Governing Body Responsibilities for Implementing Effective Compliance and Ethics Programs Tim Timmons Corporate Integrity Officer Greater Oregon Behavioral Health, Inc. #NatCon14 What We ll Cover Today Fiduciary Duties of Board Members Background the Caremark Case Causes of Potential Liability for Board Members U.S. Sentencing Guidelines Board Oversight Responsibility How to Ensure your Compliance and Ethics Program is Effective #NatCon14 1 1
Fiduciary Duties of Board Members Duty of Obedience - officers and directors act in accordance with the organization's articles of incorporation, bylaws and other governing documents, as well as all applicable laws and regulations. Duty of Loyalty - officers and directors must give undivided allegiance to the organization when making decisions affecting the organization. In other words, officers and directors cannot put personal interests above the interests of the organization. #NatCon14 2 Fiduciary Duties of Board Members Duty of Care This duty is very broad, requiring officers and directors to exercise ordinary and reasonable care in the performance of their duties, exhibiting honesty and good faith. The "business judgment rule" protects officers and directors from personal liability for actions made in poor judgment as long as there is a reasonable basis to indicate that the action was undertaken with due care and in good faith. #NatCon14 3 2
Fiduciary Duties of Board Members Duty of Care Is more explicit than the duty of loyalty in that officers and directors must act in a manner which they believe to be in the best interests of the organization, and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. #NatCon14 4 Fiduciary Duties of Board Members The reasonable inquiry test asks whether the directors conducted the appropriate level of due diligence to allow them to make an informed decision. In other words, directors must be aware of what is going on about them in the corporate business and must in appropriate circumstances make such reasonable inquiry, as would an ordinarily prudent person under similar circumstances. #NatCon14 5 3
The Caremark Case The shareholders of Caremark International, Inc. brought a derivative action, alleging that directors breached their duty of care by failing to put in place adequate internal control systems. This in turn was said to enable the company s employees to commit criminal offences, resulting in substantial fines and civil penalties. (About $200 million) #NatCon14 6 Caremark Duty to Monitor In its decision on behalf of the board, the court indicated that directors must be assuring themselves that information and reporting systems exist in the organization that are reasonably designed to provide senior management and the board itself timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning both the corporation s compliance with law and its business performance. #NatCon14 7 4
Potential Liability for Board Members * From the Caremark opinion: Generally, where a claim of directorial liability for corporate loss is predicated upon ignorance of liability created activities within the corporation, as in Graham or in this case, in my opinion only a sustained or systematic failure of the board to exercise oversight such as an utter failure to attempt to assure a reasonable information and reporting system exists will establish the lack of good faith that is a necessary condition to liability. (Underlining mine) #NatCon14 8 The Caremark Case In the Caremark decision, the court went on to define a multi-factor test designed to determine when this duty of care is breached. To show that directors breached their oversight duty (a duty later held to fall under the broader category of the duty of loyalty), plaintiffs must show that: The directors knew or should have known that violations of the law were occurring, or The directors took no steps in a good faith effort to prevent or remedy the situation, and Such failure proximately resulted in the losses complained of #NatCon14 9 5
The Freeh Report (Penn State) Citing Stone v. Ritter, Special Counsel found that the Board failed in its fiduciary duties because: In 1998 and 2001 the Board did not have regular reporting procedures or committee structures in place to ensure disclosure to the Board of major risks; and In 2011 because, after becoming aware of the Grand Jury investigation of Sandusky, Board members did not independently assess the information provided by Spanier (President) and Baldwin (General Counsel) or demand detailed reporting from the same. #NatCon14 10 The Freeh Report (Penn State) The Board failed to create a Tone at the Top environment that Sandusky and other University officials believed they were accountable to. The Board s failure to insist on thorough reporting led to an environment where President Spanier did not feel accountable for keeping the Board immediately informed on serious developments. The Board allowed itself to be marginalized by not demanding thorough and forthright reports on affairs of the University #NatCon14 11 6
Impact of OIG Exclusionary Authority Liability as a responsible corporate officer does not turn upon a corporate officer s approval of wrongdoing, but rather on whether the officer had, by reason of his or her position in the corporation, responsibility and authority either to prevent, or promptly correct, the violation at issue, and the officer failed to do so. Inspector General Levinson announcing expanded use of exclusion authority at 2010 HCCA Compliance Institute. Excluded persons are prohibited from furnishing administrative and management services that are payable by the Federal health care programs. #NatCon14 12 U.S. Sentencing Guidelines The U.S. Sentencing Guidelines describe the requirements for an effective compliance and ethics program This program structure has been adopted as the standard for compliance and ethics programs by CMS and the OIG of DHHS #NatCon14 13 7
U.S. Sentencing Guidelines 8B2.1(b)(2) states that the organization's governing authority shall be knowledgeable about the content and operation of the compliance and ethics program and shall exercise reasonable oversight with respect to the implementation and effectiveness of the compliance and ethics program. Application Note 3(k) 8A.1.2 states that The failure to prevent or detect the instant offense does not necessarily mean that the program is not generally effective in preventing and detecting criminal conduct. #NatCon14 14 What is an Ethics and Compliance Program It articulates the standards of behavior expected of all members of the organizational workforce in its code of conduct (The term workforce includes not only employees, but volunteers and anyone else whose conduct is under the direct control of the organization, whether or not they are paid by the CCO) It describes the process by which the organization exercises due diligence in preventing and detecting misconduct (illegal acts and unethical conduct) #NatCon14 15 8
Reasons for Having a Compliance and Ethics Program Mandated by the Affordable Care Act Prudent risk management Improves the quality of care National standard for all business entities Demonstration of commitment to ethical and compliant conduct Potential penalty mitigation if convicted of criminal misconduct #NatCon14 16 How Can the Board Assure Compliance and Ethics Program Effectiveness The Office of Inspector General of DHHS and the American Health Lawyers Association have developed some questions that should be asked of executive staff annually, the answers to which should satisfy its due diligence to oversee the effective implementation of the compliance and ethics program. Structural questions Does the program contain all the required elements? Operational questions Are the requirements of the program being effectively implemented? #NatCon14 17 9
How Can the Board Assure Compliance and Ethics Program Effectiveness Make sure your compliance officer reports significant risks to the compliance committee in a timely manner Ensure that the compliance officer has unfettered access to the board and understands that his/her responsibility is to keep the board informed of compliance risk exposures The Sentencing Guidelines state that small organizations have the flexibility to implement their programs in a more informal manner #NatCon14 18 QUESTIONS? #NatCon14 19 10