Conflict of Interest Blog

The Trump Conflict-of-Interest Mess

Donald Trump’s announcement last week that his steps to address his conflicts of interest will not include divestiture of his holdings presumably surprised no one. But it is still very big news, which, in my view, has important implications for the country – and not just in the COI realm.

Trump’s apparent reason for this decision is that given the nature of the holdings any divestiture would be very disadvantageous to him financially. I have no reason to doubt that point. Trying to liquidate his interest in the Trump Organization would be, without question, much harder to do than selling publicly traded stock – and would subject him to a very sizable “haircut.”

But, as others have pointed out, as Commander in Chief, he will be asking US military personnel to risk making sacrifices far greater than those he is willing to require of himself.  Indeed, in other contexts – particularly dealing with climate change and the escalating national debt – any meaningful solutions will require some degree of sacrifice by millions of Americans.

The lack of ethical leadership shown by the President Elect on COIs could indeed weaken efforts to deal with a wide range of grave challenges requiring sacrifice that the country faces. To me this is potentially the greatest harm from his decision. (For more on the link between morality-based sacrifice and the success of human societies see Jonathan Haidt’s The Righteous Mind.)

Still, while I disagree with where Trump comes out on divestiture there is at least a logic to it. But the explanation given for the closely related issue of his refusal to release his tax returns – that being under audit prevents him from taking this step – is simply false.

A lesson I learned as a young criminal defense lawyer which has served me well as an older C&E lawyer is that if a good reason can’t be given for something then the real reason is usually a bad one. Of course, this isn’t always the case (as behavioral ethics has demonstrated).  But it is true enough to ask – particularly when viewed in light of his decision to not divest – if Trump is hiding something damaging by not releasing his tax returns.

Regardless of what his reason actually is, a presumption of guilt will  – based on his false explanation –  likely shape the perceptions of his deals, holdings and business partners that are already known and those that emerge from what will doubtless be an endless voyage of discovery by investigative journalists. The loss of trust at risk here will be harmful not only for Trump but also the country as a whole, in the same way that Watergate was harmful.

A gloomy forecast, indeed – particularly given that this condition may well last for four years. But what does it mean for the C&E practitioners who are most of the readers of this blog?

I’d like to think nothing – and to assume that this can all be relegated to the realm of politics, which is far off and distinct from that of the business world, which is largely my focus. But we cannot ignore the warning of Justice Louis Brandeis: “Our government is the potent, the omnipresent teacher. For good or for ill, it teaches the whole people by its example.” While Brandeis was speaking about violations of law (which Trump’s decision on COIs does not involve) the point seems just as applicable to ethics.

Ethics advance…or decoy?

While COI aficionados (not to mention concerned citizens) await the President Elect’s plan to mitigate his conflicts of interest, there is interesting ethics  news regarding his nominee for Secretary of State, Rex Tillerson, CEO of ExxonMobil.  As described in today’s NY Times, in addition to selling ExxonMobil stock he owns outright to avoid a COI, “a more complicated task involved resolving the fate of two million shares of ExxonMobil stock, worth about $180 million, that Mr. Tillerson was set to receive over the next decade. If he held on to this promised future payout from ExxonMobil, he would still have a financial interest in matters that might affect the company and the oil industry. So ExxonMobil agreed to take the unusual step of paying out the value of these sales and putting the money into an independent trust, with the money invested in neutral assets like Treasury bonds and mutual funds. Under the terms of the agreement, if Mr. Tillerson, 64, goes back into the oil industry during the next decade, he will forfeit any money left in the account.”

With respect to this forfeiture provision, Richard W. Painter, a White House ethics lawyer during the administration of President George W. Bush, told the Times that it “was unusual and positive, as it removes the incentive for him to take steps while in government that might benefit an industry he planned to return to work for upon his departure. ‘It gives up something I had never been able to get from other government officials — a promise not to go back to an industry from which you came,’ Mr. Painter said.”

There is, however, a more negative way of looking at the agreement – one that focuses not on the forfeiture provision but rather on the payment for the loss of the restricted stock itself. As noted in  this article by Climate Central: What makes the Tillerson deal unusual is that ExxonMobil has agreed to provide him with benefits it had no legal obligation to provide. ‘This was not a clause in his employment contract that was triggered,’ Stanford law expert Michael Wara said. ‘It’s a special arrangement of massive economic significance to Tillerson that was given to him purely because of his move into government…’ Wara described the arrangement between Tillerson and the ExxonMobil’s board of directors as a legally questionable ‘sweetheart deal.'”

Viewed  through this lens the forfeiture provision is not praiseworthy but should be seen as  an ethics decoy. In this view, it is a clever way of distracting attention – at possibly little real cost to Tillerson  (given that he may have no interest in ever going back to the oil industry) – from a questionable payment of a magnitude that would  engender gratitude in all but the most hard hearted of recipients.

Note, however, I am not 100 % sure that the sweetheart deal analysis is correct. I say that because while I read quite a few press accounts of the Tillerson agreement this article was the only one to make the point.  And, since I’m not an employment lawyer I don’t feel like I know enough to make a judgment on this point based on the agreement documents alone.

But what does seem certain from the Climate Central article is that, in addition to the traditional COI problems, there are other reasons for concern about Tillerson’s impartiality on issues facing oil companies: “‘I want to see some questions at the confirmation hearing about how much those oil companies are going to be coming around and chatting him up,'” ethics attorney Painter said. “‘Are there going to be cognitive biases and personal loyalties?'”

In sum, a mixed bag.  The forfeiture provision does seem like a genuinely important advance in the state of the art regarding forward looking, revolving door conflicts. But the payment for restricted stock could be a powerful backward-looking COI – particularly when coupled with the COI-like bias and loyalty concerns identified by Painter. Rather than passing judgment on which view seems more right to me, I’ll fall back cryptically on  the life philosophy espoused long ago by a Doonesbury character who described himself as cynical but eternally optimistic.



Asking a good question

The late Nobel Laureate in physics Isidor I. Rabi once said: ”My mother made me a scientist without ever intending it. Every other Jewish mother in Brooklyn would ask her child after school: ‘So? Did you learn anything today?’ But not my mother. She always asked me a different question. ‘Izzy,’ she would say, ‘did you ask a good question today?’ That difference – asking good questions – made me become a scientist!”

Asking good questions can also help companies promote compliance and ethics.

In The Road to Character, David Brooks notes that he once met an employer  who asked every job applicant: “’Describe a time when you told the truth and it hurt you.’”  This is, to my mind, a good C&E-related question, as it can help identify those who practice, as well as preach, ethical behavior. It also reminds those asking the questions about the importance of C&E to the organization. A frequently used variation on this question is: “Describe an ethical challenge you’ve faced and how you dealt with it?”

Of course, employment interviews are not the only setting in which it is important to ask good C&E-related questions. Another is employee engagement surveys, in which one commonly sees questions about relative comfort in reporting violations and perceptions of the ethicality of the organization’s management.

These are good topics for questions, and I think every company that fields an employee engagement survey should use them. But my favorite question of this sort  comes from a survey conducted by the Economist (discussed here), which measured respondents’ perception of the need for ethical flexibility to advance one’s career within an organization.  What I particularly like about this question is the focus on flexibility – which may be easier for respondents to admit to than asking outright about their engaging in  ethical transgressions.

Yet another setting for asking C&E questions is the compliance audit. While most of what is done in C&E audits revolves around document reviews, interviewing employees can be part of the picture as well. Among the topics that should be considered for such questioning: Does the interviewee think that the company’s training is effective? In addition to producing useful information about training itself, posing this question may make it easier for employees to identify concerns about risks and actual violations. I.e., like the question above about ethical “flexibility,” questions about C&E training may offer a “soft” way of approaching a “hard” topic.

Moreover, questions about training can be asked  not only in audits but as part of (and typically at the end of) the training itself.  One possibility here is to ask whether after the training the employee now feels that she understands how the company’s compliance program applies to her job – again, a variation on the “soft” question approach.

Finding the right question can also be important in developing a C&E-component to a company’s exit interview template. Options include general culture questions, such as how do you rate our company as a values and ethics driven employer – with an opportunity to say why; specific questions about key aspects of the program, such as whether the departing employee understood all the options for reporting concerns; and, of course, asking whether the employee was aware of any unreported concerns.

I should stress that this post is not intended to cover the whole world of asking C&E-related questions.  Among the areas not addressed: the importance of Q&A in codes of conduct and approaches to asking questions in risk assessments.

Finally, to an extraordinary degree, boards of directors can have the power to impact a C&E program simply by asking the right questions. Here (on page 2 of the PDF) is an article which offers not actual questions but topics that boards can turn into questions in overseeing their respective companies’ C&E programs.

Domestic bribery and code of conduct waivers

It was – at least according to this Blog – the most interesting COI story of 2015 (as of February of that year): the head of the New York/New Jersey Port Authority (the PA)  – David Samson – had persuaded United Airlines to reinstate a money-losing route that was convenient for his personal use in return for his giving them favorable treatment on certain PA matters. But what has happened since? And what can C&E professionals learn from it?

In July of 2016, Samson “pleaded guilty to one charge of bribery for accepting a benefit of more than $5,000 from” the airline. “At the same time, United–which was not criminally charged–agreed to pay a fine of $2.25 million and pledged to institute ‘substantial reforms’ to its compliance program.”  And earlier this month the airline settled related charges with the Securities and Exchange Commission.

Above all, that settlement – which involved violations of the FCPA’s books-and-records and internal accounting controls provisions – is a reminder that an effective anti-corruption compliance program must be addressed to domestic  bribery, as well as the foreign kind. In that regard, it is worth remembering that the US is not at or near the top of the Transparency International Corruption Perception Index: it is tied for 16th. And for certain parts of the country – including New Jersey, where Samson worked (and I live) – the picture is worse.

Yet, in my experience some companies don’t address domestic bribery risks with the same rigor that they do foreign ones – even those involving “cleaner” countries than the US.  So, this settlement may be a useful opportunity for companies to consider whether their anti-corruption policies and procedures – including risk assessment – are sufficient to address domestic bribery.

Less significant but perhaps more interesting to C&E practitioners is the SEC’s discussion of the issue of code of conduct waiver – and specifically the failure to get a waiver of the code’s gift provision in connection with the reinstatement of the unprofitable route. The SEC noted that a companion document to the code had provided that: “exceptions would be granted only in accordance with the following procedure: Generally, requests for exceptions must be submitted in writing to the Director – Ethics and Compliance Program.  Approvals for an exception will also be in writing and must be obtained in advance of the action requiring the exception.”  Yet “no one at United sought a waiver of United’s Code of Business Conduct prior to initiating the … Route for Samson’s personal benefit. Nor did anyone at United seek or obtain an exception to Continental’s Ethics and Compliance Guidelines [which was still in effect following the merger of the two carriers]  prior to initiating the … Route. As a result, no written record reflecting the authorization for the … Route was prepared or maintained, as required by United’s Policies.”

Code of conduct waiver-related requirements are based on, among other things,  rules of the New York Stock Exchange and SEC . They derive,, to some extent, from the Enron case.  Yet in recent years I’ve heard very little about them. That may be because the NYSE and SEC standards apply to a narrow band of senior officials at public companies. Yet waiver requirements can go beyond this, as United’s ostensibly did.

So, is there any takeaway for C&E professionals from this aspect of the United case? One idea would be to include questions about waivers in audit interviews – which might pick up information that a question about violations might miss. A second is to include a discussion of waivers in training boards and senior executives – who may have at one point known the Enron-related origins of the waiver provision requirement but have likely forgotten this piece of C&E history.

Finally, for those revising their codes of conduct, one might consider requiring that waivers be granted only upon a clear showing that doing so would be in the best interests of the Company – and that all meaningful circumstances surrounding a waiver be documented in a complete and accurate way. Indeed, given that the SEC has taken the occasion of the United case to speak about code waivers, this is an area where companies should take a moment to make sure they are doing everything right.

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Why conflicts of interest matter – it is both the incentives and disincentives

Yesterday Paul Krugman had a great piece in the NY Times on Why Corruption Matters. With the COI Blog about to have its five-year anniversary, and with COIs in the news as never before (thanks to the President Elect), it seems worth asking the same question of conflicts of interest. After all, corruption can be seen as one type of COI (albeit a particularly sinister type).

Krugman’s central point is that the harm of a corrupt act cannot be measured solely by calculating the benefit to the wrongdoer. Rather, he notes: “It’s not the money, it’s the incentives. True, we could be talking about a lot of money — think billions, not millions, to Mr. Trump alone (which is why his promise not to take his salary is a sick joke). But America is a very rich country, whose government spends more than $4 trillion a year, so even large-scale looting amounts to rounding error. What’s important is not the money that sticks to the fingers of the inner circle, but what they do to get that money, and the bad policy that results.”

I agree with Krugman, but – at least as far as COIs are concerned – would offer a friendly amendment that the harm is not only in the incentives but also in the disincentives. What I mean by that is explained in one of the earliest posts in this blog (which looked at COIs broadly – not just those arising from government service):

How much does it matter that organizations, individuals and governments pay close attention to identifying and mitigating conflicts of interest? One way to answer this question is to consider – as I ask students in my business school ethics class to do – what the world would look like without such focus and sensitivity. Below are some of the observations that I have heard from them over the years.

In “Conflict of Interest World,”

– Individuals might be reluctant to take the medicines that their doctors recommend for fear that those recommendations are motivated more by the doctors’ financial relationships with pharma companies than by the patients’ well-being.

– Individuals and organizations might not use financial advisors for fear that the advice they receive is driven by hidden, adverse interests – and would instead devote otherwise productive time to trying to become their own financial experts, resulting in a significant misallocation of capital as well as time.

– Organizations could hesitate to take a wide range of everyday actions for which they need to trust their employees and agents to do what’s right by the organizations – or would proceed only with highly intrusive and costly surveillance-like measures in place.

In short, Conflict of Interest World is a place of needlessly diminished lives, resources and opportunities.

Additionally, from the perspective of “normative compliance” – an important concept in the C&E field which will be addressed in future postings – in Conflict of Interest World legal and ethical standards beyond those that are COI-related would be weakened, too.

 Bottom line: a short visit to this unhappy imaginary world – a place of “all against all” – is reminder of the vital role that sufficient attention to COIs play in our very real world.

Five years later the importance of trust to our society and the threat that COIs present to it are – to my mind – greater than ever before. While each type of COI – including those facing the President Elect – must be identified and dealt with appropriately,  I view the need for upping our COI game generally as being larger than the sum of the relevant parts. The goal is a society where individuals can trust others – both leaders and fellow citizens – to act in ways that are motivated by the common good and not individual or parochial interests.

One can identify many areas for which having such trust can be essential for success. Most prominently, dealing effectively with climate change will require millions of people around the world to trust one another in the design and execution of solutions to this grave peril. That may be the greatest reason of all to care about conflicts of interest.

Trump Princelings?

The most recent post on this blog concerned the possibility of President Elect Trump putting his assets in a trust which would be managed by his children to avoid conflicts of interest that could arise from his management and ownership of such assets while in office. Since then an unrelated legal development has occurred which further underscores the challenge facing Trump: the announcement that JP Morgan was settling the “Princeling” case, which involved the bank’s hiring the sons and daughters of important Chinese officials in return for business. The case (which will likely be followed by others of its sort) is a timely reminder that helping one’s children can inspire corruption – and not just in China.

A famous instance of this sort from the 1980s concerned the hiring (by a former Miss America) of a NY judge’s daughter to influence the judge’s decision on a pending case. And then there are the immortal words of the first Mayor Daley who, in speaking to colleagues on the  Cook County Democratic Committee, defended his having directed a million dollars of insurance business to an agency on behalf of his son John by saying: “If I can’t help my sons, then [my critics] can kiss my ass. I make no apologies to anyone.”

Indeed, helping one’s children might  be a more powerful source for wrongdoing than is pure self-centered greed, for the very reason that it seems to spring from a sense of duty. (An old saying goes that if you’re not stealing from your company you’re stealing from your family.)

Note that I’m not suggesting that Trump would use his influence to get jobs for his kids or direct government business to them. But if they are running his far-flung, secretive and complex business empire  he will have plenty of opportunities to use his influence to benefit them.

None of this means that Trump’s children are destined to serve as “princelings.” I should also stress that I have no reason to think they would do anything unethical. Seriously.

Rather, the focus of this post (and indeed this blog generally) is more about structures and circumstances than it is individual personalities. In effect, the princeling analysis is part of risk assessment, even if it is speculative; it is not an accusation.  More specifically, the JP Morgan case reminds us that in designing (or agreeing to)  an approach to address the COIs relating to his assets, Trump needs to  have procedures that will help  avoid not only direct COIs but those involving his sons and daughters as well – and give the public comfort that those procedures are up to the task at hand.

A conflict of interest monitor for President Trump?

The past few days has seen a near avalanche of news stories on the looming conflicts of interest that will arise from Donald Trump’s being President while being the owner of a wide range of real estate and other interests. There has never been anything like it in the history of the Presidency, and the solution suggested by the President elect – having his children assume management of his interests – would do little to mitigate the conflicts (since he would still know which properties he owned and could use his official power to benefit such properties).

One solution I haven’t seen proposed is the use of a special monitor to help identify COIs facing the President and assure that they are dealt with appropriately. Monitors have been used for decades to assure ethical conduct in a variety of settings, such as public sector construction projects or the operation of companies after a criminal conviction. While novel (I think), a monitor of the sort suggested here might go a long way to mitigating both the actuality and appearance of COIs.

Of course, Trump might resist what he could see as a stigmatizing implication of such an arrangement, but the monitorship needn’t be viewed in a negative light. After all, COIs are not inherently bad – rather, they are circumstances that create the possibility of something bad happening, unless mitigated in an effective manner.

Such a monitoring arrangement could be challenging in other ways, too. For example, the monitor would presumably need to report to the public periodically on her findings and recommendations – but at the same time protect the legitimate privacy interests of the Trump family and their fellow investors.

For this and other reasons it wouldn’t be easy. But what’s the alternative? A government in which – to modify words attributed to the late Leona Helmsley – ethics would be seen as only “for the little people.” Both for the country itself and Trump’s success as President that would be substantially worse than the inconveniences of a COI monitorship.

Conflict of interest certification best practices

As noted in an earlier post, the Ethics & Compliance Initiative has recently published a COI best practices report written by a research working group which I co-chaired (along with Mark Snyderman of Laureate Education). Here are some of the report’s findings and recommendations on the important topic of COI certifications (“COIC”):

– Using a written COIC instead of simply requiring disclosure

– Including a section about the COIC requirement in the organization’s code [of conduct]

– Providing guidance and training to assist employees in completing the COIC

– Dedicating resources to respond to COI questions and address issues related to reported potential conflicts, including coordination within the organization’s control groups such as HR, E&C, and legal, and protecting the confidentiality of COIC responses

– Requiring new hires to sign or complete a COIC

– Evaluating the need for additional customized COICs (i.e., COIC specific to risk area or employee group)

– Distributing a COIC annual report or summary to senior executives and governance committee(s)

– Retaining and storing completed COICs in accordance with the organization’s record retention policy

– Establishing expectations and a schedule for periodic recertification (semi-annual, annual, ad hoc self-reporting).

Of course, to most C&E professionals some of these will be fairly obvious (e.g., periodic recertification) but others of may not be (such as the recommendations concerning the COI annual report or customized COICs). And hopefully, having a list of this sort itself will be useful to those launching or revisiting COI certifications for their respective companies.

Finally, some earlier posts on certifications can be found here  and here.

A silver anniversary for a golden rule

Last week saw the 25th anniversary of the Corporate Sentencing Guidelines – which, more than any other legal development, gave rise to the Age of Compliance.

In my latest column in Compliance and Ethics Professional (page 2 of PDF) I celebrate this happy occasion.

Reverse behavioral ethics

I am a member of LinkedIn and for the past few months have periodically received a message saying: “2 people in your network are using LinkedIn Sales Navigator to be more effective.” Given that I have – as I assume is the case with many members – more than 500 people in my network (most of whom I don’t actually know), this piece of information may be less persuasive than LinkedIn presumably intends it to be. Indeed, the apparent strategy of telling all members about how many in their network are using “Sales Navigator” – regardless of how small that number is – might actually be hurting Linked In.

As described on the Ethical Systems website,  the work of Professor Robert Cialdini has shown that communicating how many people are engaged in undesirable activity can increase that number by suggesting that “everyone is doing it.” I imagine the same dynamic applies to communicating how few people are engaged in desirable conduct, i.e., what LinkedIn is doing.

But this dynamic can also be a force for good, including compliance-related good. As described in this 2012 article from Reuters: “Applying [Cialdini’s] insight, the British tax agency, Her Majesty’s Revenue and Customs (HMRC), has tested different form letters on delinquent taxpayers. In one letter, this sentence – ‘Nine out of 10 people in the UK pay their tax on time’- increased positive response by 1.5 percent. Adding another sentence – ‘You are one of the few who have not paid us yet’ – raised the success rate 3.9 percent. HMRC also found compliance rose 6.8 percent when taxpayers were told they were one of few delinquents in their hometowns.”

Of course, LinkedIn would presumably love to be able to have statistics like these to use in promoting Sales Navigator. But in the absence of such it might be better to say nothing on the subject, and follow the old adage to “always tell the truth but don’t always be telling it.”

For compliance and ethics people, the opportunities to tell the truth in an effective way may be numerous. Among other areas, the good news can concern code of conduct certifications, training completions, conflict of interest disclosures, helpline use and audit results – as some companies have already found.  But the first rule for all in the persuasion business – which includes C&E professionals, as well as marketers –  is to do no harm.