It certainly is one thing for a company to make changes in their compliance program based upon ongoing monitoring, evolving best practices or remediation during an investigation. However, Boards of Directors, Chief Compliance Officers (CCOs) and compliance programs may now face a new source of dynamic tension in the form of activist shareholders. Typically, such shareholders want to “unlock shareholder value” or enhance growth through downsizing, breakup or divestiture. Nevertheless, we recently were treated to an activist shareholder considering the structure of a corporate compliance program. This could certainly portend a new pressure on compliance programs.

Matt Kelly, in his Radical Compliance blog, has devoted a couple of posts to the story of this tale, here and here. It involves Cardinal Health, Inc. and its settlement of fines and penalties surrounding its opioid shipments and/or contribution to the opioid crisis. The activist shareholder is the International Brotherhood of Teamsters (Teamsters), which claimed in letter to all Cardinal Health shareholders that “To date, Cardinal Health has paid nearly $100 million to settle state litigation and regulatory claims related to its distribution of controlled substances”.

The Teamsters criticized the Board’s leadership on this issue and submitted a proposal for an Independent Chairperson on the Board of Directors, in lieu of the current Chair, Cardinal Health Chief Executive Officer (CEO) George Barrett. The Teamsters’ campaign worked, although not exactly as the Teamsters had proposed. As Kelly noted, “their shareholder proposal failed to win a majority at last week’s shareholder meeting. But two days before the meeting, Cardinal announced that CEO George Barrett will step down from that job on Dec. 31 and then remain as executive chairman until next November. Then the board’s lead independent director, Gregory Kenny, will become chair.”

The CCO came into play because of a discretionary bonus he received. The first key point to be noted is that the CCO and General Counsel (GC) were the same person, Craig Morford. The Teamsters’ letter stated, “In every year from 2010 to 2016 the board’s Compensation Committee, working in conjunction with Mr. Barrett, saw fit to award Mr. Morford an annual incentive bonus that was significantly above target, even as the company was paying out tens of millions of dollars to settle DEA claims and even though Mr. Morford’s bonus is supposed to reflect in part the effectiveness of Cardinal Health’s regulatory and compliance program.”

As GC, Morford has the role of protecting and defending the company. As a CCO his role is quite different; to prevent, detect and remediate issues. When a company pays out millions of dollars in settlements, from the GC’s perspective, it may be the best thing to do to protect the company. However, as the Teamsters’ letter notes such payments are difficult to reconcile with an effective compliance program around the over-sale of opioid drugs.

This action by the Teamsters is the first such instance I am aware of in which an activist shareholder complained about the pay of a CCO. Since the position held by the person being complained of was both GC and CCO; it might also be fair to consider the Teamsters’ complaints relating to the excerpt from their letter that specifically refers to Morford’s actions (or inactions) in his role as CCO. The Teamsters’ complaint about Morford’s actions as CCO go directly to the role of the CCO to remediate, stating “given the failures in the company’s controlled substance anti-diversion programs that have become tragically apparent and costly for the company.” Perhaps the Teamsters’ complaints are more than simply the bonuses awarded to Morford based upon his performance as CCO; it is his performance which is at the heart of the compliant.

Morford himself is well known to the greater compliance community. He was the Acting Deputy Attorney General over whose name the Morford Memorandum was issued. This dealt with the selection of corporate monitors under Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs); specifically related to abuse which had raised the ire of Congress. So Morford would seem to meet the questions posed under the Department of Justice’s (DOJ) Evaluation of Corporate Compliance Programs around the appropriate experience and qualifications of the CCO.

Yet this entire affair emphasizes once again why the role of the GC and CCO need to be split. If a company wants to pursue an aggressive litigation defense strategy, as Cardinal Health did, as it was detailed in the Teamsters’ letter; that is certainly within the purview of the GC. Further, if the GC wants to settle potential legal risk through payments of fines, penalties and settlements,  even in the range of hundreds of millions, that is also directly within the purview of the GC. The problem with the structure of having the same person in both roles is that the focus of the CCO must be to fix the problem; which may not lend itself to a favorable financial settlement.

The Teamsters’ complaint could also be extended to the reporting structure, where a compliance function reports to the GC rather than the Compliance Committee, Audit Committee or full Board of Directors. This is the next logical step if shareholders desire to affect change to benefit an organization through its compliance program. This approach would also make compliance more directly answerable the Board and ultimately shareholders.

There have been shareholder lawsuits in the past, usually targeting companies which have announced Foreign Corrupt Practices Act (FCPA) investigations. While almost always these lawsuits do nothing but line the pockets of plaintiff’s counsel with attorney’s fees disguised as settlement monies, there have been two notable exceptions. These were the Halliburton shareholder action settlement from its 2009 FCPA DPA and the SciClone shareholder settlement action. In both matters, substantive changes to the companies’ compliance programs were entered into as a part of the settlement.

However, the Teamsters’ shareholder activism is something different. There were no settlement monies paid to the Teamsters, only the promise of (hopefully) better corporate governance, leading to a better run, more ethical and more profitable company for all the shareholders. Yet this activism does not work towards changing the company culture which led to its large sales of opioid drugs, which eventually led to the regulatory settlements. That change must be impacted from the very top of the organization and then pushed down through the organization. It is hard to conceive such a cultural change can be affected from the outside. But if shareholders are going to review and then call out the structure of a corporate compliance program, companies need to be ready to respond.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2017

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