Summary: Pursuant to a congressional request, GAO analyzed an agreement to limit a Department of Energy (DOE) contractor's parent company's profits from an affiliated venture firm's investments in companies that are commercializing DOE-developed technology, or companies in which contractor personnel are involved as consultants, investors, or employees.
GAO noted that: (1) the agreement requires the parent company to report annually to DOE, beginning on March 31, 1987, on its total investment in, and return on investment from, the affiliate firm and its venture companies; and (2) it could not determine precisely how the agreement would work, since the parent company had not submitted its first annual report to DOE. GAO found that the agreement: (1) is intended to reduce incentives for favoritism and avoid perceptions of organizational conflict of interest; (2) establishes a ceiling on the parent company's return-on-investment from venture companies; (3) does not specify what action DOE may take or what sanctions it may impose if the parent company does not abide by the agreement's terms; and (4) does not give DOE access to financial information it needs to determine that the parent company's annual report is accurate and complete. GAO also found that the parent company could retain excess earnings from venture companies indefinitely within the context of the agreement by: (1) increasing investments in nonlimited companies to offset returns from successful limited companies; (2) selling ownership in successful companies after the agreement terminates; and (3) using certain nonequity forms of investment, such as warrants, to avoid the agreement's limits.
