Diana Hueter | Greater Yield
Since the passage of the Sarbanes–Oxley (SOX) Act in 2002, the new regulations forever changed the way U.S. public company boards, management and public accounting firms handle compliance in the pharmaceutical industry and in other public companies.
Within the pharmaceutical industry, board of directors (BOD) along with the assistance of management began reviewing the impact of SOX while implementing changes to conform to the new reforms. Corporate responsibility for compliance, enhanced financial disclosures, fiduciary duty to shareholders, and code of conduct are just a few of the significant compliance mandates.
Since the enactment of SOX, the importance of governance and the Board of Directors’ role in pharmaceutical compliance has heightened substantially. The driving force behind an organization’s success, sound governance protects shareholder value, empowers both the Board and management team, while maintaining the integrity of the company.
Under SOX, the BOD’s role is strengthened in matters of establishing company policy, setting the strategic direction, making significant decisions and maintaining effective governance oversight. Ultimately, the Board is held responsible for the company’s activities, strategy, risk management and financial performance.
Through various committees, the Board ensures that the policies and procedures are followed and in compliance with the law. Administered by a written charter, committees help enforce governance-related issues. In most pharmaceutical companies, committees oversee Audit and Risk, Compensation, Board Nominations, and Executive or Governance functions.
The Audit and Risk Committee assists the BOD to ensure that appropriate management controls are in place to help certify the integrity of financial reporting. Some of this committee’s functions assist the Board in fulfilling oversight responsibility with respect to:
- accounting and financial reporting principles, policies and practices;
- internal financial controls and procedures;
- the identification and management of risks;
- monitoring and managing potential conflicts of interest;
- compliance with accounting standards and applicable laws and regulations;
- quality and integrity of financial statements and the independent audit and reviews; and,
- selecting, evaluating and reappointing or replacing independent auditors.
The members of the Audit Committee may not receive, directly or indirectly, any fees from the company or any company subsidiary other than those incorporated in the Board Compensation policy and may not be affiliated persons, as defined in Rule 10A-3 under the Securities Exchange Act of 1934, of the company. The Securities and Exchange Commission (SEC) require at least one member of the Audit Committee be an “audit committee financial expert.”
In addition to the Audit Committee expert, the Board requires that the chief executive and chief financial officers must certify the accuracy of the company’s financial statements and operations. The act of certification demonstrates that the officers are giving formal assurance to the Board, investors, lenders, employees and other interested parties that these documents have been reviewed carefully. More importantly, the certification process makes the C-level executives accountable for the accuracy of the reports.
A Compensation Committee for a pharmaceutical company is responsible for selecting, evaluating and approving the company’s directors’, executive officer and senior management compensation plans, policies and programs. To ensure fairness and avoid conflicts of interest, this committee checks to see that compensation levels are appropriate, competitive, structured to avoid the encouragement of risky behavior, and promote effective performance and ethical practices, while properly reflecting the company’s objectives.
In addition to salary-related matters, members of the Compensation Committee must satisfy the independence requirements of the New York Stock Exchange. The committee must meet the definition of “non-employee director” under Rule 16b3 of the Securities Exchange Act of 1934, and be an “outside director” for the purpose of Section 162(m) of the Internal Revenue Code of 1986.
The Nominations Committee reviews the structure, size, and composition of the Board, and identifies and evaluates qualified individuals for appointment to the BOD. This committee is responsible for disclosure, communications and oversight of the process by which shareholder’s nominate Directors.
Individuals considered for board appointment may have characteristics that include knowledge of the company and/or the pharmaceutical industry, skills (such as communication, strategic, financial, information technology, marketing, research and development, etc.), diversity, senior management experience, and compatible personal characteristics. The nomination of new board members often is based on the matrix of existing board members and filling voids where needed.
The Governance Committee for a pharmaceutical company has the authority to oversee compliance-related management issues including:
- development, periodic review and recommendations to the BOD concerning appropriate corporate governance principles;
- review and approval of long-term strategic goals business objectives, monitoring of corporate performance against business plans, while evaluating performance against company peers;
- oversight of an annual review of the Board and Board Committees’ self-assessments, evaluation of the overall performance effectiveness;
- selection of the CEO, evaluation of performance, and monitoring of leadership progress; and,
- administration of the Company’s Code of Business Conduct and Ethics, which dictates compliance with corporate policies and procedures, accountability of adherence to applicable laws, rules and regulations, behavior of honesty and integrity, and overall good business conduct.
Included in the Code of Conduct is the prohibition of certain types of payments and interactions between pharmaceutical companies and physicians / health care practitioners. It has been common practice in the past for pharmaceutical companies to take physicians to lunch or invite them to participate in educational seminars in an effort to talk with them about new and current product offerings.
Under the Federal Physician Payment Sunshine Act, a provision under the Patient Protection and Affordable Care Act (PPACA) of 2010 (national healthcare reform), pharmaceutical companies are required to disclose the names of physicians and teaching hospitals who received any form of material payment or other transfer of value. The regulations require that companies list the amount of the payment, in addition to providing background information such as the date, exact form of the payment and a description of the payment. For example, PPACA requires details outlining specifically how the payment was used – for example, food, entertainment, gifts, travel, and/or consulting fees.
The first report under the Sunshine Act will be due in 2013 for the calendar year 2012. The data in the reports will be reviewed to assess potential violations of the federal Anti-Kickback Statute (42 U.S.C. Section 1320a-7b(b). Like the company’s financial reports, this report must be certified, and any false statements are subject to prosecution under the Responsible Corporate Officer Doctrine.
The Code of Conduct has some very specific applications for pharmaceutical companies. Under the Code, producers of drugs and prescription medications sold to consumers must provide the purchaser with details of all risks and complications that may occur from taking the drug.
Furthermore, the Code mandates that drugs may only be marketed for the specific purpose approved by the FDA. All pharmaceutical sales and marketing are required to include key facts and to avoid deceptive marketing practices. Marketing strategies used to promote drugs for off-label use are strictly prohibited.
Unfortunately, there are numerous areas that present potential opportunities for fraud. In the pharmaceutical industry, the most prevalent types of abuse include kickbacks, off-label marketing, consulting and advisory arrangements with health care professionals, and various sales and marketing courtesies.
In recent years, the pharmaceutical industry has witnessed an extensive list of fraud-related settlements and judgments. In September 2010, Novartis pled guilty to off-label marketing of Trileptal. Forest Pharmaceuticals agreed to a settlement to resolve allegations related to the unlawful distribution and promotion of Levothroid; the promotion of off-label uses for Celexa; kickback payments to physicians prescribing Celexa and Lexapro for unapproved pediatric uses in treating depression; and the submission of false payment claims.
During the same time-frame, AstraZeneca settled a case for the unlawful promotion of Seroquel and misleading physicians about the drug’s safety. Johnson and Johnson was cited for off-label marketing of Topamax. And just this year Pfizer agreed to settle allegations that the company’s employees bribed physicians and other officials in Europe and Asia. In November 2012, GlaxoSmithKline agreed to a settlement resolving allegations of false and misleading representations involving Avandia safety claims.
Given the strict enforcement of fraud and abuse cases, proactive pharmaceutical companies carefully review physician, marketing and sales spending policies and practices, making the necessary changes to establish a “best practices” protocol to ensure Code compliance. The firm’s Code of Business Conduct and Ethics should be required reading for employees of all highly regulated industries – most especially pharmaceutical companies. While not a mandate, each BOD should require every director, employee, and agent acting on behalf of the company to sign a statement certifying that the individual must have read, understand and abide by the firm’s Code.
Educational awareness emphasizing the importance of incorporating superior governance and ethics in pharmacy practices, while promoting transparency, accountability and adherence is critical in a strong compliance-based program. To make sure that the workforce is committed to honesty and integrity, ongoing communication of the Code of Business Conduct and Ethics is essential, and the Board must ensure that adherence to the Code is monitored and any infractions are promptly enforced.
A strong Board, a well-developed compliance program and the adherence to sound governance practices within the decision making process, will optimize the performance and accountability throughout all levels of a pharmaceutical business.