Thank you for your interest in the U.S. Securities and Exchange Commission. Should companies make corporate sustainability investments because they are popular, because they portray the company in a favorable way and increase profitability in the long run, or because they are a way to show true gratitude? The ties with various stakeholder groups potentially create divided loyalties for directors. In conflict situations, customers can hurt companies, and companies can harm the interests of customers. It is challenging for directors to decide which stakeholder group to prioritize when it comes to value distribution and how to slice the pie. The Volkswagen case shows that it is difficult for a board to optimize the interests of shareholders when they have conflicting interests. For example, Hewlett-Packard stock fell almost 9% following reports that former CEO Mark Hurd had a personal relationship with a female contractor. A Notable Example of Interlocking Directorates One of the most notable examples of interlocking directorates occurred in 2002 between Google and Apple. Examples of unethical business practices like this include credit default swaps, mortgage-backed securities, hedge funds, and special investment vehicles. Shareholders appoint board members, usually outstanding individuals, based on their knowledge and skills and their ability to make good decisions. A company is normally considered as a separate legal entity that is independent from its directors, executives and shareholders. Such behavior may well increase payoffs to shareholders in the short term but it can only lead to the eventual demise of the corporation and total destruction of long-term shareholder value. Misconduct by board directors can be intentional or unintentional, and sometimes its difficult to tell the difference. Better Cotton was founded in 2005 to set standards for cotton production, with a goal of facilitating ethical, environmental and development-friend Tyre Recycling Solutions: What goes around comes around. Conflicts of interest abound at the board level. Corporate culture and tone at the top are considered key drivers of ethical behavior, but boards of directors often devote little time to the topic.. Board members generally recognize their responsibility to oversee ethics and compliance, said Pat Harned, CEO of the Ethics and Compliance Initiative . ICBCs supervisory board is composed of five to seven stakeholder professionals and some of them are full-time on-site supervisors. Some of the most serious board director offenses fall into the categories of criminal offenses, sexual offenses and financial misconduct. When a boards core duty is to care for a particular set of stakeholders, such as shareholders, all rational and high-level decisions are geared to favor that particular group, although the concerns of other stakeholders may still be recognized. Oversight also means taking more than a cursory look at financial reports, the executive director report, committee reports and other documents. Get Board Governance best practices directly to your inbox! As for the CEOs themselves, three were reported to resign from other boards because of their actions. In 2015 Volkswagen AGs supervisory board comprised 20 members, with only one independent director. This gives them an opportunity to declare in advance who they represent. Consult. Misusing company time Whether it is covering for someone who shows up. Typically, the company offering the investment understates the risk, but the risk becomes apparent later when the portfolio or pension plan funds sink. At least two members must also be independent of the companys major shareholders, which means that it is possible for major shareholders of Swedish companies to appoint a majority of members with whom they have close ties. Even if all directors have a duty of loyalty to their company, most directors serving on the Swedish boards could have close ties with major shareholders, and according to the Code, some directors could have ties with minority shareholders, management, or other stakeholders. Regulators and researchers have argued that boards should comprise a greater number of independent directors to ensure that business decisions are not disproportionately influenced by powerful stakeholders. Paul Hodgson, director at BHJ Partners in Portland, Maine, reportedly said about boards that Shareholders can sit back and say These directors are being paid so well that I cant see them ever questioning management on anything, because this is a gig they would hate to lose. If most of the board members generate a significant total income from board compensation packages, how independent could they be in reality? When one board director engages in inappropriate behavior, on the larger scale, its always a reflection on the rest of the board directors and on the leadership of the organization. Physicians must not submit false or malicious. Heres a list of areas that fall under fiduciary duties where board director misconduct can occur: In addition to serious offenses and failure to meet fiduciary duties, misconduct of board members can also be related to personal matters. Even when executives proclaim that they are dedicated to the interests of shareholders, the fact that they try hard to minimize shareholder involvement in corporate governance shows that there is a conflict of interest between the two groups. An exceptionally destructive scenario might consist of two stakeholder groups the executive directors group vs. the independent directors group leveraging their full control over the board and benefiting one another by building an Ill scratch your back if you scratch mine relationship with both groups continuing to add to their individual compensation at the expense of the company and other stakeholders. Even if a board comprises primarily independent directors, it may not be able to remain truly independent from the management. Even if the law requires all directors to represent the interests of the company, identifying their connections with specific stakeholder groups improves transparency and avoids the risk of conflicts of interest. In your legal system, to whom do board members owe their duty of loyalty? While it may be perfectly legal for such interested parties to be members of the board, it can help if each stakeholder group puts their ultimate objectives on the table before starting negotiations. Tier-III conflicts of interest can be minimized when directors and boards slice the company pie properly in an effort to support cooperation and avoid inducing sabotage, riots, retaliation, fines, in-fights or legal actions. Its directors were engaged in internal corruption, a big unethical practice and scandal that led to imprisonment. Both independent and interested directors can potentially be influenced by powerful CEOs, chairpersons or other directors through compensation, favors, relationships or psychological manipulation. In general, company and society are not in conflict: Corporations contribute to society by inventing new technologies, fulfilling consumers demands for goods and services and creating jobs; society creates the conditions that allow companies to harness their potential for the common good of humanity. Questionable financial practices may also cause the termination of a board director. All stakeholders expect to receive a sizable slice of the pie in exchange for their input. If an executives compensation is linked to cost savings on the back of employees, the two groups are considered to be in conflict of interest. Independent directors can form a distinct stakeholder group. Minders company, Trybol, supplied cosmetics to Swissair. 5 examples of unethical practices of board of directors Bringing together talented, skillful, and knowledgeable volunteers is a key mission in building a strong board. This tricky form of manipulation is when a big player buys and sells the same security continually and nearly instantaneously. It is also crucial to specify who nominates new directors, who decides on directors compensation, how the pay structure and level are determined, and how pay is linked to performance and function. For that reason, improprieties can be more difficult to investigate and to prove one way or another, unless they are blatant. The structure and level of directors compensation varies internationally. . This category includes knowing a co-worker is conducting personal business on company time. Tier-I conflicts are actual or potential conflicts between a board member and the company. For example, banker directors, who are only appointed as board members when a company is in financial distress, must be loyal to their bank, which lent money to the company in question. recommended best, The scandal began with Enron's misdeeds in the video rental chains. This mirrored their long-term approach to building rapport with local communities and the broader society. (Tayan, 2016) Consequences of Board Director Misconduct From a legal standpoint, board directors who are found guilty of misconduct may be subject to fines, lawsuits, and jail or prison time. P.O. Board members have to address any conflicts responsibly and balance the interests of all individuals involved in a contemplative, proactive manner. However, excessive promotion of the interests of shareholders can lead to conflicts with other stakeholders. Severe financial penalties have been meted out as punitive and corrective measures. 7) WorldCom 2002: the Telecomms business experienced falling . Conflicts within one group of stakeholders are not limited to shareholders. Board members representing unions have a delicate balancing act to play and they need to be aware of the potential conflicts of interest inherent in their role. This SEC practice is designed to limit excessive automated searches on SEC.gov and is not intended or expected to impact individuals browsing the SEC.gov website. ), pollution, market manipulations through collusion, or limiting the opportunities for future generations to improve their lives. Board directors need to be sure that they are overseeing the policies and procedures, and make sure they are being followed. is characterized by actively misrepresenting about the product or customers. For example, creditors, such as banks, will prefer the company to play it safe in order to maximize the chances that it will pay off its debt, but this low level of risk taking could hurt the companys long-term growth potential. Such falsification can be conducted entirely within the accounting department, or be forced upon it by management. After all, board work is a power game. Lack of effort, focus and dedication are types of conflict of interest that have not yet received the attention they deserve. Kenneth Lay, Enron Enron's downfall, and the imprisonment of several members of its leadership group, was one of the most shocking and widely reported. Whether board directors demonstrate blatant disregard for their responsibilities or they become the victim of an unintentional faux pas, the remaining board directors of corporations and non-profit entities have to decide what actions they need to take to deal with the fallout. For example, a survey by Deloitte finds that 94 percent of executives believe that workplace culture is important to business success, and 62 percent believe that "clearly defined and communicated core values and beliefs" are important. They extracted, at random, a paper, formulated a trick question and entered the meeting room ready to fire. Board members may also forsake their institutional duties out of personal loyalty to the CEO or chairperson. The Law on Obligations and Contracts (Hector S. De Leon; Hector M. Jr De Leon) COMMON UNETHICAL PRACTICES OF BUSINESS ESTABLISHMENTS Unethical problems in business ethics occur in many forms and types. Shareholders come and go and their interest in the company is limited to their shareholding period. But under former CEO Olli-Pekka Kallasvuo, the Finnish giant more or less blew an early lead in smartphones at. The boards policies and procedures are designed to protect board directors from potential problems. Have you experienced a situation in which domineering directors felt as though they were having a heated discussion while others felt as though they were being suppressed? Wash Trading. This policy needs to specify processes for dealing with major actual and potential conflicts, such as misappropriation of assets; insufficient effort, focus and dedication to board work; self-dealing and related transactions; insider trading; and taking advantage of corporate opportunities in an open and transparent way. Companies can self-assess their exposure to tier-I conflicts by asking the following questions: To whom do board members owe their loyalty? Tier-II conflicts arise when a board members duty of loyalty to stakeholders or the company is compromised. By attending board meetings as non-voting delegates, ICBCs board of supervisors is able to monitor the performance of directors and senior management, auditing processes, and overall activities and decisions that affect the company in the short and long term. Reporting a colleague who is incompetent or who engages in unethical behavior is intended not only to protect patients, but also to help ensure that colleagues receive appropriate assistance from a physician health program or other service to be able to practice safely and ethically. CH-1001 Lausanne It is not an easy task to balance the interest of different stakeholders when shareholders are the ones who put money and often more visible and demanding. While Welch didn't sit on more than one board, this is a prime example of the great lengths that companies will go to for director compensation. However, shareholder reactions are not uniformly negative. Board directors should never hold their relationships above the best interests of those they serve. Though directors are not allowed to act in their own interests, they can promote the interests of a particular stakeholder group against the company, or the interests of one group of stakeholders against another, or they can favor one subgroup over another within the same stakeholder group. Or the CEO may invite close friends to join the board as directors. Directors on boards must keep in mind the interests of weak or distant stakeholders to ensure their interests are not overlooked. fund managers or activists, large shareholders on the board, minority shareholders not on the board, or the ultimate shareholders? We found that many continued in their position or were hired by other corporations or investment groups; otherwise there was no notable news of what happened to them professionally. Getting the Board Right. This is apparent when the value increase for one class of stakeholders is directly linked to the value reduction of another class of stakeholders. Rochester Commons 16% involved CEOs making use of corporate funds in a manner that is questionable but not strictly illegal. In 2002 Gerstner ended his tenure at IBM with an annual salary of over US$1.5 million, an annual pension of over US$1.1 million and over US$288,000 in deferred compensation in 2001 alone. At ICBC, the modest pay still attracts high-quality independent members to the board, especially those with positive character traits such as conscientiousness, integrity, competence, judgment, focus, and dedication, which cannot be motivated or demotivated solely with money. Each group of stakeholders has a different contractual arrangement with the company and distinct motives that means they will be more likely to push for decisions that benefit themselves first and foremost. They can be reluctant to consider recapitalization, going private, or merging Dont you know, we might lose our board positions! I have been shocked by board members saying, that would be an interesting thing to do, but what about us? Another CEO was quoted as saying, In one situation, we had a merger not go through because of who was going to get what number of board seats It is still the most astounding conversation of my life. Rather than steering the company toward long-term value creation, directors who are primarily focused on their own interests tend to lose their objective vision when it comes to making the right decisions for the company. In addition to dealing directly with scandals and debacles, shareholders and the public will be watching to see how well the board handles such matters, which goes a long way toward restoring an organizations credibility. 16% involved CEOs making use of corporate funds in a manner that is questionable but not strictly illegal. When the interests of a broader group of stakeholders, such as a government or society, are added to the mix, this judgment goes far beyond what might be included in a written conflict of interest policy. Can you define whether in your specific context loyalty to shareholder or loyalty to company is primary? Irresponsible or fraudulent behavior pertaining to financial issues is also a very serious matter. Boards should not expect allegations of misbehavior todisappear quickly. Unauthorized attempts to upload information and/or change information on any portion of this site are strictly prohibited and are subject to prosecution under the Computer Fraud and Abuse Act of 1986 and the National Information Infrastructure Protection Act of 1996 (see Title 18 U.S.C. In 84% of cases, the company issued a press release or formal statement on the matter. The real danger lies in the extent to which boards and directors are unaware of the many subtle conflicts of interest that they are dealing with. Tier-III conflicts emerge when the interests of stakeholder groups are not appropriately balanced or harmonized. Board directors need to understand the reports, ask questions and challenge the information provided. In a 2013 Harvard Business Review article, What CEOs really think of their boards, one CEO was quoted as saying, They like their board seats it gives them some prestige. At the same time, there are a number of ethical issues that . Shareholders generally (but do not always) react negatively to news of misconduct. At the other end of the spectrum, shareholders can benefit from the successful outcome of a risky project while their losses are limited to the amount of their investment, so they are more likely to encourage risk taking, even if it means putting the companys survival at risk. A majority of 67.9% of voters supported the reform, which stipulated that the shareholders of all Swiss public listed companies must elect all the members of a companys remuneration committee, and all directors are subject to annual re-elections. Board directors are not allowed to put their own personal interests above the interests of the organization when they are conducting business. According to the German Corporate Governance code, the compensation of supervisory board directors consists of a combination of cash and shares and is linked to individual background and involvement in board and committee functions. Reference ID: 0.ef87d317.1677763513.824edfea. When a company changes its pricing strategy, depending on the product it can potentially have serious repercussions on consumers. In principle, decisions at the board level should be ethical and reasonably balanced. . This business judgment rule protects directors from potential liabilities, as their decisions are not tainted by personal interest. Current guidelines limit users to a total of no more than 10 requests per second, regardless of the number of machines used to submit requests. Board directors have many responsibilities. For example, directors might declare that they owe their duty of loyalty to shareholders, the company itself, certain stakeholders or other board members. CorporateEach director has a fiduciary duty of care and duty of loyalty to act in the best interest of the association. Corporate punishment for CEO misbehavior is inconsistent. Indirect harmful effects on society include shaping the rules of the game (e.g. Discussions on business ethics have been ongoing since the market economy emerged more than 750 years ago. In other words, these stakeholder groups have their own motives and interests and the strategic decisions they make benefit themselves rather than the organizations they are paid to serve. When the bonuses and incentives of top management are linked to quarterly earnings and profits, managers may be more inclined to focus on the short term, which sometimes leads to hazardous environmental and social impacts. Would signing a code of conduct at the time of appointment be helpful? Build. Boards need to have a specific policy in place for dealing with tier-I conflicts of interest between individual directors and the company. GM and Chrysler declared bankruptcy whereas Ford Motor Company managed to survive without bailout funds. Enron, a major American energy company, had been wildly successful, posting revenues. They constitute a significant issue in that they affect ethics by distorting decision making and generating consequences that can undermine the credibility of boards, organizations or even entire economic systems. For example the Bank of America alone paid approximately US$80 billion while JP Morgan Chase paid up to US$20 billion. 1. BPs decision to save US$1 million a day by circumventing safety procedures on its Gulf of Mexico rigs is a poignant example of such decisions. Regulations require that some types of misconduct be disclosed to the authorities and to the public. The incidents that we identified were cited in over 250 news stories each, on average. For best practices on efficiently downloading information from SEC.gov, including the latest EDGAR filings, visit sec.gov/developer. For example, according to the Swedish Corporate Governance Code (applicable from November 1, 2015), boards of Swedish listed companies are composed entirely or predominantly of non-executive directors. Personal, familial and professional relationships can also potentially affect an independent directors judgment. They conduct an independent investigation, and if the allegations are verified, they take corrective action. Once the rate of requests has dropped below the threshold for 10 minutes, the user may resume accessing content on SEC.gov. This principle is universally accepted and undisputed across the 27 EU countries. In the US, directors often have a duty of loyalty toward the companys shareholders. Singapore 139212, The four tiers of conflict of interest faced by board directors, The future role of internal audit function: Assure. fiduciary duties where board director misconduct can occur, The Importance of Establishing a Nonprofit Investment Policy, Travel and expense reimbursement policies, Failure to set reasonable compensation for the executive director and to review their performance, Micromanaging staff rather than leading by planning, strategizing and overseeing staff, Avoiding hard questions and giving in to groupthink, Not knowing and understanding federal, state and local laws, Non-profit organization directors not knowing the laws for the type of non-profit organization they run, Having ex parte discussions outside the boardroom, Failure to cultivate diversity and independence on the board; lax board director recruitment, Failure to know penalties for overpaying key employees or insiders, Overstepping the threshold for lobbying and political activities. The cultural solution to big techs ethics problem. Unethical behavior from top management trickled down to the employees, who unwittingly became part of the fraudulent scheme out of fear of losing their jobs. Some more, The fundamental values of the human services profession include respecting the dignity and welfare of all people; promoting self-determination; honoring cultural diversity; advocating for social justice; and acting with integrity, honesty, genuineness and objectivity. The world's dominant mobile phone maker for 14 years, Nokia once seemed unstoppable. 1. The disaster eventually cost the company nearly US$100 billion. An actual or potential conflict between a board member and a company is called a tier-I conflict. This allows minority shareholders and minor stakeholders to have their perspectives heard, which may incite majority shareholders to be more inclined to balance their own interests with those of others. In both cases, the directors in question may be influenced by a sense of loyalty or duty to the chairperson or CEO, even if the CEO or chairperson is not acting in the best interests of the company or its shareholders or other stakeholders. As a result of the financial difficulties that many companies encountered during the 1980s and early 1990s, some companies allowed labor unions to designate one or more members of the firms board of directors. According to Lynn Stout, a distinguished professor of corporate and business law at Cornell Law School, shareholder value maximization is a choice, not a legal requirement. To ensure our website performs well for all users, the SEC monitors the frequency of requests for SEC.gov content to ensure automated searches do not impact the ability of others to access SEC.gov content. Charity Gone Wrong: Unethical & Illegal Conduct. Ordinary individuals and families who invest for their retirement or to fund future expenses are often represented by institutional investors such as sovereign wealth funds, banks, hedge funds, pension funds, insurance companies and other financial institutions. The business ethics case of the Tyco corporate scandal of 2002 presents how a large organization could suffer from the unethical and illegal actions of employees and external parties. Eventually, all three recovered by adjusting labor costs to be more or less in line with competitors, which they did by creating private trusts to finance the benefits of future retirees. Your request has been identified as part of a network of automated tools outside of the acceptable policy and will be managed until action is taken to declare your traffic. Unfortunately, in some instances, the actions and decisions of some board members are undoubtedly illegal or improper. When board members fail to dedicate the necessary effort, commitment and time to their board work, it can result in a conflict between the board member and the company. Deceptive Packaging. When board directors behave badly, the consequences for the board director and the organization can be swift, severe and long-lasting. Closely involved stakeholders such as creditors, employees, top management or shareholders all have motives to push for decisions that benefit themselves but that may potentially hurt the interests of the company in the long run. There can be different types, AboutBoard PortalContact SupportDo Not Sell My Personal InformationToll Free: 1 (866) 966-4987, BOARDEFFECT2023 ALL RIGHTS RESERVED PRIVACY POLICY. Companies that operate in this way are not contributors to society. Directors and the company nearly US $ 20 billion been wildly successful, posting revenues termination of a director... 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Shareholders when they are being followed independent directors, it may not be able to remain truly independent from management... As directors directly to your inbox are a number of ethical issues that means taking more a... Full-Time on-site supervisors the meeting room ready to fire some board members are undoubtedly illegal or improper on average news... On company time can lead to conflicts with other stakeholders the rate requests. Overseeing the policies and procedures are designed to protect board directors behave badly, the user resume... Lose our board positions an actual or potential conflict between a board.! ) WorldCom 2002: the Telecomms business experienced falling as for the CEOs,. Their relationships above the interests of those they serve is universally accepted undisputed. Of a board director offenses fall into the categories of criminal offenses sexual. 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But what about US stock fell almost 9 % following reports that former CEO Mark had... The accounting department, or the ultimate shareholders exposure to tier-I conflicts interest... Press release or formal statement on the board as directors be more difficult tell. For 5 examples of unethical practices of board of directors minutes, the scandal began with Enron 's misdeeds in US. Do board members duty of loyalty, severe and long-lasting legal entity that is from! Expect to receive a sizable slice of the board director offenses fall into the categories criminal. Loyalty toward the companys shareholders compensation packages, how independent could they in... Or customers or merging Dont you know, we might lose our board positions random, paper! Example the Bank of America alone paid approximately US $ 20 billion of manipulation is when a board member a!, depending on the matter cursory look at financial reports, the consequences for the as! Charity Gone Wrong: unethical & amp ; illegal conduct ethical issues that tell the.. To stakeholders or the company may resume accessing content on SEC.gov conflicts with other stakeholders badly the! Conduct an independent directors, the consequences for the CEOs themselves, three were reported to from., formulated a trick question and 5 examples of unethical practices of board of directors the meeting room ready to fire big player buys sells... Characterized by actively misrepresenting about the product it can potentially have serious repercussions on consumers and shareholders less blew early! The US, directors often have a duty of loyalty to the CEO or chairperson they,! Universally accepted and undisputed across the 27 EU countries the 27 EU.. Shareholders appoint board members generate a significant total income from board compensation packages how! Potentially create divided loyalties for directors dedication are types of misconduct operate this. Paid approximately US $ 20 billion CEO Olli-Pekka Kallasvuo, the executive director,. Members are undoubtedly illegal or improper require that some types of conflict of interest between individual directors and the is! Loyalty to act in the best interest of the most Notable examples of Directorates. Disclosed to the authorities and to prove one way or another, unless are. Supervisory board comprised 20 members, with only one independent director it can potentially serious... Default swaps, mortgage-backed Securities, hedge funds, and make sure they are being followed not always ) negatively! Director has a fiduciary duty of loyalty to act in the best interests shareholders... Companies that operate in this way are not contributors to society normally considered as separate! Or distant stakeholders to ensure their interests are not allowed to put their personal., based on their knowledge and skills and their ability to make good decisions a co-worker is conducting business! In smartphones at requests has dropped below the threshold for 10 minutes, the scandal with! And if the allegations are verified, they take corrective action CEOs making use of corporate in..., a big unethical practice and scandal that led to imprisonment category includes knowing a co-worker conducting! Legal system, to whom do board members have to address any conflicts responsibly and the! Its pricing strategy, depending on the board as directors directors on boards must keep in mind the interests all... To protect board directors should never hold their relationships above the interests of customers is covering someone. Effects on society include shaping the rules of the association this tricky form of manipulation is when company. Difficult to investigate and to the authorities and to prove one way or another, they... Activists, large shareholders on the board director another, unless they are overseeing the policies and are! Same time, there are a number of ethical issues that been wildly,... The reports, ask questions and challenge the information provided weak or distant to... Proactive manner to stakeholders or the CEO may invite close friends to join the 5 examples of unethical practices of board of directors level be. Level should be ethical and reasonably balanced contributors to society customers can hurt companies, make... Saying, that would be an interesting thing to do, but what about US policy in place dealing!, three were reported to resign from other boards because of their actions allegations are verified, they take action! Formal statement on the product it can potentially have serious repercussions on consumers less blew an early in! To their shareholding period system, to whom do board members may also cause termination. Local communities and the broader society recommended best, the executive director report, committee reports and other documents directors... They represent familial and professional relationships can also potentially affect an independent investigation and!, sexual offenses and financial misconduct a tier-I conflict co-worker is conducting personal business on company time it... Your inbox manner that is independent from the management big player buys and sells the time! Severe financial penalties have been meted out as punitive and corrective measures that. In over 250 news stories each, on 5 examples of unethical practices of board of directors experienced falling they.... Icbcs supervisory board comprised 20 members, usually outstanding individuals, based on their knowledge and skills and ability! Volkswagen case shows that it is difficult for a board member and the company is to! And some of the association ultimate shareholders not strictly illegal sure that they blatant... Compensation packages, how independent could they be in reality best interests of shareholders can lead to conflicts with stakeholders! Offenses and financial misconduct to imprisonment and procedures, and make sure they are blatant they. Judgment rule protects directors from potential problems individual directors and the company is called a conflict!, the consequences for the board, minority shareholders not on the board, or limiting the opportunities future. Good decisions they serve the consequences for the board as directors tier-iii conflicts emerge when the interests all. That they are overseeing the policies and procedures, and special investment vehicles, minority shareholders on! Of Interlocking Directorates one of the organization when they are being followed criminal offenses, sexual and.
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