Edited by Jeff Kaplan
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Conflict of Interest Blog
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An earlier posting discussed the important – and certainly non-intuitive – finding of behavioral ethics research that doing good can actually increase the risk of doing bad. In addition to an unexpectedly high likelihood of wrongdoing, those in the business of doing good – e.g., charities, foundations and other non-profits – may face outsized impacts from ethical missteps, particularly related to COIs, given their need to maintain the trust of donors and others to fulfill their respective missions. In this post we begin to explore measures that non-profits can take to address COI risks.
According to the National Council of Non-Profits, a “policy governing conflicts of interests is perhaps the most important policy a nonprofit board can adopt. To have the most impact, the policy should be in writing and the board (and staff) should review the policy regularly. Often people are unaware that their activities are in conflict with the best interests of the nonprofit so a goal for many organizations is to simply raise awareness and cultivate a ‘culture of candor.’ It is helpful to take time at a board meeting annually to discuss the types of situations that could result in a conflict between the best interests of the nonprofit – and the self-interest of a staff member or board member.” Indeed, the Internal Revenue Service – which has an oversight role over charities in U.S. – expressly recommends that they develop a COI policy .
Non-profits seeking to draft or revise their COI policies can find plenty of publicly available examples from which to draw ideas and language (including some at the National Council of Non-Profits web site). For instance, the COI policy of the Gates Foundation contains a clear and comprehensive articulation of what generally would be considered a COI at the Foundation; a discussion of the types of situations that could give rise to COIs there; requirements concerning disclosure and management of COIs, including mandating the involvement of the legal team in these matters (see this post on the need for independence in COI management measures); detailed guidance on COI issues regarding the receipt of directors’ fees, authors’ royalties and like matters (for further information on COI issues in serving on outside boards see this post); a provision on outside employment, with – understandably – greater restrictions placed on high ranking employees; and discussions of a range of other COI issues relevant to the foundation, including those concerning matching grants and employee political activities. The Gates Foundation policy also has an extensive series COI-related FAQs that could be an invaluable source of ideas for those drafting/revising a COI policy for another non-profit.
But, by bringing attention to this resource I don’t mean to suggest that non-profits should simply adopt what the Gates Foundation, or any other organization, has done regarding COIs. Different non-profits could have COI issues that are, relatively speaking, unique. For instance, this article about COI policies for cooperative groceries – a very different sort of organization than a foundation - identifies a series of “emotional conflicts of interest” that may pose risks for organizations of that kind. (E.g., “The board president’s daughter is a co-op employee. After she is denied a raise of the size she had expected, her father begins bringing up concerns at board meetings about the fairness of the pay raise system and staff turnover due to low pay.”) As with any other sort of COI mitigation effort, the key for non-profits is to engage in some form of risk assessment before designing policies or other compliance measures. And, of course, the effort should include determining what any relevant legal requirements or expectations are for the entity regarding COIs.
Finally, understanding the COI risks of non-profits is important not only to board and staff members of such organizations but also employees of for-profit organizations who deal with non-profits, under the general imperative (often espoused in this blog) of not causing conflict in others.
A future post will discuss COI training for non-profits.
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In materials from a talk last year called Beyond Agency Theory: The Hidden and Heretofore Inaccessible Power of Integrity , Michael Jensen of Harvard Business School and Werner Erhard (affiliation not listed) argue: “There is far too much concern today about the conflicts of interest between people…and not enough attention paid to the damage caused by an individual’s conflict of interest with himself or herself.” Their focus is on the importance of integrity, meaning “the quality or state of being complete; unbroken condition; wholeness; entirety [and] the quality or state of being unimpaired; perfect condition; soundness” – not the definition of integrity concerning “sound moral principle; uprightness, honesty, and sincerity.” The former type of integrity has a profound impact on various aspects of performance but is often disregarded because “[f]or most people and organizations integrity exists as a virtue rather than as a necessary condition for performance. As a virtue, integrity is easily sacrificed when it appears a person or organization must do so to ‘succeed.’”
One key aspect of integrity is the importance of honoring one’s word, by which they mean: ”1. Keeping your word or: 2. Whenever you will not be keeping your word, just as soon as you become aware that you will not be keeping your word (including not keeping your word on time) saying to everyone impacted: a. that you will not be keeping your word, and b. that you will keep that word in the future, and by when, or that you won’t be keeping that word at all, and c. what you will do to deal with the impact on others of the failure to keep your word…”
On this latter point they argue: “When giving their word, most people do not consider fully what it will take to keep that word. That is, people do not do a cost/benefit analysis on giving their word. In effect, when giving their word, most people are merely sincere (well-meaning) or placating someone, and don’t even think about what it will take to keep their word. This failure to do a cost/benefit analysis on giving one’s word is irresponsible.”
This notion of doing a cost/benefit analysis when giving one’s word seems very important, and I think it should be woven into ethics training of all kinds (among other reasons, because the underlying idea of ethics as requiring more than good intentions needs far more support than it currently gets). Still, one can embrace this point without agreeing that we pay too much attention to conflicts of interest.
Indeed, many COIs can be seen as failures to honor one’s word – whether it is an explicit promise of loyalty or the inherent promise of such that comes from entering into and staying in a relationship of trust. For this reason, paying more attention to COIs might, in my view, support the authors’ cause of promoting integrity generally and encouraging individuals to keep their word in particular.
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By Lori Tansey Martens
In my last post, I outlined some of the challenges that global organizations face when implementing conflict of interest procedures throughout the world. In this post, I make recommendations to help mitigate some of those challenges.
Standards and Policies
First, many international employees will be unclear as to the definition of conflicts of interest. Accordingly, conflict of interest standards should include a clear and precise definition of the concept. Unfortunately many companies define conflicts of interest around the following lines: A conflict of interest occurs when you have personal interests which may conflict, or appear to conflict, with the company’s interests, or, A conflict of interest arises when we become involved, directly or indirectly, in activities that could impair, or be perceived to impair, our responsibility to act in the best interests of the company.
Sound familiar? The problem with this type of definition is that it assumes that the employee’s and the company’s interests are at odds – the term ‘conflict’ itself is negative. Yet, many international employees will see some of these situations not as conflicts, but as “win-wins,” both for themselves and for the company.
If we could go back and rewrite our terminology on this topic, I would recommend that we talk about “Confluences of Interests” as opposed to “Conflicts of Interests”; however, I doubt that’s going to happen anytime soon. But companies can certainly embed this concept into their definitions. For example, companies can add the following to their standard conflict of interest definitions: We may face situations where there is an overlap between our own personal interests, and the interests of the company. Even when these situations appear to be in the best interests of both parties, they require particular care and scrutiny by your manager (or other appropriate company resource.)
The policy itself should also include “Q&As” that illustrate the nuances around some of the situations that can arise in an international context. For example: Q. In our region, the best supplier for a certain resource is a firm owned by our Managing Director’s wife. To not buy from this firm will increase our costs significantly. What should we do? A. In certain situations, the company may elect to do business with suppliers who are closely related to key personnel. However, in all such cases, in order to promote transparency and to ensure fairness in supplier selection, the personal relationship must be disclosed to the Regional Director, who will make a determination as to the best course of action.
Another global concern is that some companies may consider employee involvement with certain non-profit organizations and charities to be a potential conflict of interest. However, companies should be aware that this is a particularly sensitive issue in Europe. Employees in Europe may view such concerns as a violation of their right to privacy. If companies include this element in the standard, the language should be very precise. For example, companies might specify that service in charities and nonprofit organizations “with aims that are overlapping or in direct conflict with the goals and aims of the Company” should be disclosed.
The standard or policy should also include a statement demonstrating respect for employees’ right to privacy for relationships that are outside the business sphere. For example, “The Company respects the privacy of personal affairs of all employees, but employees must disclose situations that could result in real or perceived overlaps and/or conflicts between their personal interests and the interests of the Company.”
Finally, the policy should explain why managing confluences of interest are important for an organization. The rationale should extend to both potential ‘conflicts’ (e.g., an employee’s personal relationships may compromise his/her business judgment, decisions clouded by personal interests can negatively influence the long-term welfare of the organization, etc.) and ‘confluences’ (e.g., the company desires full transparency even in situations where both the company and the employee stand to benefit from the particular situation to ensure fairness, avoid misunderstandings, etc.)
Training
The same considerations for policy concerning definitions, illustrations and rationales, holds equally true for training. Dedicated training on this topic is a must in many international locations given that, as discussed in the previous blog post, it may run counter to prevailing local culture and customs. And similar to the formation of policy, the training needs to focus on not just the “what,” but the “why” and the “how,” using scenarios, case studies, and potentially even role-plays.
Processes
Multinational companies should avoid blanket prohibitions against all confluences of interest since situations may arise internationally that are unique and ambiguous. Likewise, there may be situations in which overlapping interests are unavoidable. If a company operates in small villages where all residents know each other, it could be difficult for staff to avoid business relationships with relatives or friends. The conflict of interest processes can anticipate these situations and outline clear procedures for employees to follow. For example, many companies place the focus on disclosure of these situations to management, or other appropriate company resource, either verbally or in writing, instead of forbidding such situations outright.
While conflicts of interest can pose global challenges, companies can anticipate and mitigate many of these concerns through well thought-out standards, dedicated training and adaptable procedures.
And I’d like to thank my good friend Jeff Kaplan for allowing me to post on his blog site. I’m hoping that you’ll agree that this was a good example of an entirely appropriate ‘confluence’ of interest!
Lori Tansey Martens, a 20-year veteran in global business ethics, is the President of the International Business Ethics Institute. The Institute helps companies develop effective global ethics and compliance programs. For more information, please visit www.business-ethics.org
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This is the seventh post in a series on behavioral ethics. Prior posts can be accessed here.
Recent posts in this series have discussed various circumstances in which an individual’s ethical standards – what could be called “inner controls” – might not provide the safeguards against wrongdoing that one would tend to expect. As we saw, the risk of an ethical shortfall in some of these circumstances may be intuitive, but being able to prove that risk with data – as behavioral ethics research can do – should help companies understand the need for extra compliance and ethics measures to bridge these gaps.
And, not all risks of an “inner controls” shortfalls identified by behavioral ethics are intuitive. For instance, we previously saw how disclosing a conflict can actually increase the likelihood of conflict-driven behavior. And in today’s post, we take note of several studies from this field that show that ethical risks can in fact spring from doing good, based on the phenomenon of “moral compensation.”
As described in a paper by Ann Tenbrunsel, Jennifer Jordan, Francesca Gino and Marijke Leliveld, this compensation works both ways. Being cognizant of one’s ethical failings increases the likelihood of subsequently doing good – and that part is no surprise. But the converse is true, too, and that part seems non-obvious (or at least it did to me).
So, for instance:
- a prior act of gender equality can serve to “license” a subsequent discriminatory act,
- reminding people of their humanitarian traits actually reduces their charitable donations, and
- purchasing “green” products also licenses selfish and ethically questionable behavior.
While unfortunate, these are certainly risks about which C&E professionals should know.
Perhaps most significantly, this research indicates a need for particular attention to C&E by organizations devoted to the public good such as charities, government agencies, universities – many of which seem to have weak-to-non-existent C&E programs. Indeed, because some of these organizations could be at risk of losing funding and other important forms of support in the event of a C&E transgression, this need may be acute in some instances. (Note: the Blog will soon run a post on COI policies for non-profits.)
Additionally, for-profit entities whose work can be seen as serving the public – e.g., news organizations, certain health care related businesses – should attempt to ensure (such as through C&E training) that their employees understand that their public missions do not come with a license to cut corners.
Beyond these sector- or function-specific implications, the “moral compensation” phenomenon may provide useful (albeit somewhat unsettling) insight into optimum strategies for promoting ethical conduct in organizations of all kinds. And those strategies will be explored in our next post in this series.
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 By Lori Tansey Martens
Part I of this blog post will deal with the challenges that firms may face when implementing conflict of interest policies and programs around the world. Part II will present approaches and strategies to mitigate many of these challenges, in order to increase adherence to company standards.
Perhaps the biggest challenge faced by most “westerners” when navigating conflict of interest challenges around the world is that they have a hard time understanding that the rest of the world doesn’t always think like they do, nor share their value systems. In fact, many cultures do not subscribe to the belief that the business world is better off with impartial, ‘arms length’ relationships.
Yes, you read that correctly. Many societies including parts of Asia, Africa and the Middle East, actually believe that developing close relationships is the most important factor for success in business (and, frankly, in life as well.) Activities that foster close relationships are, therefore, seen as positive and ethical, even if they may meet the West’s definition of a conflict of interest.
I remember conducting an ethics workshop for a major multinational company in Africa. We presented a conflict of interest scenario about hiring a brother-in-law as a supplier, but the participants were aghast at the “correct” answer, which was not to hire the family member’s firm. “It is unethical for me NOT to hire my brother-in- law if he is qualified – and he will do a better job for my company because he is my brother, and therefore more accountable to me,” said one participant, summarizing the feelings of the entire group.
Now, I’m not suggesting that companies adopt the value systems in other cultures, but understanding the perspective of employees in other parts of the world is imperative to successfully implementing your own conflicts of interest policy.
Asia
In many Asian cultures, business has been conducted for centuries by family members with other family members, so the idea of “arms-length” makes little sense to many employees. In fact, over 70% of businesses in Asia are family-owned, and even many of the large multinational corporations throughout Southeast Asia are connected through extended family ties.
Additionally, in Asian cultures, social reciprocity is an important cultural tradition. In Chinese cultures it is known as “guanxi,” while in Japan, it is known as “kashi” and “kari.” These are best described as “favors” one party does for the other to build a relationship, and they are considered serious social duties.
In many instances, guanxi may be the only way to find scarce resources, trusted suppliers or a route through government bureaucracy. Lyman Miller, director of China Studies at Johns Hopkinʹs Paul H. Nitze School of Advanced International Studies, said of guanxi: ʺTo some Americans, it may seem mildly like corruption or insider dealings, but in China, itʹs the natural way of doing things. Everything is done through connections. Things that weʹd blanch at are standard operating procedure over there.ʺ
Africa
Historically, in many African countries, the moral responsibility of the individual was to contribute to the happiness and welfare of their individual family and their tribe. The concept of social reciprocity also exists in African, albeit in a somewhat modified form from the Asian concept. In parts of Africa, reciprocity goes more to the need for mutual assistance and aid, as expressed in the African proverb, “the right arm washes the left arm and the left arm washes the right arm.”
Middle-East
The business community in many Middle-Eastern countries can be small and, like other regions discussed, has traditionally been based on family. Depending on the country, it is likely that employees will face situations in which the only supplier for crucial services or supplies, or even the most qualified candidate for job openings, comes from a related party. Cross membership on boards is also common, sometimes even among competing organizations. And parts of the Middle-East can be particularly sensitive to the perception of “cultural imperialism,” resenting the imposition of Western values over local culture and customs.
Europe
Many American firms can be surprised by the strength of attitudes toward personal privacy and the marked separation between personal and business life, which in some cases is supported by employment law in Europe. While many American employees are used to lengthy conflict of interest disclosure forms, which ask about family relationships, financial holdings of family members, personal and professional associations, some of these questions will be resented by European employees as an unnecessary intrusion into their family and private lives.
In my next post, I’ll detail some strategies global companies can employ to navigate these challenges and successfully implement a conflicts of interest policy throughout their operations.
Lori Tansey Martens, a 20-year veteran in global business ethics, is the President of the International Business Ethics Institute. The Institute helps companies develop effective global ethics and compliance programs. For more information, please visit www.business-ethics.org
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In 2010, Goldman Sachs made headlines (and history) in a conflicts-of-interest related enforcement action by agreeing to the largest SEC settlement ever paid by a Wall Street firm in any kind of case. And this week the firm was back in court, facing what a Delaware judge called “serious” allegations of conflicts of interest arising from its multiple roles in connection with Kinder Morgan’s purchase of El Paso Corp.
Here is what seems to be a good summary of the allegations made by El Paso shareholders: “Goldman was advising … El Paso on a plan to spin off its exploration business last year when crosstown rival Kinder Morgan offered to buy the entire company for $21.1 billion. Goldman private equity funds own a big chunk of Kinder Morgan and have two representatives on the board…Goldman used its influence to steer El Paso into accepting a lower price than it was worth while scooping up bigger advisory fees than it would have from the exploration unit’s spinoff. The first sign that Goldman might be pulling strings in the deal came even before it was announced, when Goldman’s equity analysts upgraded their rating on Kinder Morgan, but the conflicts in the transaction apparently went much deeper…[El Paso CEO] Doug Foshee privately discussed a management buyout of the exploration business with Kinder Morgan chief Rich Kinder [but] never revealed that conversation to El Paso’s board…Foshee was willing to sell the company on the cheap if he got to walk away with the exploration business.”
Whew!
I should add that “Kinder, Goldman and El Paso all have said they took appropriate steps to mitigate any potential conflicts in the deal,” and the judge has reserved his ruling. Still, it is hard to argue with the judgment of corporate governance expert Charles Elson that: “Given all the bad press Goldman has gotten recently, it might have been better if they’d taken a pass on serving as an adviser in this deal…”
I should also add that Goldman is not the only investment bank to have faced serious COI allegations in court recently. Last fall, Barclays PLC and Del Monte paid nearly $90 million to settle claims that Barclays, which served as Del Monte’s financial adviser in a buy-out, had conflicting interests in the deal – as it also provided some financing to the buyers. That settlement came after a (different) judge in Delaware found that the bank had “secretly and selfishly manipulated the sale process to engineer a transaction that would permit [it] to obtain lucrative buy-side financing fees…”
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We continue the discussion from our most recent post in this series on behavioral ethics on circumstances in which an individual’s ethical standards – her “inner controls” – may not reduce the risk of wrongful behavior as much as expected.
Another set of circumstances that is relatively likely to lead to an ethical shortfall is where we do not know who will be impacted by a contemplated act. As described in this paper by Deborah A. Small and George Loewenstein, in one study “subjects were more willing to compensate others who lost money when the losers had already been determined than when they were about to be” and in another “people contributed more to a charity when their contributions would benefit a family that had already been selected from a list than when told that the family would be selected from the same list.”
Beyond their direct application to the area of charitable giving, these findings may be relevant to a broader range of ethics issues, and, for instance, could help explain the relative ease with which so many individuals engage in offenses where the victims are not identifiable.
One example of this is insider trading – a crime which, although widely known to be wrong, seems utterly pervasive (based, among other things, on the extent of trading in securities right before public disclosure of market moving events). A behavioral ethics perspective suggests that (at least part of) the reason for this “inner controls” failure is that the victims of insider trading are essentially anonymous market participants.
Another offense of this sort is government contracting fraud (where the victims tends to be everyone), and indeed Ben Franklin famously described the risks of an ethics shortfall here as well as anyone could: “There is no kind of dishonesty into which otherwise good people more easily and more frequently fall than that of defrauding the government.” Understanding why “otherwise good people” do bad things is much of what behavioral ethics is about.
From a C&E risk assessment perspective, the combination of behavioral ethics data and Franklin’s (eerily prescient) insight suggests that companies should take extra measures (e.g., through training, auditing and other C&E tools) to prevent and detect wrongdoing in situations where legal or ethical violations would seem to be victimless – and hence where our “inner controls” could be weak .
In our next post in this series: behavioral ethics and the unexpected risk of doing good.
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Today is the 200th anniversary of the great man’s birth.
While pretty much everyone should be grateful for his timeless stories, members of the compliance and ethics field owe Dickens a special debt, as A Christmas Carol can be seen as the forerunner of much modern ethics training. And, to my mind, none have done it better.
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In the initial post in this series, we introduced the field of behavioral ethics to the Blog and suggested that it could help both enforcement personnel and corporate leaders better understand the need to support C&E efforts in business organizations. Subsequent posts examined how behavioral ethics can assist with mitigating COIs, delivering C&E communications and making managers accountable for C&E violations occurring on their watch. In this fifth posting we begin to explore implications of behavioral ethics for C&E risk assessment.
How do the ethical standards of individuals in an organization impact the organization’s risk? Simply put, the stronger their ethical standards, the more likely they are to resist pressures or temptations to engage in wrongdoing – and the less the need for traditional compliance measures. The ethical standards of a company’s employees provide what could be considered “inner controls.”
But behavioral ethics research teaches us that in some circumstances these inner controls may not offer the protection expected of them – as actions can deviate from ethical standards based on various external factors which may not be fully appreciated by organizations. Understanding those causes can enhance C&E risk assessment by identifying circumstances where extra compliance measures may be necessary to make up for the “ethics shortfall.”
Here are two examples of this phenomenon:
- Individuals with depleted resources tend to face greater risks of unethical conduct than do others, as described in Too tired to tell the truth: Self-control resource depletion and dishonesty. From a risk assessment perspective, this suggests a need to focus extra C&E efforts on parts of an organization where employees are subject to greater-than-ordinary stress.
Of course, this is a cause of risk that is pretty intuitive – but it is also one which, in my experience, is greatly under-mitigated. Being able to prove the risks here, as behavioral ethics does, may help C&E officers in getting the management attention or resources necessary to effectively addressing high-stress conditions at their companies through additional compliance measures.
- Acting indirectly can blind individuals to ethically problematic behavior more than direct action does. For instance, in one behavioral ethics study, a hypothetical pharma company that sold a drug at an exorbitant price was judged to be significantly more unethical than a pharma company that sold its rights to market the drug to a smaller company, which in turn sold the drug at an even higher price than the first company did. This phenomenon suggests that in dealings with a company’s third parties – suppliers, agents, distributors, joint venture partners and others – companies should not count too much on the inner controls of their employees to restrain such parties from acting unethically. And that, in turn, suggests the need to take supplemental targeted compliance measures to make up for the shortfall.
Again, this is fairly intuitive, but for C&E officers being able to prove what is otherwise known can be of immense value in risk mitigation. And, as we will see in coming posts, not all behavioral ethics risks are intuitive. But before that we’ll discuss: Ben Franklin: proto behavioral ethicist?
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While the NFL’s code of conduct for fans doesn’t mention COIs (it is more about not throwing objects on the field.) the Super Bowl is a perennial source of COI issues. Indeed, Super Bowl tickets received by a US Secretary of Agriculture from a company his department regulated played a central role in a major COI prosecution in the 1990’s – although the Secretary was acquitted and the company’s conviction on a related matter (involving US Open tickets, among other things) was overturned by the Supreme Court.
The case evidently didn’t put an end to government officials getting Super Bowl tickets from those with whom they have official business. As noted in this post last year by Judy Nadler, senior fellow in government ethics at the Markkula Center for Applied Ethics: “I spoke with a reporter recently who was writing about gifts elected officials were taking but not disclosing. More troubling, many of the officeholders said they ‘couldn’t remember’ whether or not they had gone to the Super Bowl courtesy of a major business interest.” (Easy to see how one could forget that!)
More common, though, is a business providing Super Bowl tickets to individuals in the private sector, particularly to customers. Indeed, Super Bowl tickets are frequently the subject of discussions in codes of conduct. For instance, the Home Depot’s code provides, in relevant part: “In the event that the recipient is willing to pay face value for a ticket or other gifts and entertainment, when in fact the market value is significantly higher than the face value (e.g. Super Bowl or Masters Tournament tickets), the associate must still have the item approved in advance in accordance with this policy.”
As with many COI issues, the devil is in the details regarding the propriety of giving or receiving Super Bowl tickets, and here are a few questions to ask in deciding whether to give:
-Would someone from your company attend the event with the potential recipient or would it be an out-and-out gift?
- What does the recipient’s company’s policy say about gifts and entertainment?
- Does the recipient’s supervisor know about the offer?
- What is the function of the proposed recipient in her company? (Purchasing, of course, is most obvious from a risk perspective, but others – e.g., an external auditor or even supplier in some instances – could raise COI risks, too.)
- What is the state of play in terms of new/existing business with the recipient’s company?
- What other costs (e.g. air travel) would be borne by your company in connection with attending the event?
- Is the recipient an employee of a government agency (including a state-owned enterprise)? Even if not, do they do business with the government – which, in some instances, might be risk causing at least from a reputational perspective?
Finally, two questions about process:
- Is the decision of whether give or not to give reviewed by the compliance officer or other function (e.g., law department) that is independent of the part of the business proposing the invite?
- Are the bases for decisions sufficiently documented?
But, all this is for next year. For now, just enjoy the game! And, go Giants! (Disclosure: I’m from NJ.)
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