalker.com

23. Other training • 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? www.kaplanwalker.com

24. Other COI communications • 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 thethe “why” of COI compliance requirements • Question: how does your company communicate about COIs? www.kaplanwalker.com

25. Auditing – many different types • 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 asksuppliers 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

26. Auditing (cont.) • 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? www.kaplanwalker.com

27. Self assessing • 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? www.kaplanwalker.com

28. In closing • What are COI challenges that we haven’t yet discussed? Thank you for participating! www.kaplanwalker.com