Third Parties

Complying with customers’ conflict of interest requirements

A federal indictment handed down this week charged a former CEO of CalPERS (the California Public Employees Retirement System), who had become a consultant to a “placement agent” just one day after leaving CalPERS,  with defrauding Apollo Global Management in connection with Apollo’s payment of  14 million dollars in fees to the placement agent for its role in persuading CalPERS to hire Apollo to manage some of its funds.  As charged in the indictment, Apollo asked the agent to have a CalPERS official sign a letter saying that they were aware of the placement agent’s role in getting Apollo the business, but CalPERSs’ officials – presumably concerned with the conflict of interest involved – refused to do so. So, the former CEO and a colleague at the placement agent allegedly created and presented to Apollo phony letters evidencing such approval.

This is a fairly unusual (as well as tangled) case and apparently leaves open a number of  important questions regarding CapPERS and Apollo.  But it also raises the broader and more general question which countless companies face on a frequent basis:  what should be done to ensure that one’s employees and agents are complying with a customer’s COI standards, (a topic we haven’t explored since the early days of the blog)?

There are a number of possibilities here, including the following:

– Mandating that your company’s employees/agents comply with relevant customer standards, i.e., building such an expectation into your code of conduct, other policies and agency agreements.

– Training and otherwise communicating periodically to at-risk employees and agents on such expectations.

– Making an effort to ensure that employees/agents are in fact aware of applicable customer standards, such as by collecting and distributing relevant sections (e.g., on gifts, entertainment and travel) of customer codes of conduct to employees/agents who deal with such parties.

– Including such standards in one’s audit protocols.

– Contacting the customer with respect to specific contemplated actions that could raise COI  issues under the customer’s policies or relevant law.

The last of these measures is, of course, the most delicate – and it is not something that companies tend to do for small-scale matters (e.g., taking a customer’s employee to lunch).  However, for potentially weightier COI issues it is often warranted (and, of course, should be done where required by law – as was the case in the CapPERS matter).

Finally, it is worth considering that there are different  types of effort that each of the above compliance measures can entail.  For instance, regarding the delicate but potentially important customer-contact-related measure one can require that:

– Written notice be given to the customer (e.g., the supervisor of an employee of a government agency who one would like to invite on a business trip) –  a one-way written communication.

– The customer confirm in writing its approval of the contemplated action (e.g., what Apollo sought to do here) –  a two-way written communication.

– There there be an in-person or telephonic contact with the customer – to avoid the type of fraud that happened in the CalPERs case.

Conflicts of Interest in Joint Ventures – the Rights of “Consenting Adults”

This is the second post this week on COIs involving specific types of business organizations – the first post was on non-profits.  This coming weekend we’ll look at some of the COI stories that have been in the news of late and next week we will resume our series on ways to assess COI risks.

In an earlier post on the murky legal landscape regarding COIs we noted that the fiduciary duty of loyalty operates as a “default” in certain circumstances – imposing various COI-related obligations in the absence of an agreement to the contrary.  But when, one might ask, would anyone give up a duty to be treated in a less than loyal way?  One example lies in the area of joint ventures.

The governance and operation of JVs can certainly raise conflict of interest concerns. For an employee of  a JV’s co-owner who is either on the JV’s board or is seconded to the JV whose interests to be treated paramount?  Given the inherent tension in situations of this sort, those involved have good reason to clearly articulate applicable duties and expectations.

Indeed, as noted in recent Gibson Dunn publication Recent Trends in Joint Venture Governance : “Partners negotiating joint ventures are spending increasing amounts of time developing codes of conduct and policies regarding conflicts of interest.  These codes and policies are intended to legislate how business dealings between the joint venture company and a venture partner or its affiliates will be conducted and define the rights and responsibilities of the joint venture company and the venture partners regarding corporate opportunities.  They often reflect the nature of the industry in which the particular joint venture will operate.  In technical joint ventures, for example, the focus of conflict of interest policies is often the ownership, use and commercialization of intellectual property rights.”

Additionally JV agreements sometimes directly address – and waive – fiduciary duties.  As the Gibson Dunn publication further notes: “The managing boards of joint venture companies also owe fiduciary duties to the venture partners under applicable law.  But venture partners generally have a direct voice on the board.  In addition, when they enter into the venture, they have the opportunity to negotiate specific contractual rights designed to protect their interests.  In fact, in many circumstances, they will waive their common law or statutory fiduciary protections, relying instead on a set of negotiated contractual protections.”

Bottom line: JV owners are considered “consenting adults” who can not only waive individual COIs but the right to be treated in a loyal way by their directors and employees.

I should emphasize that there is a whole host of compliance risks in JVs beyond COI ones.  And this recent post in Corporate Compliance Insights  –  “Joint Ventures and Compliance Risks: The Under-Discovered Country”  identifies  three categories of measures that companies should take to promote C&E in JV’s in which they invest: screening the contemplated JV partners; structuring the JV agreement to promote compliance; and once the JV is operational, having a C&E officer work on an ongoing basis with key company personnel who serve as JV board members or seconded employees in senior positions to manage compliance.

Also, this week Compliance Week is running a story “JV Compliance Takes Varsity Skills”; it is for subscribers only so I can’t link to it, but mention it as further indication that C&E issues surrounding JVs are a hot topic these days.

Finally, related to the issue of COIs and JVs is this post concerning COIs arising from serving on another company’s board of directors.