Conflict of Interest Blog

More on conflicts of interest disclosure

“Culture trumps compliance,” the old saying goes. But it still worth being reminded of it, particularly in the conflict of interest area, where the effect of culture may be less manifest than it is for various other types of misconduct (like harassment).

The latest contribution to this body of knowledge is Conflict of Interest Disclosure as a Reminder of Professional Norms: Clients First! by Dr Sunita Sah of Cornell’s business school, to be published in Organizational Behavior and Human Decision Processes. Sah writes:

“Disclosure is a popular solution for managing conflicts of interest (COIs) across a variety of industries and professions. The present work documents how perceived professional norms may influence advisors’ reactions to COI disclosure. In a series of laboratory and framed field experiments, five with monetary stakes, I demonstrate that disclosure can have differing effects on advisors who have a COI. These studies provide evidence that COI disclosure increases the salience of the perceived professional norm (‘clients first’  or ‘self-interest first’) and, correspondingly, the level of bias in advice. I show that in both the medical and financial context COI disclosure can significantly improve the advice quality of professional advisors who have norms to place clients first.” (Note: that a prior post discussed  the other side of the coin: Sah’s research on how disclosure of COIs can in some instances  exacerbate conflicted actions by those making the disclosure.) As stated  by Sah, “If self-interest first norms are prevalent, then the findings in this paper suggest that steps to change the perceived norms may be useful or even necessary as a precursor to implementing disclosure.”

Of course, most companies can’t delay implementing COI disclosure requirements. But, this research may help underscore for decision makers that disclosure alone is not enough, and that they may need to assess and possibly enhance the COI-related aspects of their culture.

Expanding Compliance Liability for Directors?

A post a few weeks ago discussed the issuance of an important recent judicial decision in Delaware regarding board liability for compliance failures, and specifically the fact that the claim against the directors had survived a motion to dismiss.  Given how few decisions  support claims such as this – what are generally called Caremark cases – it is worth noting that  a second such decision  has been issued only a few weeks later.

As noted in a post this week in the Harvard Law School corporate governance blog by attorneys from the Wachtell Lipton law firm:  Further extending the practical reach of the Caremark doctrine, the Delaware Court of Chancery this week upheld claims against directors of a life sciences firm for failing to ensure accurate reporting of drug trial results. In re Clovis Oncology, Inc. Derivative Litig., C.A. No. 2017-0222-JRS (Del. Ch. Oct. 1, 2019)…. The Clovis directors argued, and the court accepted, that duty-to-monitor claims require a showing of scienter—that is, evidence that the directors knew they were violating their duties. But the court did not require the plaintiff to allege particular facts showing such knowledge. Instead, reasoning that Clovis had a board “comprised of experts” and “operates in a highly regulated industry,” the court concluded that the directors “should have understood” the problem and intervened to fix….Clovis thus highlights the widening risk to boards of directors of fiduciary litigation when bad news can be tied to an alleged compliance failure. …A compliance program is no longer enough. Courts now look for engaged board oversight, and directors should consider implementing procedures to ensure that the board itself monitors “mission critical” corporate risks.

Of course, while such procedures are themselves important, equally key is having a boardroom culture that encourages robust monitoring of compliance risks. For this reason (as well as others) board members should have strong relationships with their respective companies’ chief compliance officers, as CCOs  can – by word and deed – help develop and maintain a culture that is up to this task.

 

The big compliance news of 2019

In my latest column in Compliance & Ethics Professional I discuss the Department of Justice’s new policy of rewarding antitrust compliance programs.

I hope you find it interesting.

CECO reporting relationships

Here is a just-published article from Compliance Week on compliance & ethics officer reporting relationships.

I hope you find it useful.

Come to the Advanced Compliance & Ethics Workshop

I am honored to have been selected to chair the Practising Law Institute’s Advanced Compliance & Ethics Workshop in NYC on October 28 and 29.

Information about program topics and our stellar faculty is available here.

I hope to see you then and there.

Conflicts of interest: why we fight

The current attention to President Trump’s using his official position to bring business to his properties – discussed here – has drawn national (and even global) focus on the area of conflicts of interest. It is thus an opportune time for the COI Blog to review some basic principles.

First, as Justice Louis Brandeis famously said: “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 the point seems just as applicable to ethics.

Second, and as one would expect, the impact of COIs can go beyond the economic value of the transaction at issue. 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 used to 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:

– 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.

Finally, and returning to the issue of Trump’s COIs, the negative impact of presidential impunity regarding COIs is particularly worrisome in a way that is unique in our history.  In the coming years we will be compelled to make sacrifices to address increasingly urgent needs regarding climate change and public debt. If government’s motives on these and other critical issues are subject to question due to COI’s then the (already small, in my view) likelihood of sufficient sacrifice being made is further diminished, with potentially catastrophic consequences for our country and planet. (For more on the link between morality-based sacrifice and the success of human societies see Jonathan Haidt’s The Righteous Mind.)

See you at SCCE?

Later this month I’ll be speaking at the SCCE  18th annual Compliance & Ethics Institute in National Harbor Maryland.  I’ll be presenting in sessions on 100 + Years of Business Ethics: Learn About the Future from Masters of the Profession (together with my long-time colleagues Steve Priest, Carrie Penman and Ed Petry – Sunday morning, session P7) and on Leverage Legal Developments to Advance Your Program (together with my law partner Rebecca Walker – Tuesday afternoon, session 705).

Readers of the COI Blog attending the conference  are encouraged to use the occasion to say hello.

Free webinar on risk assessment

On September 11 at 1 Eastern I’ll be presenting a free webinar  on best practices in compliance and ethics risk assessment. The webinar is  sponsored by Syntrio  and my co-presenter will be  Jason Lunday. He and I hope you can attend.

How deep is the ocean? The latest on Trump’s conflicts of interest

In a report on President Trump’s conflict of interest published last week, the Citizens for Responsibility and Ethics  in Washington  (CREW)  noted that it had “tallied 2,310 conflicts resulting from President Trump’s decision to retain his business interests.” Highlights include the following:

– The president has visited his properties 362 times at taxpayer expense during his administration, sometimes visiting more than one of them in a single day. In 2019 alone, he has visited his properties 81 times, helping to further establish them as centers of political power. The number of days where President Trump has spent time at a Trump-branded property account for almost a third of the days he’s been president.

– One-hundred eleven officials from 65 foreign governments, including 57 foreign countries, have made 137 visits to a Trump property, raising the question of how much foreign money has been spent at Trump’s properties.

– Additionally, CREW has recorded 630 visits to Trump properties from at least 250 Trump administration officials. This includes high-level White House staff, members of Trump’s cabinet, and individual agency employees. So far this year, CREW has recorded 198 visits by White House officials. Ivanka Trump—who has an ownership interest in the Trump hotel in D.C.—and her husband Jared Kushner, both senior White House advisors, are the most frequent executive branch officials to visit Trump properties, other than the president himself. Jared has made 28 known visits, while Ivanka has made 23.

– Members of Congress have flocked to President Trump’s properties, despite their constitutional oversight responsibility to provide a check on the executive branch as it relates to President Trump’s conflicts of interest. Throughout his two and a half years as president, 90 members of Congress have made 188 visits to a Trump property.

– Forty-seven state officials, including 20 Republican governors, have made 64 visits to Trump properties, sometimes resulting in state taxpayer funds being spent there.

– President Trump has used the presidency to provide free publicity for his properties, which he still profits from as president. Over the course of his presidency, Trump has tweeted about or mentioned one of his properties on 159 occasions, and White House officials have followed suit: Members of Trump’s White House have mentioned a Trump property 65 times, sometimes in the course of their official duties.

– Political groups have hosted 63 events at Trump properties since President Trump took office, selling wealthy donors access to the administration while also enriching the president. Seventeen of these have been for Trump-linked groups, and another six have been hosted by groups linked to Vice President Mike Pence. Trump Victory, the joint fundraising arm of Trump’s 2020 election committee and the RNC, has hosted six events at Trump properties just this year, four of which were attended by the President himself. In all, the RNC and other Republican Party groups have had 28 events at Trump properties.

– Twenty Trump administration officials have attended 38 political events at a Trump property, giving wealthy donors who fund spending at the president’s businesses access to top officials to discuss their pet issues while they enrich President Trump personally.

-Political groups have spent $5.9 million at Trump properties since President Trump took office. So far this year, political groups have spent $1.1 million at Trump properties. In more than a decade prior to his run for president, Trump’s businesses never received more than $100,000 from political groups in a single year.

– The Trump Hotel in Washington, D.C. is the top beneficiary of this political spending. In just over two and a half years, the hotel has raked in $2.4 million in traceable political spending.

– Foreign governments and foreign government-linked organizations have hosted 12 events at Trump properties since the president took office. These events have been attended by at least 19 administration officials.

This is a stupendous record of corruption – and one that, as the report notes, is likely incomplete. CREW is performing an important public service by keeping track of and analyzing this sordid mess.

But will it matter? The presidential election next year and how voters respond to Trump’s conflicts of interest may prove to be the most consequential ethics test in our country’s history. And it is not Trump who will be tested in  that contest –  it is us.

(Postscript:  less than a day after my posting the above piece Trump made an overt and sustained public pitch for the next G-7 meeting to be held at one of his hotels. A morally normal person would feel some sense of disgrace if found doing this sort of thing.  But Trump seems to view it as a badge of honor, as proof that he  – like a modern-day Raskolnikov – is above the morality of the “little people.”) 

What is in a name?

A recent letter to the editor of Nature argues:

Transparency about competing interests is essential when reporting scientific data. However, use of the term ‘conflict of interests’ for such declarations can be misleading in some biomedical papers. A genuine example of a conflict of interest is when academic researchers are financially rewarded for their work by commercial partners. The situation can be more nuanced for reports of biomedical discoveries that could be applied in clinical situations. After all, developing such treatments for patients is a moral obligation for academic researchers, both to their funders and to society — even though it can mean working with biotechnology or pharmaceutical companies. Disclosing a financial arrangement as a ‘conflict of interest’ under such circumstances implies that engagement with for-profit companies is a nefarious activity, potentially at odds with what society expects from biomedical scientists. In that context, a ‘declaration of interest’ would be a more accurate term for a mandatory and transparent disclosure of financial relationships. A ‘conflict of interest’ should instead be reserved for authors who cannot document efforts to translate their discoveries to the clinic. (The author of the letter is  René Bernards of the Netherlands Cancer Institute.)

I do not know enough about biomedical research conflicts of interest to gauge the merits of this suggestion, but I would be surprised if some scientists couldn’t  still have a conflict of interest even if they translated their discoveries to the clinic. However, the larger point about a COI disclosure seeming to unfairly suggest nefarious conduct basically seems sound.

More generally, I believe that in organizations of all kind,  policies, training and disclosure documents should communicate that not all ostensibly conflicting interests are  wrongful. (This point is sometimes made, but  in my view  not often enough.) The alternative may be to discourage desirable conduct and to drive other conduct underground.