A Compliance and Ethics Program: Framework for Implementing a“Culture of Transparency” Charles L. Pourciau, Jr. JD
Why listen today?• What are the Costs . . . . . . . . . without a Culture of Transparency?• What is a Culture of Transparency?• What are the Organizational Benefits? • Questions
Do these situations exist in your company? Types of misconduct observed: • Sexual Harassment • Substance Abuse • Insider trading • Illegal Political Contributions • Stealing • Environmental violations • Improper contracts • Contract Violations • Improper use of competitor’s information • Health or safety violations • Anti‐competitive practices The 2011 National Business Ethics Survey asked employees about these situations in their companies.
2011 National Business Ethics SurveyUS Workforce = 138M people• 62M (45%) – observed misconduct,• 41M (65%) – reported misconduct,• 9M (22%) – experienced retaliationAre the details of these responses an indication of an Opaque Culture?
How does an ‘Opaque’ Culture Look? AS ECONOMIC STRESS ON COMPANIES EASES, MISCONDUCT BECOMES MORE PREVALENT Hiring new 80 Percentage of Employees Who Observed employees 79% Misconduct in previous 12 Months Rehiring of 60 63% former staff 56% Business 40 42% expansion Restoration of 20 compensation and/or benefits 0 1 or 2 3 or 4 5 Reinstatement of Number of Recovery Measures hours or overtimeWhat are other indications of an Opaque Culture (vs. A Culture of Transparency)?
‘Uncle Sam’ visits!The Justice Department’ s Criminal Division ‐ FCPA: • 2004 collected around $11,000,000; • 2005 collected around $16,500,000, • In 2009 and 2010 combined collected nearly $2B. Assistant Attorney General Lanny A. Breuer’s speech before World Bank on May 25, 2011 Healthcare fraud 2001 to 2009 $2.5B False Claims Act (FCA) whistleblower lawsuits – 2001 to 2009 $9.2B Pfizer ‐ $ 2.30B 2011 GSK ‐ $ 0.60B 2010 NYS/ NY City $ 0.54B 2009 Lilly ‐ $ 0.43B 2009 Merck‐ $ 0.65B 2008 Total $ 4.52B“The Justice Department’s Consumer Protection Branch recovered more than $913M in criminal and civil fines, penalties, and restitution in 2011. . .” DOJ Press Release Monday, March 5, 2012 Is this the US Government’s Deficit Reduction Program?
Motivation of healthcare fraud whistleblowers• New England Journal of Medicine (May 2010) – Identified 42 whistleblowers – Interviewed 26 – 4 outsiders; 22 insiders – 6 intended to file suit; 20 saw lawyer for other reasons before filing suit – Motivation themes – integrity (11), public safety (7), justice (7) and self preservation (5) It is about integrity not about the money!!!
2011 National Business Ethics Survey Supplement• MONETARY REWARDS LEAST LIKELY TO MOTIVATE REPORTING• Reason for Reporting Outside Company: – If it was a big enough crime 82% – If keeping quiet would cause possible harm to people 76% – If the problem was ongoing 70% – If keeping quiet would cause further harm to the environment 65% – If my company didn’t do anything about my [internal] report 65% – If keeping quiet would get my company in big trouble 56% – If I had the potential to receive a substantial monetary reward 43% Bounties are not the main motivator!!!
Opaque Company Examples • FCPA violation‐self reported, cooperated, responsible • Revenue $467M 2011 • MN government contractor • USAF suspended from future contracts for 6 months Total Cost: $15,000,000 • Revenue $3.96B • UK‐based: US and German subsidiaries paid Greek doctors to use their products. • Under the FCPA: Doctors at overseas government‐ owned or operated hospitals are foreign officials. • Paid DOJ $16.8M penalty; paid SEC $5.8M penalty; legal fees: $9.4M in 2.2012 Total Cost: $30,700,000 Other Examples?
Opaque Company Examples • 2011 Revenue $11M out Lufthansa’s $125M • Tulsa, OK; Maintenance, Repair, Overhaul (MRO) • Bribed Latin America foreign officials • FCPA violation‐self reported, cooperated, responsible • Paid DOJ $11.8M penalty; $7.&M legal fees in 3.2012 Total Cost $19,500,000 • Exton, PA; Global specialty metals distributor • Titanium alloy & aluminum bars no export licenses • Paid DOC $575,000 penalty 3.2011 • Price fixing guilty plea 12.2011 • Export privileges revoked from 2.2012 till 2.2014These examples include issues both self reported and investigation identified.
War Story #1 ‐ Opaque Company ScenarioImagine you are the CEO of a company under investigation by the US Attorney’s office for fraud.Two Board members accompany you to a meeting with a US Attorney to discuss a Deferred Prosecution Agreement.On the next slides see how this conversation unfolds for this opaque company. Opaque Company
War Story #1 Opaque CompanyAssistant US Attorney: “Please describe your ethics and compliance program.” CEO: “We don’t have a formal document but I have an open door policy and our people are honest and good.” Opaque Company
War Story #1 Opaque CompanyAssistant US Attorney: “How much does your company spend annually on office supplies?”CEO: “I believe that we spend between $50k and $100K annually.” Opaque Company
War Story #1 Opaque CompanyAssistant US Attorney: “How much does your company spend on ethics & compliance?”CEO: “I do not have that number at hand but will get back to you with it.” Opaque Company
War Story #1 Opaque CompanyAssistant US Attorney: “How does your company train its employees?”CEO:“We do not have a training program for ethics and compliance.”Five days later your company is indicted. Transparent Company
War Story #2 ‐ Transparent Company ScenarioImagine you are the CEO of a company under investigation by the US Attorney’s office for fraud.Two Board members accompany you to a meeting with a US Attorney to discuss a Deferred Prosecution Agreement.On the next slides see how this conversation unfolds for this transparent company. Transparent Company
War Story #2 Transparent CompanyAssistant US Attorney “Please describe your ethics and compliance program.” CEO: “We have a formal program and annually every employee certifies they read, understood and agree to follow it.” Transparent Company
War Story #2 Transparent CompanyAssistant US Attorney “How much does your company spend annually on office supplies?”CEO: “We spend $100K annually.” Transparent Company
War Story #2 Transparent CompanyAssistant US Attorney” “How much does your company spend on ethics & compliance?”CEO: “Over the last five years we have spent $200,000. Would you like detail?” Transparent Company
War Story #2 Transparent CompanyAssistant US Attorney: “How does your company train its employees?”CEO: “Training based an employees job; initial training completed within 30 days of hire; mandatory annual ethics training.”Your outside counsel receives a Non‐Prosecution Agreement for review. Transparent Companies
Transparent CompaniesEthisphere 2011 Worlds Most Ethical Companies – Partial Culture of Transparency: Elements
The Culture of Transparency includes:• A written Policy for Ethics and Compliance• Accountability for the Ethics and Compliance assigned• Initial and annual education all employees• All reports investigated and discipline as required• Practices & Operating procedures aligned with the law Culture of Transparency: Elements
The Culture of Transparency includes:• Openness … not whack‐a‐mole … With good listening skills• No Retaliation …… No Retribution• Accountability …… No Passing the Buck• ‘Walk the Talk’ of Ethics and Compliance Organizational Benefits
Organization Benefits Higher gross margin and profits With COT 7.9% increase SH value Without COT 2.1% increase SH valueTotal SH return (10 yr period) Top Quartile +8.8% Bottom Quartile ‐7.4% Top outperformed Bottom by >16% Morgan Stanley
HOW IT’S SUPPOSED TO WORKFCPA violation – China Managing Director pleads guilty • Evaded internal controls • Web of deceit to thwart adequate controls to prevent corruption • Self‐dealing and deception DOJ Press Release April 25, 2012 Morgan Stanley had • Self‐reported, cooperated with DOJ investigation • Effective internal controls; employees not bribing government officials • Frequent training on internal policies 2002 ‐ 2008 • Managing Director – trained 7 times; reminded 35 times • Monitoring; Random audits •DOJ Press Release April 25, 2012 Uncle Sam Declined To Prosecute!
National Business Ethics Survey http://www.ethics.org/nbes/“Whistleblower Experiences in Fraud Litigation against Pharmaceutical Companies” New England Journal of Medicinehttp://www.whistleblowers.org/storage/whistleblowers/documents/DoddFrank/newenglandjournalmedicine.pdf Charles L. Pourciau, Jr. JD
My Requests?• I seek introductions to Board members & CEOs • Speaking engagements Contact Info: 727. 410. 4786 Email: email@example.com Charles L. Pourciau, Jr. JD