FCPA Compliance and Ethics Blog

December 18, 2013

Joan Fontaine and the Evolution of Compensation Issues in a Compliance Program

Yesterday I noted the passing of Irish actor Peter O’Toole this past weekend. But we also lost one of the great female leads from the 1940s and 50s this weekend as well, Joan Fontaine. Ms. Fontaine was the younger sister of Olivia de Havilland. She won a Best Actress Oscar in 1941 for her role in Suspicion making her the only woman to win a Best Actress Oscar for acting in an Alfred Hitchcock film. It also made her a member of the only sisters’ duo to win Best Actress Oscars. Prior to winning her Oscar, Fontaine had been nominated in 1940 in the Best Actress category for her role in another Hitchcock film, Rebecca, in which she played the haunted second wife of Laurence Olivier. For my money, her role in Rebecca was by far the greater performance than Suspicion. While born of British parents, Fontaine never actually lived in England, being born in Japan and then coming to the United States as a teenager. Fontaine also had one of the greatest sibling rivalries of all-time with her equally famous sister, stating once that, “I married first, won the Oscar before Olivia did, and if I die first, she’ll undoubtedly be livid because I beat her to it!” She did.

So with the sisters, some things never changed. However in the compliance world, things do change. Compliance programs evolve just as the thinking on best practices has changed over the past few years. One of the areas that has not received as much attention in compliance programs is the amount of compensation paid to third party representatives. Clearly a great amount of attention has been paid to due diligence, knowing just who you are doing business with and the management of the relationship. However the area of the quantum of compensation is not something as explicitly considered. Another area which is now drawing greater scrutiny in the Foreign Corrupt Practices Act (FCPA), and other anti-corruption law arenas, is compensation which results in a conflict of interest.

Jeff Kaplan, editor of the Conflict of Interest Blog, wrote, in a post entitled “Conflicts of Interest and Industry Culture”, that “intersection of culture and C&E that is too often overlooked: industry culture.” He went on to say that “As a general matter industry culture is not as significant a cause of risk as organizational or geographical culture. But it can be potent, particularly in industries with a high degree of inter-company mobility, such as financial services.”

I thought about Kaplan’s insights when I read an article in today’s New York Times (NYT), entitled “Glaxo to Stop Paying Doctors To Boost Drugs”, by Katie Thomas. This is the same GlaxoSmithKline PLC (GSK) that is under investigation for bribery and corruption in China, in violation of Chinese domestic anti-corruption legislation. In her article Thomas wrote that “British drug maker GlaxoSmithKline will no longer pay doctors to promote its products and will stop tying compensation of sales representatives to the number of prescriptions doctors write, its chief executive said Monday, effectively ending two common industry practices that critics have long assailed as troublesome conflicts of interest.” While this practice has gone on “for decades” it had been prohibited in the United States through an “industry-imposed ethics code but still occurs in other countries, specifically in China. I found this quite interesting since the FCPA only applies to non-US (foreign) government officials, such as those in socialized medicine health care system.

In addition to this ban on paying doctors to speak favorably about its products at conferences, GSK will “also no longer compensate sales representatives based on the number of prescriptions doctors write, a standard practice that some have said pushed pharmaceutical sales officials to inappropriately promote drugs to doctors.” Instead GSK would pay its sales representatives “based on their technical knowledge, the quality of service they provided to clients to improve patient care, and the company’s business performance.” (What a novel idea, compensation based on quality!) There was nothing in Thomas’ article to suggest that GSK made these changes based upon the ongoing investigations in China. Indeed, a company spokesman interviewed for the NYT article “declined to comment on the investigation because he said it was still underway.” However the timing of such changes and the fact that it seemed to apply more fully to GSK operations outside the US, would make the timing of the changes certainly appear less than coincidental.

In addition to the obvious conflict of interest, which apparently is an industry wide conflict because multiple companies have engaged in these tactics, there is also clearly the opportunity for abuse leading to allegations of illegal bribery and corruption. Indeed one of the key bribery schemes alleged to have been used by GSK in China was to pay doctors, hospital administrators and other government officials, bonuses based upon the amount of GSK pharmaceutical products which they may have prescribed to patients. But with this new program in place, perhaps GSK may have “removed the incentive to do anything inappropriate.”

This new program by GSK demonstrates that companies can make substantive changes in compensation, which promote not only better compliance but also promote better business relationship. A company spokesman interviewed for Thomas’ piece noted that the changes which GSK will make abroad had already been made in the US and because of these changes, “the experience in the United states had been positive and had improved relationships with doctors and medical institutions.”

For the compliance practitioner, one of the lessons from the GSK scandal is to look not only at the amount of compensation paid but how it was paid. If there is a way to remove or even help to remove “the incentive to do anything appropriate” it certainly can be positive for the company and positive for your overall compliance efforts.

You might also fire up the DVD player over this holiday season for a Joan Fontaine double shot of Hitchcock.

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, 2013

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