Conflict of Interest Blog

Investigation manuals

An article in  C&E Professional on drafting investigations manuals.

I hope you find it useful.

This is a test

In Testing Compliance, (published on the Harvard corporate governance web site, with the full paper available at SSRN), Brandon L. Garrett. Professor of Law at Duke Law School, and Gregory Mitchell, Professor of Law at the University of Virginia School of Law, note that “what makes the compliance enterprise deeply uncertain and problematic is that the information generated by compliance efforts is simultaneously useful and dangerous. However, documenting problematic behaviors creates a record that may be used against the corporation in future administrative, criminal or civil proceedings, or may become the subject of a media exposé. Officers and directors, and the in-house compliance team, may sincerely hope compliance programs are effective, but they may quite rationally avoid testing that hope. The end result will often be rational ignorance with respect to the effectiveness of corporate compliance programs. This dynamic—the hope that greater attention to compliance will reap benefits drives more resources toward compliance efforts, yet fears about what examining the effects of those efforts might reveal hinders validation of compliance programs—creates a ‘compliance trap’ that can ensnare corporations and regulators alike.” The authors  “explore ways out of this trap.”

Among other things:

– They argue for government policies to promote more information sharing by companies about what works and what doesn’t in terms of C&E. While there is already some such sharing via compliance conferences and though various professional organizations there is clearly room for improvement here.

– They also note, based on compliance information published by Fortune 100 companies, that if such companies “are measuring the effectiveness of their compliance programs, they are not sharing it. It is also possible that what we see is what we get: active educational efforts focused on employee training and assessments of that training using employee surveys and reactive compliance efforts relying on whistleblower reporting and investigation of those reports. The public record reveals few active efforts to detect and remedy weaknesses within internal compliance systems.” I agree that sharing of this kind could be a powerful force in promoting strong C&E.

– They propose instituting a “legal mandate that organizations regularly test their compliance systems for effectiveness. But to incentivize companies to put in place strong compliance programs and audit those programs rigorously, the mandated reports should not increase their litigation exposure. ” I think implementing legislation to help companies avoid the “compliance trap” in this way would be very beneficial, though getting to such a safe place would – in my view – be a lengthy and difficult journey.

– They note: “Companies need to proactively test whether their employees, when given the chance to misbehave, really do. Such testing need not involve comprehensive data collection or expensive analytics, although firms increasingly use such tools, and consultants may market AI approaches to compliance. Rather, experiments, relying on blind performance testing of randomly sampled employees, can quite inexpensively measure whether employees comply in realistic work situations.” I note (as do the authors) that some this already happens but think there needs to be more of it. However, one must be careful to avoid the perception that employees are being treated as the subject of experiments.

Finally, there is much more to this piece and I encourage you to read it in its entirety.

 

Assessing compliance incentives

A new post by Rebecca Walker and me in Corporate Compliance Insights.

We hope you find it useful.

Will working at home make us more ethical?

Research we reported on several years ago suggests it could.

In “Truth Telling: A Representative Assessment,” published in October by the Institute for the Study of Labor in Bonn, Johannes Abeler, Anke Becker and Armin Falk report on the results of two recent studies in Germany which suggest that individuals who are given an opportunity and motive to lie/cheat are unlikely to do so where the wrongdoing would take place in their home.  That is, individuals were called in their homes and asked to flip a coin – with the understanding that if they reported tails they would be paid a certain amount of money but they would get nothing if the reported heads.  In one version of the experiment, 56% reported heads, a number which presumably reflects a near zero amount of cheating (and maybe underreporting of the profit maximizing result).   The results of a second version were essentially indistinguishable from the first.

What is noteworthy here is that earlier studies on honesty that were conducted in laboratories showed a substantially higher percentage of cheating.  Thus, comparing those results to the new ones suggests that context may have a significant impact on truth telling – and perhaps other forms of ethical conduct.  This is consistent in a broad way with many other behaviorist studies showing how surprisingly malleable we are with respect to ethical conduct.

But can this information be used to promote compliance and ethics in the workplace, or is it interesting but not especially helpful?  At least as a general matter, I expect that C&E training and other communications could evoke the sense of home that seems to engender honesty, although obviously one would need to take care not to go overboard with such an approach.  (Indeed, some training I developed years ago sought to draw this connection,  and I think it was well received.)

Moreover, building on the apparently well-understood need for being truthful at home may be especially important given the relatively tepid endorsement of truthfulness in the workplace that one finds in many companies, including some with otherwise strong C&E programs.  That is, from what I’ve seen over more than twenty years in the field, one finds far less attention in codes of conduct and other C&E communications to the general importance of truthfulness than one would expect.  This shortfall may reflect the commonly held view that some degree of “bluffing” is appropriate in business, as noted in a famous article in the Harvard Business Review.

The benefit of evoking a “domestic” sensibility regarding ethics is that whatever the apparent logic of the bluffing perspective might be in the business realm (and from my perspective, it was never persuasive) on a gut level we are far less likely to accept it in our home lives, where its unsustainability is self-evident to the point of being intuitive (particularly so for parents, but presumably for any type of family member).  That is, whereas one might be aware of successful business careers built on truth bending it is simply impossible to imagine a healthy family life resting on such a foundation, and, I believe this is something that we not only understand intellectually but feel emotionally.

Of course, C&E professionals can also draw upon some very good data showing that in business honesty really is the best policy, such as this study last year by the Corporate Executive Board.   Appealing to one’s colleagues with a direct case should always be the principal approach to promoting business ethics.  But, as with many behaviorist experiments linked to above, this recent study may provide another, and somewhat less obvious, set of tools for enhancing the ethical performance of organizations.

 

Revisiting inherent conflicts of interest

While other stories dominate the news these days, it is likely that national attention will turn to COIs as the presidential election gets closer. If Biden is nominated, then much will be said about possible COIs involving his son Hunter serving as a director of a controversial Ukrainian energy company. On the other side of the coin, President Trump has recently been accused of having more than 3000 COIs.

In anticipation of this, I thought it might be useful to revisit a post on inherent conflicts of interest.

At his trial for Libor rigging several years ago, evidence was introduced  that former trader Tom Hayes had told the Serious Frauds Office that “many of the people responsible for submitting panel banks’ Libor rates also traded products linked to the rate, creating an inherent conflict of interest” and that “’[n]ot even Mother Teresa wouldn’t manipulate Libor if she was trading it,…’”

While obviously somewhat self-serving, this colorful bit of analysis still  helps to underscore the overarching behavioral ethics point that to reduce the risk of ethical transgression … one cannot always count on the characters of those involved.  Rather, the situation will often play the decisive role.

Inherent COIs are an instance of that. Granted, they are just one of many such types, but they may also be more common than most others, and hence worth further study.

And beyond an area of interest to behavioral ethicist scholars, seeing some COIs as being inherent (or near to inherent) can be useful to others, too, such as:

– C&E professionals, who should consider the category of inherent COIs in their risk assessments.

– Senior managers and directors, who should – as part of their C&E program oversight – make sure that nothing their company is doing or contemplating doing falls into (or anywhere near) this category of risk.

– Enforcement personnel, who often can find good fishing in the inherent COI waters.

– Individual business people, who – in making career decisions – should steer clear of jobs that could involve inherent conflicts of interest.

It is worth noting – in light of the election – that virtually any COI involving the President of the U.S. could be inherent, given his extremely broad powers.

Finally, note that anti-COI measures can be undertaken on an “inherent” basis too, as described here.

The oldest conflict of interest

Many years ago a client being vetted for a high-ranking post asked me if a question about prior ethical violations required him to disclose a long since concluded extramarital affair. I replied that this seemed beyond the scope of the question, and I would give the same answer if asked today. But a recent paper suggests a different way of looking at this area.

In “Personal infidelity and professional conduct in 4 settings”,  John M. Griffin and Samuel Kruger, both of the McCombs School of Business, University of Texas at Austin, and Gonzalo Maturana of the Goizueta Business School, Emory University: “study the connection between personal and professional behavior by introducing usage of a marital infidelity website as a measure of personal conduct. Police officers and financial advisors who use the infidelity website are significantly more likely to engage in professional misconduct. Results are similar for US Securities and Exchange Commission (SEC) defendants accused of white-collar crimes, and companies with chief executive officers (CEOs) or chief financial officers (CFOs) who use the website are more than twice as likely to engage in corporate misconduct. The relation is not explained by a wide range of regional, firm, executive and cultural variables. These findings suggest that personal and workplace behavior are closely related.”

The ramifications of these findings indeed  seem significant. Included is the negative implication for behavioral ethics: “our findings suggest that personal and professional lives are connected and cut against the common view that ethics are predominantly situational. This supports the classical view that virtues such as honesty and integrity influence a person’s thoughts and actions across diverse contexts and has potentially important implications for corporate recruiting and codes of conduct. A possible implication of our findings is that the recent focus on eliminating sexual misconduct in the workplace may have the auxiliary effect of reducing fraudulent workplace activity.”

For more on the connection between personal and professional ethics see this prior post.

The moral hazard moment

For governments, business organizations and even individuals every moment might have a “moral hazard” dimension. But it would be hard to find one as potentially consequential as that presented by the US general election. Does the compliance and ethics field have a role to play in addressing this?

The concept of moral hazard was used originally to refer to the phenomenon that providing insurance tended to promote risky behavior by insured parties.  Subsequently, the idea has been applied more generally to mean the provision of incentives that encourage unduly risky conduct by shifting the impact of a bad decision to a party other than the decision maker.

Most recently, moral hazard was seen as playing a major role in the economic crisis of 2008, as some of the individuals creating the risks at issue there evidently did not have interests sufficiently aligned with those jeopardized by their actions.  A perfect example of this can be found in an SEC report on ratings agencies quoting an e-mail between two analysts concerning their plans to give positive ratings to certain financial instruments that were, in fact, unworthy of such ratings: “Let’s hope we are all wealthy and retired by the time this house of cards falters.”

Notwithstanding its name, moral hazard is generally viewed as more of an economic phenomenon than a moral one.  Moreover, moral hazard risks are often seen as somewhat distinct from COIs, perhaps because the interests at issue in the former are not external or unknown to an affected organization.  (A typical COI concerns ownership of or compensation from an entity other than one’s employer, whereas a typical moral hazard risk is likely to be based on the employer’s own compensation scheme.) However, the two are similar in that both tend to diminish the fidelity of employees to their employers’ interests – a decidedly moral consideration in the traditional sense of the word.

Something similar concerning the misalignment of risks and incentives can be said about the political realm. Most importantly, with climate change those who are most likely to be affected by this unparalleled calamity are generally not the same as those who have the power to slow it down (and ultimately reverse it). The same phenomenon is at work with a host of other risks (including incurring dangerous levels of public debt) where the consequences will be borne by individuals who were not the primary causes of the risks.

Where does C&E fit into this picture?

The full promise of C&E programs goes beyond the business realm to nurturing habits of mind that can be helpful to addressing a wider range of challenges than traditional corporate law abidance and ethicality. Among other things, such habits could include thinking systemically about risk, having a deep appreciation for the interests of other individuals, insisting on transparency where it is reasonable to do so, embracing meaningful approaches to accountability for doing what is right and for stopping what is wrong and protecting truth telling at all costs. It should also – in my view – include identifying and addressing situations of moral hazard

None of these approaches were invented by C&E practitioners. But for many millions of Americans and others there is now a steady reminder through C&E programs of the importance of thinking in these and related ways – and this could provide a foundation for promoting greater ethicality in the broader societal realm, including addressing moral hazard.

There is a lot more that can be said about how ethical thinking in one realm can inspire and support such thinking elsewhere. See this prior post for the somewhat similar suggestion that ethical thinking in the private sphere can strengthen C&E  in the business world. It is not a new idea. But I doubt the importance of adopting a robust approach to moral hazard will ever be greater.

 

Risk assessment made easy

My latest column in Compliance & Ethics Professional.

I hope you find it useful.

The many harms from conflicts of interest

A new post in the FCPA Blog.

I hope you find it  useful.

Program assessments and moral hazard

Rebecca Walker and I hope you enjoy this article from today’s edition of Corporate Compliance Insights.