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Compliance program standards of proof

The Chauvin trial in Minneapolis has caught the attention of much of the US, and rightly so, given the importance of the issues it raises and the highly compelling nature of the proof in the court. The case – like many highly public prosecutions – also provides the occasion for instructive civics lessons in various aspects of litigation.

One of these concerns standards of proof, with  commentators describing and discussing “proof beyond a reasonable doubt.” Another concerns the defendant’s state of mind, with possibilities including “depraved mind murder.”

Compliance officers sometimes deal with standards of proof and state of mind in connection with disciplinary procedures.  Less obviously, these issues can be relevant to conflicts of interest.

While some organizations bar conflicts of interest in all cases, many opt for allowing COIs  to exist where appropriate. But how should appropriate be defined for these purposes?

One formulation that I have recommended is: A COI may be approved only where doing so would clearly be in the best interest of the company.

Two comments about this.

First, the word “clearly” is intended to require a showing greater than a mere preponderance of the relevant facts. Of course, it is not as high as “beyond a reasonable doubt,” which, in my view, would be widely seen as too much in this setting.  But, it is still a high standard  and presumably would require rejection of any proposed COI where there was a lack of genuine clarity on this issue.

Second, the “best interest of the company” should be read broadly. It requires more than an absence of corruption or other  outright misconduct. Rather, it also mandates consideration of how  the COI at issue could impact the ethical culture of the organization and related matters.

A behavioral ethics and compliance primer

Published by Ethical Systems.

In praise of Goldilocks compliance

My latest column in C&E Professional.

I hope you find it useful.

Defamation as a compliance risk area

Dominion Voting Systems recently sued Fox News and two of President Trump’s former lawyers – Sydney Powell and Rudolph Giuliani – for their statements that Dominion had engaged in election fraud in connection with the 2020 presidential election. This could have profound adverse affects on the defendants. (Among other things, Dominion is suing Fox for $1.6 billion in damages and Powell for $1.3 billion.)

While of special relevance to the defendants, C&E professionals from all companies should use the occasion to consider if they have defamation risks of their own.

Defamation is generally not in the first tier of compliance risks for corporations, the way that corruption, antitrust and fraud tend to be. But second-tier risks can still be significant, as discussed in this recent post in the FCPA Blog.

Here are some brief thoughts and questions on defamation and compliance:

– Risk assessment. What kind of communications do your salespeople have about competitors? What about their salespeople communicating about your company?  Given the nature of the products and services you sell does defamation seem reasonably likely?

– Policies. Defamation should be mentioned in the code but generally need not be a standalone section. (It can often be part of a general sales compliance discussion.)

– Procedures. For high-risk areas, companies should consider preapprovals by the legal department or other control functions.

– Auditing or monitoring. Internal auditors should, for high-risk areas, be trained on defamation risks. And, for such areas, consider requiring monitoring.

– Training. For his risk companies consider including defamation in the code course. And for higher risk individuals consider targeted in-person training.

– Third parties. As with  other  risk areas third-parties can pose special C&E challenges and so should be focused on in the risk assessment.

There’s much more to be said about this topic but hopefully this post will help some companies get started.

Conflicts of interest: the role of norms

There has lately been much discussion of norms in the realm of politics and governance.  But norms are also important in the business world, particularly  those established within a profession.

In Regulating Conflicts of Interest Through Public Disclosure: Evidence From a Physician Payments Sunshine Law, Matthew Chan of William College and  Ian Larkin of  UCLA  Anderson  review the literature and report on the results of their recent study in the area of pharma companies providing things of value to prescribing physicians and legal mandates to make disclosure in Massachusetts, which has such a requirement, and several  other states which don’t. They also conclude with an interesting thought about the role of norms in COI mitigation.

In particular, they show a significant post-disclosure reduction in brand name drug prescriptions by Massachusetts physicians, relative to control doctors in other states. These effects are driven by heavy prescribers of brand name drugs in the pre-policy period, particularly for drugs with large pre-policy sales forces. Effects are also detected before the first data were released, implying that the effects are not because patients or administrators responded to the disclosed payments. Instead, some physicians may have reduced payments after disclosure is mandated, leading to changes in their prescriptions. Taken in tandem with the many studies showing that industry payments influence prescribing, this study suggests a strong role for mandatory public disclosure in reducing conflicts of interest in medicine and costly prescribing of brand name drugs.

They further note:

These results carry important managerial implications in healthcare. For health care managers and officials concerned with the effects of pharmaceutical marketing on prescription drug costs, increasing the coverage of disclosure or making disclosed payments more salient (e.g. by implementing hospital-wide communications or campaigns) may be an effective method for changing physician behavior. Other physician conflicts of interest may also benefit from disclosure. For instance, the “Total Transparency Manifesto” and the “Who’s My Doctor?” campaign advocates for physicians to disclose all sources of potentially conflicting incentives, including incentives for ordering additional tests or procedures (Wen 2013; Sifferlin 2014). Approximately 70% of surveyed physicians believed that clinicians are more likely to perform unnecessary procedures when they profit from them (Lyu et al. 2017); disclosure of these payments may be worth exploring, especially as alternative pay structures continue to be introduced into the field, thus making fee-for-procedure structures more optional.”

.They conclude with the following:

These results may also carry important implications for how managers and officials manage conflicts of interest even in non-healthcare settings. The principal-agent problems inherent in drug prescribing, where an informed expert makes important decisions for an uninformed principal, are found in many other industry settings such as retirement planning, consumer insurance, mortgage origination, and legal advice, to name a few. However, within medicine, there are norms (such as the Hippocratic Oath) that place great importance on earning a patient’s trust (Sah 2019); since our results suggest agents must care about appearing unbiased in order for disclosure to work, it remains for future research to test whether disclosure is effective in settings where such norms are not as heavily emphasized. Nevertheless, the results in this paper suggest that disclosure is at least worth exploring further in these contexts, despite the literature on the pitfalls of disclosure,

As a COI generalist, I am particularly interested in the notion that unlike the other professions they mention, “within medicine, there are norms…”  Of course, in light of the striking statistic that “70% of surveyed physicians believed that clinicians are more likely to perform unnecessary procedures when they profit from them” one might wonders what the real norms are.

But still, the point is an important one, and I do hope that there will be future research conducted along the lines they propose.

Liability of corporate officers: new developments

The liability of corporate directors is well-trod territory.   But what about corporate officers?

In a recent issue of the Harvard Law School Forum on Corporate Governance          /    Edward Micheletti, Bonnie David and Andrew Kinsey of  Skadden, Arps, Slate, Meagher & Flom LLP, write: “More than a decade ago in the seminal case Gantler v. Stephens, the Delaware Supreme Court clarified that officers of Delaware corporations owe the same fiduciary duties of care and loyalty that directors owe to the corporation and its stockholders.” But “until recently, officer liability cases were still few and far between. Over the past year, however, stockholder plaintiffs have increasingly pursued claims against officers for breaches of the duty of care.”

Note that the cases described in the Skadden memo involve deal litigation – not compliance program oversight, which is the setting for Caremark   the case which paved the way for fiduciary liability against directors and officers. But there is, to my knowledge, nothing preventing such a case against officers, at least as a general matter.

What should be done with this news? It should be the subject of training not only of corporate officers but also of the directors who oversee the officers and the chief compliance & ethics officer who helps the others keep fiduciary duties top of mind.

Compliance thought experiments

My latest article in CEP.

I hope you enjoy it.

“Maginot Line” compliance

A post in the FCPA Blog on spending too much effort looking backward in risk assessments.

I hope you rind it interesting.

President Biden and behavioral ethics

One of the key findings of the behavioral ethics field is that it is easier to act unethically to an anonymous individual than a known one. As described in this paper by Deborah A. Small and George Loewenstein,  in one study “subjects were more willing to compensate others who lost money when the losers had already been determined than when they were about to be” and in another “people contributed more to a charity when their contributions would benefit a family that had already been selected from a list than when told that the family would be selected from the same list.”    

Like a lot of behavioral ethics findings, this one seems pretty common-sensical.  But it is still good to know that there is data behind it.

And it is particularly encouraging to know about this when one considers the powerful – indeed almost unique – empathetic feature of President Elect Biden’s character. To Biden it seems like there are no strangers.

Over the next four years we will see if Biden’s empathetic words correlate with ethical deeds. But in a sense we already know the answer – because we have seen how his immediate predecessor’s unempathetic words are strongly correlated with unethical actions.

Another Way to Prevent Corporate Crime?

Do prosecutors need another arrow in their quiver? Professor John Coffee of Columbia Law School thinks so.

In Rethinking Corporate Prosecutions in the Harvard law school corporate law blog Coffee writes:

What threat could cause corporations to agree to turn in senior executives? Clearly, current penalties are not sufficient. In some event studies that we conducted for my book, the stock prices of corporations sentenced to record fines actually went up on the day of sentencing (even though these record fines could not have been easily predicted). This does not prove that corporations cannot be deterred, but only that cash fines on huge public corporations can be easily digested. Yet, heavy penalties can cause externalities that fall on the least culpable: low-level employees who might be laid off, creditors whose debt securities will decline in value, and local communities who depend upon the local industry to provide its tax revenues. We need therefore to focus the necessary penalty on the shareholders—who alone can take action to reform their firm and who are probably for the most part well diversified.

How can one do this? My proposal is the “equity fine”: a fine levied not in cash but in common shares. This fine would transfer some percentage of the corporation’s authorized, but unissued, stock to a victim compensation fund. Forcing the company to issue 10% to 20% of its stock is certainly severe enough to deter shareholders through dilution, but it has no real impact on low-level employees, creditors, or other stakeholders. Nor does it render the corporation less solvent or threaten bankruptcy (as cash fines do).

From a fairness perspective this does sound like a distinct improvement over present practices. But would the “equity fine” also serve as a more effective deterrent to corporate crime than the cash fine does?

My initial reaction to it was that the “equity fine” is built partly on a foundation of “homo economicus” thinking which – as described in in this prior post – reflects a hyper-rational economics-based view of human nature.   But I also see that an equity fine could improve the practice of compliance, particularly in large corporations. By focusing so directly on shareholders, which would include directors, such fines could bring an immediacy to compliance needs that in a variety of ways  (including building on applicable fiduciary duties) could make a compliance program more effective.