Conflict of Interest Blog

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.

Our fiduciary future?

There is, of course, no one body of law governing all conflict-of-interest issues. But the law regarding fiduciary duty comes closer to doing so than does any other body of law.

In “The Rise of Fiduciary Law,” recently posted on the Harvard Law School Forum on Corporate Governance and Financial Regulation, Professor Tamar Frankel of Boston University School of Law notes: Fiduciary rules appear in family law, surrogate decision-making, laws of agency, employment, pensions, remedies, banking, financial institutions, corporations, charities, not for profit organizations, medical services and international law. Fiduciary concepts guide areas of knowledge: economics, psychology; moral norms; and pluralism. Fiduciary law was recognized in Roman law and the British common law. It was embedded decades ago in religious Jewish, Christian, and Islamic laws. Internationally, fiduciary law appears in European, Chinese, Japanese and Indian laws.

Frankel traces the growth of fiduciary expectations to the increasing need in modern societies to share expertise while minimizing the risks that can arise from such sharing. Power can be used to benefit or harm. The recipients’ inability to check the experts’ power and services quality can result in suspicion and withdrawal from the expert. This result conflicts with society’s interests. After all, the financial, health, legal and education systems, to name a few, are built on offer and exchange of expertise. In response, fiduciary law establishes duty of care ensuring expert services and duty of loyalty prohibiting conflicting interests which undermine trust. Fiduciary law can entice and protect those who need expert services to rely and trust their experts. The lower the ability to check the experts’ expertise and honesty, the higher the fiduciary duty of experts and their punishment for abuse will be.

Looking forward, Frankel notes: The impact of fiduciary law is likely to rise. Fiduciary law issues are expanding. Inequality of knowledge and expertise exist and is likely to continue, depending on the degree to which those who rely on the experts can trust the experts, and the degree to which society benefits from this degree of trusting by expanding and exchanging knowledge and helpful services to its members….Regardless of whether they are enforced by law, by social rules, or by cultural pressures, fiduciary rules are a condition to the long-term well-being of a human society.

(For an earlier post on the many harms that can come from a COI-based lack of trust click here.)

For legislators, enforcement personnel and business leaders the lesson of this analysis is clear: fiduciary standards should be strongly defined and enforced. But what is the take-away for the fiduciaries themselves?

Frankel notes, in this regard: Fiduciary law should be based on one guiding test by a party that offers trusted fiduciary expert: “Would I, the trusted person, like to be treated the way I treat those who trust me?

I understand and partly agree with this proposal, but also worry – based on behavioral ethics research showing that people often underestimate the impact on them of others’ wrongdoing – that it might not produce the desired result enough of the time.  So, my friendly amendment is to put this suggested question into a third-party framework: Would the proposed action if taken by people generally tend to reduce trust generally in the context at issue?  (E.g., would non-disclosure of a payment by a pharmaceutical manufacturer to a doctor tend to reduce  the  trust of patients in their doctors generally.)

Just to be clear, I am not advocating a rewrite of the Golden Rule. I  am just suggesting that it can be easier to recognize vulnerabilities in others – i.e., people generally – than in ourselves, and this might be relevant to designing a guiding principle for fiduciaries.

 

Conflict of interest self assessments

C&E program assessments sometimes have a general scope and sometimes are focused on a single substantive risk area – such as corruption or competition law. For some companies it makes sense to do such a targeted assessment for conflicts of interests – particularly those responding to a significant COI violation or “near miss.”

The scope and approach of such assessments for any given company at any given time should vary based on a variety of circumstances. Hopefully, however, the following questions/comments can be helpful to some organizations seeking to determine whether/how to go down this road.

Risk Assessment. Has the company assessed COI risk? If so, has it used the results of the assessment(s) in designing and implementing other aspects of the COI program?

Governance. Have the respective COI oversight roles of the board of directors and senior management been formalized? Do they receive appropriate reports of COI program activity? Are there sufficient escalation provisions regarding COIs?

Culture. Are COI rules followed or are there double standards? What is the sense of “organizational justice” vis a vis COIs?

Policies. Presumably nearly every business organization has a COI provision in its code of conduct – but there are also many that need but do not have a standalone policy as well.

Procedures. Are disclosure procedures clear, easy to use and well known? Do those tasked with reviewing COIs have sufficient knowledge and independence for the job?

Training/other communication. Is there enough training given relevant COI risks (which tend to be high for senior managers/board members and in certain functions). Is training reinforced through other communications?

Auditing and monitoring. Is the COI disclosure practice audited? Same question for monitoring (of conditionally approved COIs)..

Responding to allegations/request for guidance. Do employees feel comfortable seeking guidance on possible COIs? Are investigations truly independent? Are violations of the COI policy treated with sufficient seriousness? Does the company conduct a “lessons learned” analysis of significant COI failures?

Of course, there is much more that could be included in a COI self-assessment (and I encourage you to browse the blog for ideas in this regard). But hopefully the above will be a useful foundation for starting.

 

 

Assessing compliance incentives

The latest from the Compliance Program Assessment Blog.

Rebecca Walker and I hope you find it useful.

Disclosure’s two-edged sword

Several prior posts reviewed the findings of various studies which raised questions about the efficacy of disclosure as a COI mitigant, including that:

Disclosure can “morally license” the conflicted party to act in a COI-based way.

– Individuals impacted by the COI may not fully understand/be aware of what is being disclosed.

– A “reverse conflict of interest” could occur, meaning that an individual dealing with the conflicted party could overcompensate for it.

“Disclosure can place inappropriate pressure on the audience to heed the advice — for example, in order to avoid insinuating that the [disclosing party’s] advice has been corrupted.”

A study recently authored by Sunita Sah of the Samuel Curtis Johnson Graduate School of Management of Cornell University; and Prashant Malaviya and Debora Thompson, both of the McDonough School of Business, Georgetown University  — “Conflict of Interest Disclosure as an Expertise Cue: Differential Effects Due to Automatic Versus Deliberative Processing,” which  was published in July in Organizational Behavior and Human Decision Processes — adds to this intriguing body of knowledge.

As described in a recent issue of the Cornell Chronicle, “the researchers examined two years of posts in 60 influential fashion and beauty blogs. Fewer than 350 of more than 150,000 posts contained disclosures [itself a troubling number]; but the higher the rate of disclosures, the more positive the reader comments. The researchers then did a series of experiments comparing participants’ reactions after reading blog posts with and without various types of disclosures. Study participants who read a blog post about apartment decorating were more likely to share the post if they read the version with a conflict of interest disclosure,…”

As noted by the authors, the reason COI disclosures have this positive effect is that they act “as a heuristic cue [i.e., a mental short cut] to infer greater trust in the blogger’s expertise and consequently greater persuasion.” Looking forward, however, as “COI disclosures become more pervasive, the heuristic effect of COI disclosure might disappear over time.” But until that day comes, C&E professionals need to make sure —  in reviewing COI disclosures and designing mitigation plans —  not to be unduly affected by the fact of disclosure itself.

Indeed, this study might be worth mentioning  in training managers.  That is, the message that COI disclosure could actually be good for business — which seems a fair reading of the results — could be a persuasive (albeit novel) way of encouraging disclosures.

(There is much more to this paper than what I have touched on above, and I encourage you to read the original.)

 

 

How to assess compliance investigations

The latest post by Rebecca Walker and me in the Compliance Program Assessment Blog.

We hope you find it useful.

Conflict of interest risk assessment (part 2)

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

I hope you find it useful.

Loyalty and conflicts of interest

Movie mogul Samuel Goldwyn famously said  “I’ll take fifty percent efficiency to get one hundred percent loyalty.”  But too much loyalty may be bad for reasons that go beyond inefficiency, as indicated by President Trump’s call for then FRI director Comey to be loyal to him.

In Ethics for Adversaries,  Arthur Isak Applbaum describes how many of the adversary systems with which we live – law, politics, and others – seem to license wrongdoing that would not be countenanced if done in other settings.  As he notes, “[A]dversaries act for by acting against,” and this leads to a purported “division of moral labor” – with the expectation that some sort of equilibrium will arise therefrom.   But, he says, acts that ordinarily would be morally forbidden – such as deception – should not be considered permissible merely because they are performed in a political or professional role.

The phenomena of loyalty can be thought of somewhat in the same way as adversarial norms in that, although the source of much good, it too can interfere with fairness and honesty in thought and deed.

In a piece in a recent issue of Forbes. Rob Asgar makes the following important  points about loyalty:

– The “loyalty bind,” as some psychologists call it, keeps the members of an organization from being able to see tumors metastasizing in their midst. It’s what leads to scandals and cover-ups in churches, city halls, companies and ideological movements.

-The challenge is to move organizations away from the notion of loyalty to persons and toward the notion of loyalty toward first principles. These principles include transparency, integrity, accountability and a constant readiness to reform in whatever way necessary—no matter whose personal interests may be affected. This isn’t easy, because humans are tribal—we evolved to be in the society of other humans and to instinctively sacrifice our own safety in order to defend them against outside threats. The notion of defending shared principles came later, and it still hasn’t taken root fully.

– It’s something of a management cliché to suggest that good leaders inspire loyalty. But the reality is that it’s often the bad ones who focus on that. Good leaders inspire principled behavior, not loyalty or obedience.

Assessing compliance training

The latest post in the Compliance Program Assessment Blog.

Rebecca Walker and I hope you find it useful.