Conflict of Interest Blog

Hire the guilt prone

In a recent edition of Knowledge at Wharton, Maurice Schweitzer of that school discusses a paper, “Who is Trustworthy? Predicting Trustworthy Intentions and Behavior,” he co-authored with T. Bradford Bitterly, a postdoctoral research fellow at the University of Michigan’s Ross School of Business, Taya R. Cohen, a professor at Carnegie Mellon University’s Tepper School of Business, and Emma Levine, a professor at the University of Chicago’s Booth School of Business. Schweitzer notes:

We tapped into a personality trait that hasn’t received as much attention as say, the “Big Five” personality traits [extraversion, openness, agreeableness, neuroticism and conscientiousness.] The personality trait we tapped into is something called guilt proneness, or how prone someone is to feeling guilty. Imagine you’re out at a party. You have a glass of red wine, and you spill some red wine onto a white carpet. How would you feel? The people who would feel extremely guilty about that are the people who are prone to feeling guilt. Now what’s interesting is that people who are prone to feeling guilt, they don’t actually experience a lot more guilt because they spend a lot of effort trying to avoid putting themselves in that position. Those are the people who would say, if I’m if I’m going to be drinking wine over a white carpet, I’m having white wine. Those are the people that are thinking ahead to make sure they’re not missing deadlines. They’re not falling short of your expectations. They’re going to take their time and work extra hard to take other precautions. Those are the guilt-prone people. And it turns out that those people are pretty reliable. And when it comes to being trustworthy, those are the people we should be trusting.

This makes sense to me as an intuitive matter. But more than that, we have only to look at the example set by President Trump, who seems to show no guilt about anything – and who is as untrustworthy as any leader can be.

I’m not sure how compliance officers can operationalize this research. But for citizens the implications couldn’t be clearer.

Compliance officers as entrepreneurs?

In a paper recently published by Boston University School of Law – The Law Office (LO) and Compliance Officer (CO): Status, Function, Liabilities, and Relationship  – Emerita Professor Tamar Frankel of that school quotes a former SEC official (John Walsh, then Chief Counsel, Office of Compliance Inspections and Examinations) as noting the following:

[C]ompliance officers have the characteristics of entrepreneurs. They have the “what next” mentality. They are excited about change and interested in the unknown; perhaps because the unknown is where their opportunities lie. They are not afraid of what they do not know and are eager to learn. With continuous learning come recognizing problems and ideas for solutions. They focus on creating and implementing new ways of doing things. Often, they are more interested in the future than in the present or the past, particularly if the future promises better methods and results. This process and the ideas it brings, are the exciting for entrepreneurs. In this respect COs are similar to entrepreneurs.

Note that these remarks are from a speech given in 2002, and compliance is not quite as new a profession now as it was then. On the other hand, the expectations of COs are now escalating steadily and the need for COs to have an entrepreneurial mindset – and entrepreneurial reputation within their respective companies – is as great as ever.

But COs are not the only members of the compliance universe who need be entrepreneurial in how they approach their work. Prosecutors should do so too, as the Department of Justice seemed to recognize in 2015 by creating the position of Compliance Counsel for the Fraud Section. The lawyer appointed to that post – Hui Chen – noted in an interview with Ethical Systems:

By creating the Compliance Counsel role, the Fraud Section in the Criminal Division sought to bring in-house expertise to that evaluation [of target companies’ compliance programs]. In doing so, the Fraud Section both recognizes compliance as an area of professional expertise, and heightens the significance of that expertise as something that is critical to companies.

Chen was (and is) clearly a compliance expert. And she seemed to bring an energy and engagement to her work that could fairly be called entrepreneurial.

However, she resigned in 2017, and last month the head of the Criminal Division announced that the position would not be filled. He noted:  “Our expectation is that the [Criminal] Division will develop a training program [for prosecutors] that addresses compliance programs generally, as well as issues specific to each section and unit.’”

Perhaps this new approach will work out okay. But without a true expert accountable for achieving compliance success at Justice I am doubtful that it will happen, as accountability is also part of what makes an entrepreneur.

I’ll be speaking on behavioral ethics with

Azish Filabi of  Ethical Systems at Navex’s Ethics & Compliance Virtual Conference on November 8.

We hope you can join us.

New on the Compliance Program Assessment Blog

A post on confidentiality and C&E assessments.

Rebecca Walker and I hope you find it useful.

New on the Compliance Program Assessment Blog

An excellent guest post by the always excellent Joe Murphy on certifications as a form of program evaluations.

Moot compliance court for corporate directors?

In their paper, “Short-Changing Compliance,”  John Armour (University of Oxford), Jeffrey N. Gordon (Columbia Law School), Geeyoung Min (Columbia Law School), argue: “Corporate compliance programs play a central role in society’s current response. Prosecutors give firms incentives—through discounts to penalties—to implement compliance programs guiding and monitoring employees’ behavior. However, focusing on the incentives of firms overlooks the perspective of managers, who decide how much firms invest in compliance.” They further note: “stock-based pay, ubiquitous for corporate executives, creates systematic incentives to short-change compliance. Compliance is a long-term investment for firms, whereas managers’ time-horizon is truncated at the date they expect to liquidate stock. Moreover, investors find it hard to value compliance programs, because firms routinely disclose little or nothing about their compliance activities.” Also, “stock-compensated managers prefer not to disclose compliance, because it can reveal private information about a firm’s propensity to misconduct: the greater a firm’s misconduct risk, the more valuable to it is an investment in compliance. As a result, both managers and markets are likely myopic about compliance.”

To remedy all of this they “propose more assertive directors’ liability for compliance failures,…” but which would avoid incenting directors to overinvest in compliance.

I agree that the prospect of director liability for compliance failures under existing law is weak, as described in this recent post.. However, I don’t see the political will among shareholders, courts or legislatures to change that.

But should it come to pass, the next issue would be how the standard would be applied. In this regard, the authors propose: “[I]f the firm resolves a compliance enforcement action, criminal or civil, through payment of a fine or accepting some other sanction, an appropriate board committee, perhaps the governance committee, should trigger an ‘accountability proceeding.’ This proceeding could be presided over by a panel of compliance and industry experts, perhaps three, who would conduct an internal investigation that would (i) evaluate the compliance system within the firm as well as the particulars of the compliance failure, (ii) assess the extent of directors’ responsibility, and (iii) determine the appropriate clawback of the accumulated stock of responsible former and current directors.”

Indeed,  one might – as part of board compliance program governance –  deploy a “moot court” accountability proceeding to help directors avoid ever having to face the “real deal.” I suggest this because much of the underlying logic of compliance programs is based on the realization that merely threatening punishment is not enough to prevent wrongdoing. And just as employees need training in various compliance areas for that threat to be meaningful, so directors should be periodically reminded about the risks they face.

As noted above, the heightened standard of board liability for compliance failures proposed by the authors is a long way from coming to pass. But, even under the current, relatively lax standards, the “moot court” idea might be worth trying, as it would undoubtedly cause some directors to focus on compliance more than they currently do.

For an earlier post on compliance incentives and managers click here.

Imagine the real

 

An early post on this blog noted that among the more interesting phenomena of behavioral ethics was the impact that knowing or not knowing a party could have on how one treated that party.

A 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 tend 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.

But what about COIs? The picture there is mixed, as some COIs do involve identifiable victims – such as the job applicant who does not get hired because the position was filled by the boss’s son. Similarly, an organization might suffer identifiable harm when its procurement process is corrupted by a COI – e.g., paying too much or getting too little.

However, with other sorts of COIs the harm is less apparent. It is the damage to trust in key relationships.

For this reason, organizations might consider including the following question in their COI resolution protocols: “How likely would it be at that the COI would diminish the trust that stakeholders (shareholders, employees, customers, business partners, suppliers or regulators) would have in the Company or otherwise adversely impact the Company’s reputation?”

Of course, this thought experiment works only if you truly try to put yourself in the shoes of one of these parties. Or, to use the memorable words (albeit from  another setting) of philosopher Martin Buber: “Imagine the real.”

The parade of horribles

My latest column in Compliance & Ethics Professional (page 3 of PDF).

I hope you enjoy it.

A free SCCE podcast on conflicts of interest

 I hope you find it useful

Webinar on C&E program assessment

On September 28, Rebecca Walker and I will be leading a Practising Law Institute One-Hour Briefing on assessing  compliance & ethics programs.

More information on the webinar can be found here.

We hope you can join us.