Edited by Jeff Kaplan
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Conflict of Interest Blog
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G.K. Chesterton once said “There are no uninteresting things, only uninterested people,” but some would argue that that meant that he never saw a conflict of interest policy. You can bet that series of justly famous beer commercials won’t show The Most Interesting Man in the World line editing such policies.
But being a less interesting person, they do interest me. Indeed, more so than with most other risk areas, effective compliance here requires close attention to policy creation and maintenance, as a company must clearly define what it considers to be a COI and what its employees should do when faced with an actual, apparent or potential conflict. So, this post collects some resources and thoughts that may be useful for COI policy drafting/revising.
First, it is often helpful to start with a sample. While codes of conduct are – at least for public companies – essentially required to be posted on the web, the same is not true for more detailed COI policies (at least in the private sector – there are, by contrast, plenty of examples for universities and other non-profits to be found with a quick search). But a few corporate COI policies are available on the web, such as those of Best Buy, Novartis and PG&E (the last one is actually part of a code – but is quite detailed, and so worth including here).
Second, while it is helpful to start with a template, one also should base the policy on a COI risk assessment, as discussed in this series of prior posts.
Third, if you are part of a global company you should keep in mind cultural differences that are relevant to COIs as you draft or amend your policy.
Finally, in policy drafting/revising, consider how (if at all) you intend to “check” for COI compliance, such as through a certification regime, auditing, and/or technology-based controls, since with each of these the capacity for checking should inform (although not necessarily dictate) the provisions of the policy.
Fascinating stuff? Certainly not! But that’s okay, because often in the C&E realm what is most interesting is when things go wrong – and it is the mission of the C&E officer to keep work life happily boring.
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In our most recent posting on the ECOA’s Ethics Exchange, Steve Priest and I consider the meaning of the Apple corporate tax controversy for E&C programs.
We’re eager to hear others’ views on this topic.
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There are many ways to look at the world of conflicts of interest – by profession/industry, types of cognizable interests, types of conflicts, and methods of mitigation (e.g., disclosure, compliance programs). In addition to these approaches, the COI Blog has – through guest posts by Simon Webley, Lori Tansey Martens and Judith Irwin – occasionally taken a geographic/cultural view, but generally in a broad way, rather than by country.
Being from the ethical “glass house” that is New Jersey, it would be awkward for me to approach COIs in this latter manner, and I have rarely seen others do it — but am happy when they do. The most recent instance is in an article – perhaps inspired by a high-profile scandal currently raging in the world of Indian cricket - published in today’s Economic Times by Samanwaya Rautray and Urmi Goswami, who report that conflicts of interest in India’s political, business and financial sectors are rampant.
The article is quite detailed and thoughtful, and would be difficult to summarize in the limited space offered by this blog. But I encourage COI aficionados – as well as C&E officers whose companies operate in India – to read it.
I also note that while some of the comments quoted in the piece suggest that there is a cultural root to the problem, roots of this sort can , in my view, be found in a great many societies. Moreover, the article also chronicles many efforts in India –e.g., a registry for politicians to identify their pecuniary interests - to address conflicts in government and business. It also makes the point that the key for dealing with COIs in public companies is for capital markets to pay closer attention to good governance, to which I would add that this challenge exists throughout the world.
Finally, the very fact that COIs are being examined broadly in this article is itself a positive development, since attitudes toward conflicts in one major sector of a society – government, business and even cricket – surely contribute to how COIs are viewed generally.
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In 1973, in speaking to colleagues on the Cook County Democratic Committee, Mayor Richard Daley of Chicago defended his having directed a million dollars of insurance business to an agency on behalf of his son John with the immortal words: “If I can’t help my sons, then [my critics] can kiss my ass. I make no apologies to anyone.”
This analysis aside, nepotism can be a tricky subject to address. There are, of course, countless instances of nepotism being good for business, as recounted in this 2009 article in Forbes. Moreover, not all cultures view nepotism-related issues through a Western lens, as described in this earlier post by Lori Tansey Martens: “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.” Additionally, irrespective of this economic analysis (family ties as promoting accountability), nepotism surely has its roots in evolution – as reflected in loyalty being one of the six universal moral foundations identified in Jonathan Haidt’s landmark book, The Righteous Mind. Finally, as noted in the Forbes piece, there is no broad legal prohibition against nepotism. In many settings, it is perfectly legal.
On the other hand, it is not always legal, as (among other things) family members have played significant roles as the vehicles of corruption in FCPA prosecutions, as recounted in this piece in the FCPA Blog. Indeed, the World Bank has identified nepotism itself as a form of corruption. Moreover, precisely because of its deep origins in our evolutionary past, nepotism may be the most potent conflict of interest of all. There are, after all, many things we would do for our children that we wouldn’t do for ourselves. In a test of strength it is a good bet that family ties will overwhelm those born of less deep-seated fiduciary duties.
Additionally, the harm caused by nepotism is not limited to sub-standard job performance by family members. It can, I believe, also imperil the sense of organizational justice that serves as the foundation for any ethical culture. As described in this earlier post (about organizational justice and COIs generally): “The special harm that COIs can cause to organizational justice arises from their frequently personal nature: because COIs often involve a personal benefit to an individual employee that is denied to others, the latter (i.e., rule abiding employees) can feel personally harmed (from a relative perspective) by the COI in a way that they would not feel, for example, with an antitrust offense or violation of export regulations.” More specifically, the very reasons that make nepotism appealing to the beneficiaries of the practice may make it loathsome to others – i.e., those who don’t share in its benefits – and this, in turn, can undermine the ethical performance of an organization generally.
Finally, I should stress that I don’t mean to suggest by the way I ordered this post that the nays always have it when it comes to nepotism. Indeed, consistent with this blog’s focus on “moral hazard”, I find the above-described accountability argument to be intriguing – at least enough to make it worth exploring further. The point of this post is merely that - at least for some business organizations - nepotism should be a topic for soul searching, and for carrying the ethical analysis further than the late mayor did.
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This week, at the PLI Compliance & Ethics Institute, I gave a presentation on assessing C&E programs. In my talk – the slides for which are here - I address legal imperatives for program assessments; the difference between program assessments, audits and risk assessments; the issue of who should conduct the assessments; the various assessment criteria that one can use - both in terms of program elements (e.g., training, monitoring) and program “attributes,” which are characteristics of successful programs (e.g., the “reach” of a program) that “cut across” program elements. I also discuss deep (and less-than-deep) dives into both risk areas (e.g., anti-corruption, competition law and conflicts of interest) or program elements (e.g., investigations or board oversight).
I hope you find this interesting.
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In a recent article in the Penn State Law Review, Conflicts of Interest in Medicine, Research and Law: A Comparison, Stacey A. Tovino of the University of Nevada at Las Vegas law school reviews approaches to managing COIs in three different professional settings. The piece begins with an analysis of legal regimes regarding COIs in clinical medicine, and particularly those arising from the involvement of individuals who, whether due to age or otherwise, have impaired decision making capacities; then examines how different state laws address COIs in human subjects research (a context that, “[u]nlike treatment…is fraught with” COIs); and, finally, compares and contrasts the above-mentioned approaches with those used for managing COIs in the context of legal representation.
Tovino “finds that the law imposes more stringent duties relating to the identification and management of conflicts of interest in the context of legal representation compared to the contexts of clinical medicine and human subjects research.” Among other things, the latter standards do not “recognize and explicitly refer to the concept of ‘conflict of interest,’” to the extent the former does. They are also less stringent with respect to disclosure of conflicts than are the relevant legal representation standards, and the same is true regarding aspects of conflicts management. Based on this analysis, Tovino argues that “state laws governing conflicts of interest in clinical medicine and human subject research should consider borrowing approaches to conflicts management that are set forth in state rules of attorney professional conduct.”
I applaud Tovino’s exercise in comparative COI analysis. Indeed, in establishing this blog, one of my goals was to provide a compendium of information about the treatment of COIs in different industries or other business contexts (the beginnings of which are collected here) in the hope that those dealing with conflicts in one setting – whether as regulators, compliance personnel or in other roles – can benefit from the experience of others in doing so.
(Thanks to Bill Sachs of HCCS for letting me know about Tovino’s article.)
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I’m pleased to announce that I’ve teamed with my very good friend and esteemed colleague Steve Priest to launch a series of conversations about E&C on the website of the Ethics and Compliance Officer Association.
Our inaugural dialogue – on a topic that is timely every graduation season, but also timeless for those already doing E&C work – is whether E&C is a good career choice. You can find it here, and Steve and I hope you’ll join in the conversation on this and future topics.
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Last Friday I spoke on how to encourage reports of suspected violations and prevent retaliation at the SCCE NE Regional C&E Conference. In the presentation – the slides for which can be accessed here – I examine:
- The uniquely powerful (in the C&E world, that is) legal drivers for strong program efforts in this area.
- The many relevant do’s and don’ts in code of conduct drafting. (Note that while I tend to think that codes play less of a part in the success of C&E programs than is often assumed to be the case, what is and isn’t in a code can play an outsized role in encouraging C&E reports, as the code might well be closely reviewed by a potential whistleblower seeking to determine just how sincere a company is its urging employees to report suspected violations.)
- The necessity of other policies – particularly an escalation one – in this effort.
- Various relevant forms of training and communications – particularly training managers how to respond when an employee reports a concern to them.
- Investigations and discipline, including the importance of seeking “organizational justice” in the workplace, and also the role that incentives can play in this area.
- Relevant governance, management, auditing, monitoring and self-assessment measures.
I hope you find some of it useful.
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Within the world of conflicts, those arising from prior employment relationships occupy a particularly significant territory. (Indeed, one of the most notable COI cases of this – still young – year concerns the former head of a pension system helping a fund manager get business from the system.) In today’s post, I briefly explore different aspects of this part of the COI map.
First, the most consequential forms of conflicts based on previous employment tend to involve public-to-private sector transitions (as in the above-mentioned pension case), and here the relevant standards are generally defined by law. At least in the U.S., the rules for such transitions can be fairly restrictive, as reflected in this 2009 memorandum from the Gibson Dunn law firm relating to employees of the federal executive branch and also in this discussion of relevant state law on the UCLA web site. Government employees and those who would hire them need to be very mindful of these rules and the latter should build into their hiring processes rigorous means for ensuring compliance.
Second, in terms of purely private sector employment transitions, restrictions of the above sort are less universal – and tend to be the domain of internal policy, rather than law. Here (on page 24) is a good example of one such approach from the Verizon Wireless code. Based on what I’ve seen over the years, this is an area where many companies have room to improve.
Finally, there are other less common COI-related employment transitions for which the inquiry goes beyond law or internal policy to something else – an ethical concern, with an element of public policy, perhaps. While difficult to define using current COI categories, these cases tend to be among the most interesting of the lot.
For instance, late last month, as reported in the Guardian, a report issued by the public accounts committee of the House of Commons in the UK charged that Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers “are using knowledge gained from staff seconded to the Treasury to help wealthy clients avoid paying UK taxes… [the firms provided] the government with expert accountants to draw up tax laws [but] went on to advise multinationals and individuals on how to exploit loopholes around legislation they had helped to write… Margaret Hodge, the [committee’s] chair, said the actions of the accountancy firms were tantamount to a scam and represented a ‘ridiculous conflict of interest’ which must be stopped.” Note that for various reasons (some of which are laid out in the Guardian piece) this doesn’t sound like a black-and-white issue to me, but it is indeed worrisome. And given the importance – not just in the UK, but pretty much everywhere - of enhancing the fairness and efficiency of tax systems, I imagine that it is the sort of issue that we’ll be hearing about more in the years ahead.
Finally, there is the story from earlier this year about Treasury Secretary Jack Lew having received a $685,000 severance payment when he left an administrative post at NYU for one at Citibank, which he subsequently left to return to government work – at which time he also got a bonus from Citibank. While the latter payment was contractually mandated, the former one was not and, as noted in this article, was “considered unusual by outside experts in benefits and raises questions about why a tax-exempt university would give a large exit bonus to an executive who was departing voluntarily.”
In light of the chronology, Lew was presumably not being paid by NYU to influence his exercise of specific duties as a government employee – and so this cannot be called a COI in the traditional sense. But it is also hard to see the severance as the school simply rewarding an employee for a job well done – especially since, in addition to a large salary, he also received a loan forgiveness valued at about $440,000. Moreover, given the path of his career (most of which was spent in public service, including holding some powerful posts) it doubtless seemed likely at the time he left NYU that he would at some point return to government in a high ranking position.
So in terms of where the Lew matter fits on our “map,” it may be most accurate to say that it has the spirit – if not the actual form – of a conflict of interest (although perhaps it could be called a COI “on spec”). But - along with other such cases - it may suggest a need to look at the adequacy of our current understanding of what a COI is, and consider redrawing the boundaries of what is out of bounds along the lines of common ethical sense.
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Risk assessment is, of course, the foundation for effective compliance measures generally – and various prior posts describe what should be included in conflict of interest risk assessment. One of the keys to mitigating identified conflicts risks is through the appointment of a subject matter expert, as discussed here.
A risk action plan is a tool for having SMEs identify and help to address C&E risks. In a post earlier this week on the Corporate Compliance Insights web site, I discuss four practice pointers for success in designing and implementing such plans. While not focused on any one type of risk, I think the approach in the CCI piece could be particularly useful to mitigating COI (as well as other) risks in some organizations, given how diffuse COI risks often are in businesses.
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