Edited by Jeff Kaplan
Conflict of Interest Blog
Imagine a company where all the senior managers took compliance and ethics as seriously as they do traditional aspects of business (R&D, production, sales & marketing). In this company, not only would senior managers do whatever was reasonably necessary to prevent and detect violations in their own business unit or function, they would use their knowledge of and clout within the entity as a whole for making sure their peers were equally committed to promoting law abiding and ethical conduct. While thought experiments are more art than science, I find it hard to imagine any other single C&E-related factor being as powerful a force for good in organizations as this would likely be.
Leona Helmsley is reported to have said that “only the little people pay taxes” and sometimes it feels like C&E programs are only for the little people – given how often it is the “big people” who engage in the types of unlawful and unethical practices that cause the greatest harm in businesses. Indeed, the “C Suite” seems to be the “final frontier” when it comes to effective ethics and compliance programs. In an article in yesterday’s NY Times, Gretchen Morgenson identifies two recent (and somewhat similar) proposals that offer a path to addressing this area of great weakness in many companies.
One is a proposal to Citigroup shareholders that would “require that top executives at the company contribute a substantial portion of their compensation each year to a pool of money that would be available to pay penalties if legal violations were uncovered at the bank. To ensure that the money would be available for a long enough period — investigations into wrongdoing take years to develop — the proposal would require that the executives keep their pay in the pool for 10 years.”
The other is an article by Greg Zipes in the Michigan State Journal of Business and Securities Law which “calls for the creation of a contract to be signed by a company’s top executives that could be enforced after a significant corporate governance failure. Executives would agree to pay back 25 percent of their gross compensation for the three years before the beginning of improprieties. The agreement would be in effect whether or not the executives knew about the misdeeds inside their companies.” Its requirements would be triggered if, among other things “a company pleaded guilty to a crime [or]…if an executive signed a financial document filed with the S.E.C. that subsequently proved false and required an earnings restatement of at least $5 million.”
Both of these proposals make sense to me. While a company should, of course, use traditional forms of compliance (e.g., training, auditing, monitoring) to address C-Suite risks, the best mitigant of all may be other “big people” – if they are properly motivated to prevent and detect wrongdoing by their peers.
For further reading:
- “Redrawing corporate fault lines using behavioral ethics”
- “Behavioral ethics and C-Suite behavior” (discussion of paper by Scott Killingsworth)
- “Behavioral Ethics and Management Accountability for Compliance and Ethics Failures”
- “Where is the accountability?” (a dialogue with Steve Priest in ECOA Connects).
While in the more than three years of its existence the COI Blog has been devoted primarily to examining conflicts of interest it has also run a number (close to fifty) of posts on what behavioral ethics might mean for corporate compliance and ethics programs. Below is an updated version of a topical index to these latter posts. Note, however, that to keep this list to a reasonable length I’ve put each post under only one topic, but many in fact relate to multiple topics (particularly the risk assessment ones).
- Business ethics research for your whole company (with Jon Haidt)
- Overview of the need for behavioral ethics and compliance
BEHAVIORAL ETHICS AND COMPLIANCE PROGRAM COMPONENTS
- “Inner controls”
- Is the Road to Risk Paved with Good Intentions?
- Slippery slopes
- Senior managers
- Long-term relationships
- How does your compliance and ethics program deal with “conformity bias”?
- Money and morals: Can behavioral ethics help “Mister Green” behave himself?
- Risk assessment and “morality science”
Communications and training
- Publishing annual C&E reports
- Behavioral ethics and just-in-time communications
- Values, culture and effective compliance communications
- Behavioral ethics teaching and training
- Moral intuitionism and ethics training
- Behavioral Ethics and Management Accountability for Compliance and Ethics Failures
- Redrawing corporate fault lines using behavioral ethics
- The “inner voice” telling us that someone may be watching
- Include me out: whistle-blowing and a “larger loyalty”
- Hiring, promotions and other personnel measures for ethical organizations
Board oversight of compliance
- Behavioral ethics and C-Suite behavior
- Behavioral ethics and compliance: what the board of directors should ask
- Is Wall Street a bad ethical neighborhood?
- Too close to the line: a convergence of culture, law and behavioral ethics
Values-based approach to C&E
- Values, structural compliance, behavioral ethics …and Dilbert
Appropriate responses to violations
- Exemplary ethical recoveries
BEHAVIORAL ETHICS AND SUBSTANTIVE AREAS OF COMPLIANCE RISK
Conflicts of interest/corruption
- Does disclosure really mitigate conflicts of interest?
- Disclosure and COIs (Part Two)
- Other people’s COI standards
- Gifts, entertainment and “soft-core” corruption
- The science of disclosure gets more interesting – and useful for C&E programs
- Gamblers, strippers, loss aversion and conflicts of interest
- COIs and “magical thinking”
- Insider trading, behavioral ethics and effective “inner controls”
- Insider trading, private corruption and behavioral ethics
- Using behavioral ethics to reduce legal ethics risks
OTHER POSTS ABOUT BEHAVIORAL ETHICS AND COMPLIANCE
- New proof that good ethics is good business
- An ethical duty of open-mindedness?
- How many ways can behavioral ethics improve compliance?
- Meet “Homo Duplex” – a new ethics super-hero?
- Behavioral ethics and reality-based law
In a book review published last weekend in the Wall Street Journal titled “Two Cheers for Corruption,” the prolific scholar Deidre McCloskey argues that while corruption can be harmful to some societies (such as Afghanistan, the subject of one of the books she reviews), “The Great Enrichment that America rode to economic power was hardly slowed by the spoils system.” In short, she sees much corruption as sort of a harmless foul, and some as even beneficial.
This is a maddening argument, because the fact that growth in the US was strong for many years does not mean that corruption was a neutral or even positive force in that growth. Additionally, the possibility that corruption may on some level be good for US economic interests is hardly the end of the ethical (or even economic) inquiry. For instance, even if one assumes that McCloskey is right from a purely US-centric view that “It can be good for efficiency if, say, bribes are paid to …smooth the course of sales by U.S. businesses to the Egyptian military,” the people of Egypt – who have long suffered from corruption of their officials – would almost certainly disagree.
Indeed, over the years I have tried to capture in this blog stories showing how conflicts of interest – which underpin all cases of corruption – can be harmful. While just the tip of the iceberg, it is hard to square these and countless other similar stories with McCloskey’s more benign vision of corruption.
One can also conduct a thought experiment about a world filled with conflicts of interest – and indeed I used to do this when I taught ethics in business school. As noted in an earlier post , my students thought that: In “Conflict of Interest World,” 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.
Note that McCloskey would probably respond that her review is focused on government corruption whereas the examples above are the private sector type. But, as Justice Brandeis said, “Our government is the potent, the omnipresent teacher. For good or for ill, it teaches the whole people by its example. Crime is contagious. If the government becomes a lawbreaker, it breeds contempt for law; it invites every man to become a law unto himself; it invites anarchy.”
McCloskey indeed has a broad view of the need for ethical instruction, arguing that “All that works in the end is ethical change, urged from the mother’s knee, the pastor’s pulpit, the judge’s bench, the schoolmaster’s lectern.” All these do work – or at least can. But the same can be said for a virtuous government as well.
Finally, note that McCloskey speaks derisively of what might be called a systems approach to promoting ethical conduct: “We should stop thinking, as too many economists do, that we can ‘engineer’ society with ‘incentives.’ Freakonomics doesn’t reign. The blessed Adam Smith wrote that ‘the man of system . . . seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board.’ Nowadays, alas, we are all men (and women, dear Adam) of system.”
While there is an obvious logic to Smith’s critique, there is also much that – in my view – can be accomplished through a systems-based approach to ethics, particularly systems built not only on economic incentives but also learnings from behavioral sciences. For more on the promising field of behavioral ethics, please visit the Ethical Systems website.
In my latest column in Compliance & Ethics Professional (page 2 of PDF) I look at legal mandates for having a pro-compliance culture, and what C&E folk should focus on in helping their companies meet those expectations.
I hope you find it interesting.
First, a plug: at the upcoming annual conference of the Ethics and Compliance Officer Association , I’ll be speaking on a panel on “A view from the edge: exploring the future of ethics and compliance.” It is a topic I addressed at the very first ECOA conference – held in 1992, when the organization had a grand total of 19 members and the entire C&E field was so new. I hope to see you at this year’s event, which will be held next month in Dallas.
Second, the COI story of the week – is also about the future. It concerns the Clinton Global Initiative (CGI) accepting contributions from foreign governments, notwithstanding the prospect that Hillary Clinton will run for President. When she was Secretary of State, the organization did not take such donations, but they lifted the ban when she resigned from that post.
Of course, since she isn’t president, technically this isn’t an actual conflict. Rather, it is a potential COI.
What’s the difference? As discussed in this earlier post: Potential conflicts refer, as a general matter, to situations that do not necessarily constitute or appear to constitute a COI but where there is a reasonable possibility of an actual or apparent COI coming into play.
As with the risk analysis of any COI, with potential COIs one should consider the dimensions of likelihood and impact.
On likelihood, there are actually two questions relevant to this inquiry. First, how likely is the COI-triggering event to happen? Here, that event – Hillary becoming President – seems reasonably likely to occur. (The analysis might be different if we were dealing with a “Bernie Sanders Global Initiative,” or organization associated with another long-shot seeker of the office.)
Second, if the triggering event does occur, can effective mitigation measures then be implemented? That might be difficult in this instance because, if she did win the Presidency, presumably returning the donations to the foreign governments, though not impossible, would be pretty unpalatable – particularly if the money was already spent on the many critically important causes the CGI supports.
Finally, the potential impact of a COI seems high here as well. That is, the donations from foreign governments could undermine the trust that the American people have in the President, and perhaps cause suspicion in other countries too.
So I agree that CGI should ban foreign government contributions. But I also applaud the organization for its effective work on climate change (and in other areas), as the actual conflicting interest we have with future generations on that issue may be the greatest COI of all time.
(Some additional reading:
Two conflicts of the apocalypse.
Is the road to risk paved with good intentions?
COI policies for non-profits.)
The most prominent COI story in the past few days comes to us from Mexico where, as described in The Economist, that country’s president Enrique Peña Nieto “announced that he, his wife and his finance minister will become the first subjects of a conflict-of-interest investigation” that was “triggered by revelations that [they] bought houses on credit from affiliates of a building firm that has benefited from government contracts.” But for me the most intriguing story of the week (and indeed the year, at least so far) comes from the ethical wonderland that I call my home – New Jersey.
As reported initially by the Bergen Record: “Federal prosecutors have [launched a probe] into a flight route initiated by United [Airlines] while [David] Samson was chairman of the [Port Authority, which] operates [Newark Liberty Airport]. The route provided non-stop service between Newark and Columbia Metropolitan Airport in South Carolina — about 50 miles from a home where Samson often spent weekends with his wife. United halted the non-stop route on April 1 of last year, just three days after Samson resigned under a cloud. Samson referred to the twice-a-week route — with a flight leaving Newark on Thursday evenings and another returning on Monday mornings — as ‘the chairman’s flight,’ one source said. Federal aviation records show that during the 19 months United offered the non-stop service, the 50-seat planes that flew the route were, on average, only about half full. United… was in regular negotiations with the Port Authority and the Christie administration during Samson’s tenure over issues that included expansion of the airline’s service to Atlantic City and the extension of the PATH train to Newark…” A story from NJ.Com added that the flight’s booking rate of 50% was significantly lower than “the rate of 85 percent or higher common among carriers” and also that the Chair of the NJ assembly’s transportation committee said the benefit to United of running this unprofitable route “could be PATH. It could be how much they pay for landing planes. It could be for how flights are dispatched at the airport. It could be a multitude of things. And it could be none of them.”
Assuming for the sake of discussion that it is indeed at least one of those or other financial benefits, the case should be interesting to COI aficionados for several reasons.
First, the main law enforcement challenges to investigating the matter will likely be (as it is many COI/corruption cases) proving wrongful intent. Presumably, Samson knew enough not to document what was seemingly happening here (although his comments about the “chairman’s flight” may suggest otherwise), but what about United? Given how cost conscious airlines have been in recent years, one imagines that someone at the company would have needed to document why they were running half full planes. Moreover, for various reasons this seems like the sort of arrangement that would have been known at a reasonably high level in the company (although finding documentation of that may be a taller order).
Second, it will also be interesting to see what role, if any, United’s compliance program played in these events. In light of how many people at the airline could well have had some suspicion about these flights, it would be pretty damning if none of them called the C&E helpline. On the other hand, if the issue was raised internally and buried, that would be even worse.
Third, it may be noteworthy that while the Company’s code of conduct does have a section called “When the government is the customer,” the bribery discussion there is limited to international transactions. Perhaps like a lot of US companies, United’s compliance team failed to grasp the risks of homegrown corruption generally (and the Jersey variety in particular). Other companies may wish to revisit their own codes to see if they could be subject to the same criticism.
Two final notes. First, the facts of this case are just beginning to emerge and the speculations in my post should not be read to suggest that Samson or United are necessarily guilty of corruption. Seriously. Second, for an earlier story about a possible COI involving Samson (and his connections to the ethically challenged Christie administration) see this post and the article linked to therein.
The recent indictment of NY State Assembly Speaker Sheldon Silver on corruption charges has – at least for the moment – focused some attention on the age-old practice of “referral fees,” under which a lawyer or other professional receives compensation for referring an individual or entity to some other service provider. In the Silver case, the (now ex-) Speaker received such fees from two different law firms. As described in this piece in the NY Times , one of these firms - “a large personal injury law firm where he has worked for more than a decade” – paid him more than three million dollars based on client referrals from a doctor whose research center had been given $500,000 in state grants orchestrated by Silver. Another part of the prosecution’s case involves his receipt of referral fees from a real estate law firm to which he had steered clients and his performing official action to benefit those clients.
In both of these alleged schemes the principal victims were the taxpayers of NY, whose interests were subordinated to Silver’s personal interest. The element of harm to the two firms’ respective clients was less a part of the picture (although some harm could be presumed with the personal injury referral fees). But in a traditional referral fee situation the harm is principally and often entirely to the client.
Of course, it is not only lawyers who pay/receive referral fees – and who face ethical questions involving these practices. For instance, architects must, as a matter of professional standards, disclose referral fees. As noted in this Advisory Opinion from the American Institute of Architects: “It makes no difference under the disclosure rules whether the architect is certain that the contractor he recommends is the best one for the job or that he would make the same recommendation even if no referral fee were paid. Though the architect may be confident there is no actual conflict of interest, any referral fee is an interest substantial enough to create an appearance of partiality and is a factor about which the client is entitled to know.”
Legal and ethical issues regarding referral fees are disturbingly common in the medical profession. For a discussion of the conflicts of interest inherent in such arrangements see this post from Chris MacDonald’s excellent Business Ethics Blog: “If the person you’re relying on for advice is financially beholden to the person he or she is recommending, you have every reason to doubt that advice.”
Such practices are also common in the financial advisory services realm. See this discussion of relevant ethical standards, and note that – as with doctors – these cases sometimes cross legal, as well as ethical, lines.
Finally, the regulation of referral fees in the legal profession has existed for many years. However, the area is increasingly complicated by the phenomenon of referrals being made by non-attorneys to law firms, as described in this paper by John Dzienkowski of the University of Texas School of Law.
Indeed, in my own practice I have been offered referral fees by vendors selling C&E products and services. I always say No. I’d like to think that my steadfastness is the result of being virtuous, but in reality, it is just a matter of common sense. That is, for clients or prospective clients to have to worry about whether my advice was tainted would be devastating to my business. And no referral fee could ever compensate for that.
Last month, Pro Publica published an extensive report regarding a dispute on whether Goldman Sachs should be sanctioned by the Federal Reserve for failing to have a firm-wide policy on conflicts of interest. An examiner for the Fed had argued in favor of such an action but the firm contended – successfully – that the COI provision in the company code of conduct coupled with COI policies for various of its divisions was good enough.
At least for C&E aficionados, the story is an interesting one (and the issue, in my view, a close call), particularly given Goldman Sachs’ recent COI history. (See this post and this one.) But for readers of this blog the piece may be most useful as an occasion to ask: Does my company have the COI policy that it needs?
To begin, a great many businesses don’t need a stand-alone COI policy. For many what’s in the code of conduct is policy enough. But there are, in my view, quite a few companies that should have stand-alone policies but don’t.
Five things to ask in a COI policy needs assessment
Certainly where companies have client relationships that could give rise to COIs there is a good reason to have a stand-alone policy, as such businesses generally face a greater array of COI risks than do others. Such risks tend to warrant a fuller discussion of COI standards and mitigation than can fit into a code of conduct. Put otherwise., companies that have relationships of trust with clients tend to have higher COI risks – both in terms of likelihood and impact – than do other sorts of businesses, and that should be reflected in how formal and extensive the related mitigation should be.
But other types of organizations should consider drafting stand-alone policies too, at least if they:
- Have had more than their share of COIs in recent years, as a stand-alone policy can help signal to key constituencies resolve in dealing appropriately with COIs.
- Face more diverse, complex, non-obvious or culturally challenging COI possibilities than the average company has. The more there is to say about different sorts of COI risks, the greater the need for a stand-alone policy, as there simply won’t be enough room in the code to do justice to all pertinent issues.
- Have significant COI-related process needs – in such areas as disclosure, management and auditing. Here too the code may not offer enough space to deal with the company’s requirements.
- Face heightened COI expectations for other reasons (e.g., non-profits, or other organizations that could be held to a “Caesar’s wife” standard of ethicality).
And don’t forget organizational justice
Even companies that don’t fit into any of the above categories should consider developing a stand-alone COI policy as a means of promoting “organizational justice.” As noted in this earlier post: “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.” Implementing a stand-alone COI policy can thus, in my view, help elevate the confidence employees have in the overall ethicality of their companies. Of course, to do so the policy must be sufficiently promoted and enforced. But being successful here could have a ripple effect – by enhancing trust that management is committed to doing the right thing generally, which can be utterly vital to compliance and ethics program efficacy.
Note that while this consideration presumably applies to all companies, it does not mean that all companies need stand-alone COI policies. But it is a factor that all companies should weigh in determining whether to implement such a policy.
Drafting a policy
If one does opt to create a stand-alone COI policy there are obviously lots of choices to be made in determining the content of the policy, and the links below to prior posts in the COI Blog might be useful in that regard.
To start, you might see this overview, which includes links to several leading companies’ policies (that could be helpful samples from a form – as well as substance – perspective).
Regarding the key question of what COIs to address in the policy, a fairly comprehensive list is included in this post about certifications (the content of which is equally applicable to policies).
Here are some more specific discussions:
- G&E generally and gifts between employees.
– Supervising family members in the workplace.
- Serving on another company’s board.
Next, regarding standards for allowing COIs to continue and related process issues, see this post and this one.
Finally, note that within the above posts there are links to many other posts and resources that might be useful in drafting or revising a COI policy.
Over time, companies should devote an increasingly greater amount of C&E program effort/resources to “checking” – auditing, monitoring and other forms of self assessment. More than two decades after C&E checking became the law of the land, one can imagine how little sympathy the government would have for a company that tries to get “credit” for its C&E program but which had taken insufficient steps to determine if that program was in fact fit for purpose.
However, if the need for checking is clear, where to start (or what step to take next) may not be. Both as a conceptual and practical matter, this can be a daunting area to tackle given the many types and dimensions of checking available.
In a complimentary web cast sponsored by The Network on January 20, 2015 at 1:00 pm Eastern, I’ll try to survey the world of C&E checking, describing relevant legal expectations and best practices that apply to both the risk area and the general program dimensions. I’ll also discuss practical measures that companies can take to begin or improve a regime of C&E checking – in effect, a needs assessment for one’s C&E auditing, monitoring, program assessment and risk assessment. Finally, I’ll consider what the impact of “behavioral ethics” should be on C&E checking.
Postscript: more than 500 C&E folks attended the web cast live and another 400 are getting the recorded version. If you’d just like the slides, please click here.
A long time ago – before Enron, World Com and Sarbanes-Oxley – business ethics issues in general and conflicts of interest compliance requirements in particular had little prominence in the work lives of the average employee. But now – through codes of conduct, policies, training, certifications, hotline calls, investigations and discipline – that has changed.
Of course, not all ethics issues are of equal interest to all employees. But COIs tend to be high on the list, because of their inherently personal nature. In the post-Enron era, employees who used to be allowed to receive hospitality from suppliers often now are barred from doing so. And to a large degree they accept that as being good for their companies and therefore ultimately good for themselves – so long as the rules apply to everyone equally. Indeed, when one of their colleagues breaks those rules the hotline can ring off the hook – often motivated not by jealousy but a sense of fairness that is truly innate to the human species. (For more on the evolutionary foundation of fairness as a moral value see this chapter from Jon Haidt’s The Righteous Mind.)
Over the past week, the story of NJ governor and presidential aspirant Chris Christie and family being flown to a Cowboys game in Dallas by the team’s owner Jerry Jones and being entertained in Jones’ sky box has been oft told in the press and echoed by football fans throughout the country too. The COI issue is that a company in which Jones was a significant investor received a lucrative contract with the Port Authority, an entity over which, as governor of New Jersey, Christie has powerful influence (and also an entity which has been plagued by patronage). Here is an article from In These Times with more details about the story.
Christie’s defense is that he and Jones were personal friends. While it is true that the relevant NJ ethics code does permit gifts from personal friends, this cannot mean what the governor claims as that would essentially permit any government employee to receive a gift from any vendor by declaring his or her friendship with that vendor. Not only would such a loophole gut the ethics law, it would encourage vendors and government employees to become real friends - thereby making the COI worse and further discouraging ethical vendors from competing for the government’s business. (For the details of the purported Christie-Jones friendship see this story - in which the governor says the friendship started only a few months after Jones’ company got the Port Authority contract, which underscores that this is not the kind of relationship for which the gift exception was designed.)
As a former federal prosecutor who brought many corruption cases, the governor almost certainly knows that this interpretation of the ethics law is untenable.* But as a politician with his eyes on the White House he seems to have made the choice that his “jury” – potential voters – won’t care.
Years ago, another brash politician – the first Mayor Daley of Chicago – was caught in a conflict of interest involving a family member getting government business, and responded: “If I can’t help my sons, then [my critics] can kiss my ass. I make no apologies to anyone.” Given the broad tolerance for COIs at the time, it is not surprising that this didn’t seem to hurt him (at least from what I recall about the incident).
But in the post-Enron era that way of thinking may no longer make sense. As noted above, many American workers are reminded constantly about the importance of an ethical approach to COIs – and know that if they tried to do something like what was done here they would probably be fired. And the obvious unfairness of a double standard like this could end up hurting Governor Christie in ways that the late Mayor Daley could not have imagined – but which the governor should have foreseen.
* The Justice Department’s example of when the personal relationship exemption to gift rules applies: Jenny is employed as a researcher by the Veteran’s Administration. Her cousin and close friend, Zach, works for a pharmaceutical company that does business with the VA. Jenny’s 40th birthday is approaching and Zach and his wife have invited Jenny and her husband out to dinner to celebrate the occasion. May Jenny accept? Yes.Gifts are permitted where the circumstances make it clear that the gift is motivated by a family relationship or personal friendship rather than the position of the employee.
Some other reading of possible interest:
A story from several years ago about a Justice Department Inspector General Report finding travel expense abuses by Christie when he was a US Attorney.
An earlier post on attendance at sporting events and COIs.