Year: 2010

Working Toward a Healthier Organization: Pfizer’s Compliance Program

I am attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere. Here are my notes, live from the session:

Picture of Douglas Lankler

There are a number of challenges associated with maintaining integrity as a top priority in a highly competitive global business. But sometimes, despite company’s most earnest efforts to effectively implement compliance metrics and an ethical culture, things can go wrong and subject a company to governmental scrutiny and penalties. Join us as Pfizer’s ehief compliance officer Douglas Lankler candidly discusses this reality and how corporate leaders handle the challenge of compliance in a global setting—and how to effectively address and rebound from cases on noncompliance.  Douglas M. Lankler, Senior Vice President & Chief Compliance Officer, Pfizer was interviewed by Timothy P. Erblich, Executive Vice President, Ethisphere Institute, Ethisphere.

Lankler started with Pfizer in 1999 at the start of the compliance program at Pfizer (and at the start of the compliance field). He told some of the background on the Pfizer investigation on Bextra. (see: Pfizer and Compliance.) It was a very difficult outcome for the company. It had a tremendous impact internally. Everyone talks about it and everyone wants to make sure it does not happen again.

The result was a very rapid evolution of the compliance program. As a big company, they already had a robust program. This made it better. When you have 100,000 employees and 99.99% of them are doing the right thing, that still leaves some bad employees.

Pfizer is very acquisitive so it is key to integrate the acquired companies into the Pfizer culture. Systems can keep an eye on employees. But culture helps them to make sure they make the right decision when no one is looking. They have taken the extra-ordinary measure having employees wear integrity pins. (Lankler had one on his lapel.)

The audit committee and the entire board of Pfizer are very focused on compliance issues. Of course there are more than financial issues for compliance failure at a healthcare/pharma company. Compliance failures can kill people.

For Pfizer the key is monitoring at a very granular level. The compliance program needs to dive deep into the transactions, sales levels and questions from customers. An increase is sales is great, but can also be a red flag for something bad happening.

Part of the problem with changing standards and regulations will be used to look back at prior actions. Something you did in 2004 will be evaluated with a 2010 perspective. (This is one of the reasons to stay ahead of the regulatory landscape.)

In dealing with a government investigation, it is very important to put yourself in the shoes of the prosecutor. When listening to the strategy of your outside counsel you need to listen to it from the prosecutor’s perspective. The prosecutor found a problem. You need to help them understand the company operations. They see the problem (and the jury will see the problem) in isolation. You need to show them that the company is as upset about the problem as the prosecutor.

As part of their settlement with the government, Pfizer’s CCO reports directly to the CEO. Previously Lankler reported to the general counsel. This was a big change for Pfizer. The company is highly regulated so there is a tight connection between the legal division and the compliance division. Outside of the legal division, he does not have the legal spending power of the legal department behind him. (He was No.2 in legal.) There was tension between the importance of compliance having a seat at the head table and the importance of support from the legal group.

Compliance 2010 – What’s Next?

I am attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere. Here are my notes, live from this session:

“New challenges abound amid advancing best practices, not to mention the continually escalating rate of enforcement both by U.S. regulators and overseas officials. What’s on the horizon for compliance? This roundtable discussion comprised of leading ethics and compliance officers will share their insight into what’s next, how to be prepared, and their own seasoned advice on how corporate executives can keep their organizations from making headlines for compliance or ethics transgressions.”

  • David G. Barry, Managing Editor, Financial Information Services, Dow Jones & Company
  • Grace Renbarger, Chief Ethics and Compliance Officer, Dell Computer
  • Haydee Olinger, Corporate Vice President & Global Compliance Officer, McDonald’s
  • Peter Jaffe, Chief Ethics and Compliance Officer, AES
  • Genie Gavenchak, Senior Vice President, Chief Compliance and Ethics Officer & Deputy General Counsel, News Corporation

Peter lead off. He is looking ahead for continuous improvement. They have an existing program that they think is solid. They have good relationships internally and wants to have even better relationships. They are also looking to better adapt to local cultures.

Grace pointed out that they were dealing with the economic downturn in 2009 by focusing closer in internal fraud issues. With a potential recovery in 2010, they are looking for better global compliance with a flat budget. Dell as a company is looking to put integrity and ethics at the forefront of its business.

McDonald’s is looking to stay ahead of the trends and regulations. Social media, privacy and HR issues will be important in 2010. They leverage their outside law firms to help with training. In foreign markets they own more restaurants, as opposed to franchise, so they want to set the tone for future franchisees.

News Corp. is looking at how to best operate in difficult foreign markets. They want the message that they will not play the old game. But at the same time they need to operate in those countries. (Disclosure: News Corp is one of the largest tenants of my company.)

Federal Sentencing Guidelines

The next question was the proposed amendments by the US Sentencing Commission. [Prior post: Proposed Amendments to Sentencing Guidelines] One panelist raised whether the effect of the amendments would be to make the general counsel the CCO. This would seem to be step back since many companies have been separating the GC and CCO functions. Most of the panelists report to the general counsel, but have lots of contact with their boards and CEOs.  One panelist really disliked the incorporation of document retention issues into compliance and ethics practices.  The panel also pointed out that the are just minimum standards.

Foreign Corrupt Practices Act

Each of the panelists have increased their focus on FCPA issues.  Each mentioned that they were trying to standardize their practices across the world. Each has a closer focus on countries with higher levels of corruption. (Nobody was willing to point fingers at any particular country as being the most problematic.)  They have made their foreign operations and foreign partners aware that the FCPA applies to them, even though they are not in the US.

One panelist mentioned that they are moving from lawyer based training to internal programs with greater focus on internal practices, not the law. One key is how to do all of this awareness and training in a cost effective way. In-person training is the most effective, but also the most expensive. One of the keys is leverage. Focus on training the trainers and the tone from the top. The top is not just the CEO, but the head of local operations and middle management.

Social Networking Sites

The panel started with a statistic that 25% of companies have fired someone for what they did on a social media site. News Corp. has taken this head on, but also has the problem that they own MySpace and are a media company. The key is to set boundaries to prevent damage to the company and to clarify ownership of content. McDonald’s has over a million employees and at the same time trying to use social media proactively. A big focus is on trademark and intellectual property issues.

Compliance in Mergers and Acquisitions

The key is to be part of the acquisition diligence process to vet any issues ahead of time. Integration is a bigger issue. You need to unify the codes and investigation processes so they are standard across the organization. One issue is that smaller companies tend to have many of the compliance and ethics process in one person and one process. A bigger company has it broken out into separate components.

Citizens United, Corporate Campaigning and Pay to Play

Panelists said that they already have political donations and lobbying policies in place. There is more of a focus on pay-to-play. When interacting with the government as a contractor you need to be focused on the issue.

Top Issues for 2010

  • Overall government regulation.
  • No idea. There were so many curveballs in 2009 and there will likely be more in 2010.
  • Communication and education.
  • Organizational scorecard for compliance and ethics

Global Ethics Summit 2010

Today I will be in New York attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere.

Assuming I can get an internet connection and power, I will be live-blogging from the summit. If not live, I will try to get my notes published later tonight on the train ride home.

Here is the agenda:

Compliance 2010 – What’s Next?

  • David G. Barry, Managing Editor, Financial Information Services, Dow Jones & Company
  • Genie Gavenchak, Senior Vice President, Chief Compliance and Ethics Officer & Deputy General Coun, News Corporation
  • Peter Jaffe, Chief Ethics and Compliance Officer, AES
  • Haydee Olinger, Corporate Vice President & Global Compliance Officer, McDonald’s
  • Grace Renbarger, Chief Ethics and Compliance Officer, Dell Computer

Working Toward a Healthier Organization: Pfizer’s Compliance Program

  • Douglas M. Lankler, Senior Vice President & Chief Compliance Officer, Pfizer
  • Timothy P. Erblich, Executive Vice President, Ethisphere Institute, Ethisphere

Tone at the Top: The Board’s Role

  • Thomas O’Neil, Advisor, WellCare Health Plans
  • C. Turney Stevens, Dean, College of Business, Lipscomb University
  • TK Kerstetter, President & CEO, Corporate Board Member

Doing More with Less: Compliance During Tough Economic Times

  • Ronnie Kann, Managing Director, CELC, Corporate Executive Board
  • Keith Abrams, Vice President & Associate General Counsel, Bayer NA
  • Dean Krehmeyer, Executive Director, Business Roundtable Institute for Corporate Ethics
  • Jeremy Wilson, Senior Manager, Ethics Office, Cisco Systems
  • Alexandra Wrage, President, Trace International

Global Insights into the Anti-Corruption Landscape

  • Rupert de Ruig, Managing Director, Risk and Compliance, Dow Jones & Company

Training a Diverse Workforce: Best Practices

  • Erica Salmon Byrne, Assistant General Counsel & Managing Director, Compliance Advisory Services, Corpedia
  • Loren Becher, Manager, Compliance Training and Communications, American Express
  • Stella Raymaker, Director, Ethics & Equal Employment Opportunity Compliance, Waste Management
  • Howard Sklar, Anti-Corruption Counsel, Hewlett-Packard
  • Nan Stout, VP, Business Ethics, Staples

Don’t Be Evil: Imagination at Work with Google and GE’s Compliance Programs

  • Brackett Denniston, Senior Vice President & General Counsel, General Electric
  • Andy Hinton, Chief Compliance Officer & Associate General Counsel, Google
  • Stephen Martin, General Counsel & Chief Compliance Officer, Corpedia

Transparency –What, How Much and When?

  • Alex Brigham, Executive Director, Ethisphere Institute, Ethisphere
  • David Andrews, Board Member, Union Bank of California
  • Nancy Zucker Boswell, President & CEO, Transparency International USA
  • Wendy Hallgren, VP, Corporate Compliance, Fluor
  • David Howard, Partner, Dechert

When the Government Comes Knocking: Trends and Tips for Dealing with Regulators and Enforcement Officials

  • Ty Cobb, Partner, Hogan & Hartson
  • Paul S. Atkins, Co-founder & Managing Director, Patomak Partners
  • Eric Feldman, Senior Advisor to the Director for Procurement Integrity, National Reconnaissance Office
  • Brian Martin, Senior Vice President & General Counsel, KLA-Tencor
  • Hank Bond Walther, Assistant Chief, U.S. Department of Justice

Does Compliance Matter?

  • Joan Meyer, Partner, Baker & McKenzie LLP
  • Jeffrey Benjamin, Vice President & General Counsel, Novartis
  • Charles Elson, Director, HealthSouth
  • Patricia Nazemetz, Chief Ethics Officer, Xerox
  • Gregory S. Nixon, Senior Vice President, General Counsel, Corporate Secretary & Chief Compliance O, DynCorp International

Hiring Lawyers for Employees Under Investigation

Your company comes under investigation and specific employees are implicated. What is the right way to get lawyers for those employees? Assuming the company is picking up the cost of the lawyers, the company usually wants to have some input on the selection.

A recent New Jersey case highlighted some of the issues involved for the company and the lawyers involved. In the Matter of the State Grand Jury Investigation (A-80-08) highlighted the ethical issues.

The court laid  it out simply that the Rules of Professional Conduct forbid a lawyer from accepting compensation for representing a client from one other than the client unless six conditions are satisfied:

  1. The client gives informed consent.
  2. There is no interference with the lawyer’s independence of professional judgment or with the lawyer-client relationship.
  3. There is no current attorney-client relationship between the lawyer and the third-party payer.
  4. Information relating to the representation of the client is protected.
  5. The third-party payer must pay the invoices in its regular course of business.
  6. Once the third-party payer commits to pay, they need to get court approval to stop.

In this case Laidlaw International, Inc. was under investigation, with a focus on three employees.  The company hired four lawyers, one for each named employee involved and a fourth for all non-target current and former employees. The retainer agreements provided that the company would be responsible for the lawyer fees, but the lawyers’ professional obligation was to the individual employees only. The lawyers were not required to make disclosures to the company, and payment of the legal fees was not conditioned on the lawyers’ cooperation with the company.

That arrangement is fairly standard. But the state attorney objected and want to disqualify the company-paid lawyers for the employees. “The attorney maintains a sense of loyalty to the party paying him,” said Deputy Attorney General Frank Muroski told the Court at oral arguments. “The lawyer must suspect that the fee payer expects to have its interests protected.”

The court denied that there is an per se conflict. But there should be safeguards in place as outlined in the six conditions.

One key practice tip for the lawyers is that there must be a careful and conscientious redaction of all detail from any billings submitted to the third-party payer.

Sources:

Compliance Bits and Pieces for February 19

Here are some interesting compliance related stories from the past two weeks. (I reserved last week for my blogoversary.)

Details Emerge on SEC Office of Market Intelligence by Bruce Carton in Compliance Week

One of the first tools that the Securities Exchange Commission launched after it ushered itself into the Internet era in the mid-1990s was the “Enforcement Complaint Center,” a fancy name for an e-mail box at the SEC where the public could send tips. The Enforcement Complaint Center initially received only about 20 complaints per day, but that number snowballed through the years. Today it’s not uncommon for the ECC to receive up to 1,000 e-mail tips per day.

Morningstar acquires footnoted!

For the past 6 1/2 years, we’ve written frequently about various mergers and acquisitions. Today, we have some M&A news of our own: Morningstar (MORN) has acquired footnoted.org. You can download the official press release here, but I wanted to personally share with you why I’m so excited about this deal and why I think Morningstar, which is already well known for its independent research, is the perfect partner to help me continue growing footnoted.

Blizzard Ethics and Parking Space Etiquette by Jack Marshall of Ethics Alarms

The Great Blizzard of 2010 inspired The Washington Post to publish a piece about snow ethics, focusing especially on this touchy question: Is it ethical to park in a space shoveled out by someone else? The problem with the article is that it doesn’t ask the ethically crucial second question: Is it ethical for someone to hold one of the rare cleared parking spaces on the street open, when other motorists desperately need a place to park?

Corporate Backlash to Social Media by Gil Yehuda

A recent post titled “Company Forces Employee to Delete LinkedIn Profile” reminded me of the reality of the corporate mindset.  The post describes the reaction to the news that employees in this one firm can no longer have a private LinkedIn profile as a result of how the company interpreted the FINRA guidelines.

Financially Justifying Ethics: A Faustian Bargain? by Charles Green in Trusted Matters

Many readers are familiar with Goethe’s Faust in which the protagonist sells his soul to the devil in return for having his way here on earth. Those who are not familiar with it will find the same theme echoed in Robert Johnson’s Crossroads song, in which the singer sells his soul to the devil in return for fame as a bluesman. . . . But never mind. What I want to talk about is the justification of ethical corporate behavior by referring to its profitability. It is, I suggest, a slippery slope.

Calpers names firms not responding on placement agents in The Washington Post

Calpers, the biggest U.S. public pension fund, released late on Wednesday a list of 11 firms with which it has invested that did not reply to its request for information on their use of placement agents, who are at the center of a probe of New York’s pension fund.

New York City Enacts New Rules for Its Pension Fund Investments

New York City Comptroller John C. Liu announced sweeping changes in the way New York City pension funds make investment decisions. Following the lead of New York state and several other states, New York City is changing how it deals with gifts, campaign contributions and placement agents.

Ban on Campaign Contributions

  • Comptroller Liu declines any campaign contributions from investment managers and their agents doing business with, or seeking to do business with, the New York City pension systems.

Requirements for Fund Managers

  • Zero-tolerance gift prohibition – fund managers must certify that they have not given any gifts to any employees of the Comptroller’s Office, nor to any employees or trustees of the New York City pension systems;
  • Minimizing contact – fund managers must disclose all contact with employees of the Comptroller’s Office regarding new investments as well as all contact with pension trustees and other individuals involved in the investment decision-making process;
  • Disclosure of placement agents – fund managers must disclose all fees and terms relating to any firm retained to provide marketing or placement services, and that any such fees are fully paid by the fund manager;
  • Agreement for recourse – fund managers must agree that the pension system(s) may terminate or rescind a contract or commitment for investment and recoup all management and performance fees for violation of these requirements.

Restrictions on Placement Agents

  • Expand current ban on private equity placement agents to include placement agents and third-party marketers for all types of funds, where such agents and marketers are exclusively providing “finder” or introduction services;
  • Ease current ban on private equity placement agents to allow use of placement agents who provide legitimate value-added services such as due diligence and similar professional services on behalf of prospective investors;
  • Require such agents and marketers to demonstrate the ability to raise capital outside NYC by establishing that they raised $500 million in at least two of the past three years from entities other than the NYC pension systems;
  • Require full description of value-added services provided as well as resumes of key professionals and employees who contact individuals involved in decision-making process regarding a proposed investment;
  • Require registration with either the Securities and Exchange Commission or the Financial Industry Regulatory Authority.

New York City is separating itself from New York State by not completely banning the use of placement agents. Unfortunately, the Comptroller has not publish a copy of these new rules on his website.

Disclosure: My company has historically used placement agents as part of its fundraising.

Sources:

Image is by Julius Schorzman under Creative Commons in Wikimedia: Boroughs Labels New York City Map.

Securities Class Actions in Canada

With the winter Olympics going full swing in Canada, I thought I would look to how that country is dealing with securities class actions. NERA Economic Consulting just released their 2009 Update on Trends in Canadian Securities Class Actions.

Some tidbits:

  • Eight securities class actions were filed in 2009, compared with the 10 filings in 2008.
  • There are now more than $14.7 billion in outstanding plaintiffs’ claims in Canadian securities class actions.
  • In 2009, six cases settled for total payments of approximately $51 million

These are not big numbers compared to the securities class action activity in the United States. (Which is a good thing from the corporate perspective.) But this is still a new area for Canadian law.

Sources:

Media Leak is not Protected as a SOX Whistleblower

Leaking information to the media about bad financial controls is not protected by SOX whistleblower retaliation clause.

Nicholas P. Tides and Matthew C. Neumann were working as “Audit IT SOX auditors” at The Boeing Company. They made several complaints about auditing deficiencies to their supervisors. They claimed “that Boeing’s auditing culture was unethical and that the work environment was hostile to those who sought change.”

So they took their story to Andrea James, a reporter from the Seattle Post-Intelligencer, providing her with information and documents.

Boeing ended up firing Tides and Neumann. They sued claiming they were wrongly fired as whistleblowers and were protected under Section 806 of Sarbanes-Oxley.

The court pointed out that 18 USC § 1514A(a)(1) states that the protection exists when

the information or assistance is provided to or the investigation is conducted by—

(A) a Federal regulatory or law enforcement agency;

(B) any Member of Congress or any committee of Congress; or

(C) a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct)

None of these three cover a reporter or media outlet, so no protection to the whistleblower.

Sources:

Disclosure: I own some Boeing stock.

The Economist: Special Report on Financial Risk

This week’s The Economist has an excellent special report: The Gods Strike Back.

The title comes from Peter Bernstein’s Against the Gods:

“The revolutionary idea that defines the boundary between modern times and the past is the mastery of risk: the notion that the future is more than a whim of the gods and that men and women are not passive before nature.”

The report contains these stories:

For me, when looking for blame, I tend to focus on the rating agencies. As the report points out, the raters were paid by the the issuers not the purchasers of the securities. That results in a misalignment of interests. Of course, they may have just gotten wrong.

Looking at the chart below you have to be impressed by how spectacularly wrong they were:

Hopefully, we will learn some lessons from the financial crisis. We should have learned by now that the next crisis will be caused by something different so we need to be able to recognize and deal with the unexpected.

President’s Day

Washington’s Birthday, the federal holiday was originally implemented by the United States Congress in 1880 for government offices in the District of Columbia (20 Stat. 277) and expanded in 1885 to include all federal offices (23 Stat. 516). As the first federal holiday to honor an American citizen, the holiday was celebrated on Washington’s actual birthday, February 22. On January 1, 1971 the federal holiday was shifted to the third Monday in February by the Uniform Monday Holiday Act. A draft of the Uniform Holidays Bill of 1968 would have renamed the holiday to Presidents’ Day to honor the birthdays of both Washington and Lincoln, but this proposal failed in committee and the bill as voted on and signed into law on June 28, 1968 kept the name Washington’s Birthday.

In Massachusetts, while the state officially celebrates “Washington’s Birthday,” state law also prescribes that the governor issue an annual Presidents Day proclamation honoring the presidents that have come from Massachusetts: John Adams, John Quincy Adams, Calvin Coolidge, and John F. Kennedy. MGL Chapter 6: Section 15VV (Coolidge, the only one born outside of Massachusetts, spent his entire political career before the vice presidency there. George H. W. Bush, on the other hand, was born in Massachusetts, but has spent most of his life elsewhere.)

— From Wikipedia