Conflict of Interest Blog

Why conflicts of interest matter – it is both the incentives and disincentives

Yesterday Paul Krugman had a great piece in the NY Times on Why Corruption Matters. With the COI Blog about to have its five-year anniversary, and with COIs in the news as never before (thanks to the President Elect), it seems worth asking the same question of conflicts of interest. After all, corruption can be seen as one type of COI (albeit a particularly sinister type).

Krugman’s central point is that the harm of a corrupt act cannot be measured solely by calculating the benefit to the wrongdoer. Rather, he notes: “It’s not the money, it’s the incentives. True, we could be talking about a lot of money — think billions, not millions, to Mr. Trump alone (which is why his promise not to take his salary is a sick joke). But America is a very rich country, whose government spends more than $4 trillion a year, so even large-scale looting amounts to rounding error. What’s important is not the money that sticks to the fingers of the inner circle, but what they do to get that money, and the bad policy that results.”

I agree with Krugman, but – at least as far as COIs are concerned – would offer a friendly amendment that the harm is not only in the incentives but also in the disincentives. What I mean by that is explained in one of the earliest posts in this blog (which looked at COIs broadly – not just those arising from government service):

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 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.

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.

Additionally, from the perspective of “normative compliance” – an important concept in the C&E field which will be addressed in future postings – in Conflict of Interest World legal and ethical standards beyond those that are COI-related would be weakened, too.

 Bottom line: a short visit to this unhappy imaginary world – a place of “all against all” – is reminder of the vital role that sufficient attention to COIs play in our very real world.

Five years later the importance of trust to our society and the threat that COIs present to it are – to my mind – greater than ever before. While each type of COI – including those facing the President Elect – must be identified and dealt with appropriately,  I view the need for upping our COI game generally as being larger than the sum of the relevant parts. The goal is a society where individuals can trust others – both leaders and fellow citizens – to act in ways that are motivated by the common good and not individual or parochial interests.

One can identify many areas for which having such trust can be essential for success. Most prominently, dealing effectively with climate change will require millions of people around the world to trust one another in the design and execution of solutions to this grave peril. That may be the greatest reason of all to care about conflicts of interest.

Trump Princelings?

The most recent post on this blog concerned the possibility of President Elect Trump putting his assets in a trust which would be managed by his children to avoid conflicts of interest that could arise from his management and ownership of such assets while in office. Since then an unrelated legal development has occurred which further underscores the challenge facing Trump: the announcement that JP Morgan was settling the “Princeling” case, which involved the bank’s hiring the sons and daughters of important Chinese officials in return for business. The case (which will likely be followed by others of its sort) is a timely reminder that helping one’s children can inspire corruption – and not just in China.

A famous instance of this sort from the 1980s concerned the hiring (by a former Miss America) of a NY judge’s daughter to influence the judge’s decision on a pending case. And then there are the immortal words of the first Mayor Daley who, in speaking to colleagues on the  Cook County Democratic Committee, defended his having directed a million dollars of insurance business to an agency on behalf of his son John by saying: “If I can’t help my sons, then [my critics] can kiss my ass. I make no apologies to anyone.”

Indeed, helping one’s children might  be a more powerful source for wrongdoing than is pure self-centered greed, for the very reason that it seems to spring from a sense of duty. (An old saying goes that if you’re not stealing from your company you’re stealing from your family.)

Note that I’m not suggesting that Trump would use his influence to get jobs for his kids or direct government business to them. But if they are running his far-flung, secretive and complex business empire  he will have plenty of opportunities to use his influence to benefit them.

None of this means that Trump’s children are destined to serve as “princelings.” I should also stress that I have no reason to think they would do anything unethical. Seriously.

Rather, the focus of this post (and indeed this blog generally) is more about structures and circumstances than it is individual personalities. In effect, the princeling analysis is part of risk assessment, even if it is speculative; it is not an accusation.  More specifically, the JP Morgan case reminds us that in designing (or agreeing to)  an approach to address the COIs relating to his assets, Trump needs to  have procedures that will help  avoid not only direct COIs but those involving his sons and daughters as well – and give the public comfort that those procedures are up to the task at hand.

A conflict of interest monitor for President Trump?

The past few days has seen a near avalanche of news stories on the looming conflicts of interest that will arise from Donald Trump’s being President while being the owner of a wide range of real estate and other interests. There has never been anything like it in the history of the Presidency, and the solution suggested by the President elect – having his children assume management of his interests – would do little to mitigate the conflicts (since he would still know which properties he owned and could use his official power to benefit such properties).

One solution I haven’t seen proposed is the use of a special monitor to help identify COIs facing the President and assure that they are dealt with appropriately. Monitors have been used for decades to assure ethical conduct in a variety of settings, such as public sector construction projects or the operation of companies after a criminal conviction. While novel (I think), a monitor of the sort suggested here might go a long way to mitigating both the actuality and appearance of COIs.

Of course, Trump might resist what he could see as a stigmatizing implication of such an arrangement, but the monitorship needn’t be viewed in a negative light. After all, COIs are not inherently bad – rather, they are circumstances that create the possibility of something bad happening, unless mitigated in an effective manner.

Such a monitoring arrangement could be challenging in other ways, too. For example, the monitor would presumably need to report to the public periodically on her findings and recommendations – but at the same time protect the legitimate privacy interests of the Trump family and their fellow investors.

For this and other reasons it wouldn’t be easy. But what’s the alternative? A government in which – to modify words attributed to the late Leona Helmsley – ethics would be seen as only “for the little people.” Both for the country itself and Trump’s success as President that would be substantially worse than the inconveniences of a COI monitorship.

Conflict of interest certification best practices

As noted in an earlier post, the Ethics & Compliance Initiative has recently published a COI best practices report written by a research working group which I co-chaired (along with Mark Snyderman of Laureate Education). Here are some of the report’s findings and recommendations on the important topic of COI certifications (“COIC”):

– Using a written COIC instead of simply requiring disclosure

– Including a section about the COIC requirement in the organization’s code [of conduct]

– Providing guidance and training to assist employees in completing the COIC

– Dedicating resources to respond to COI questions and address issues related to reported potential conflicts, including coordination within the organization’s control groups such as HR, E&C, and legal, and protecting the confidentiality of COIC responses

– Requiring new hires to sign or complete a COIC

– Evaluating the need for additional customized COICs (i.e., COIC specific to risk area or employee group)

– Distributing a COIC annual report or summary to senior executives and governance committee(s)

– Retaining and storing completed COICs in accordance with the organization’s record retention policy

– Establishing expectations and a schedule for periodic recertification (semi-annual, annual, ad hoc self-reporting).

Of course, to most C&E professionals some of these will be fairly obvious (e.g., periodic recertification) but others of may not be (such as the recommendations concerning the COI annual report or customized COICs). And hopefully, having a list of this sort itself will be useful to those launching or revisiting COI certifications for their respective companies.

Finally, some earlier posts on certifications can be found here  and here.

A silver anniversary for a golden rule

Last week saw the 25th anniversary of the Corporate Sentencing Guidelines – which, more than any other legal development, gave rise to the Age of Compliance.

In my latest column in Compliance and Ethics Professional (page 2 of PDF) I celebrate this happy occasion.

Reverse behavioral ethics

I am a member of LinkedIn and for the past few months have periodically received a message saying: “2 people in your network are using LinkedIn Sales Navigator to be more effective.” Given that I have – as I assume is the case with many members – more than 500 people in my network (most of whom I don’t actually know), this piece of information may be less persuasive than LinkedIn presumably intends it to be. Indeed, the apparent strategy of telling all members about how many in their network are using “Sales Navigator” – regardless of how small that number is – might actually be hurting Linked In.

As described on the Ethical Systems website,  the work of Professor Robert Cialdini has shown that communicating how many people are engaged in undesirable activity can increase that number by suggesting that “everyone is doing it.” I imagine the same dynamic applies to communicating how few people are engaged in desirable conduct, i.e., what LinkedIn is doing.

But this dynamic can also be a force for good, including compliance-related good. As described in this 2012 article from Reuters: “Applying [Cialdini’s] insight, the British tax agency, Her Majesty’s Revenue and Customs (HMRC), has tested different form letters on delinquent taxpayers. In one letter, this sentence – ‘Nine out of 10 people in the UK pay their tax on time’- increased positive response by 1.5 percent. Adding another sentence – ‘You are one of the few who have not paid us yet’ – raised the success rate 3.9 percent. HMRC also found compliance rose 6.8 percent when taxpayers were told they were one of few delinquents in their hometowns.”

Of course, LinkedIn would presumably love to be able to have statistics like these to use in promoting Sales Navigator. But in the absence of such it might be better to say nothing on the subject, and follow the old adage to “always tell the truth but don’t always be telling it.”

For compliance and ethics people, the opportunities to tell the truth in an effective way may be numerous. Among other areas, the good news can concern code of conduct certifications, training completions, conflict of interest disclosures, helpline use and audit results – as some companies have already found.  But the first rule for all in the persuasion business – which includes C&E professionals, as well as marketers –  is to do no harm.

 

ECI publishes COI benchmarking report

Today the Ethics & Compliance Initiative published a benchmarking report written by a working group of 34 ECI members, which I was honored to chair with Mark Snyderman of Laureate Education.  The report is available for free download here. I hope you find it useful.

Free webcast on new conflicts of interest research

On October 19 the Ethics & Compliance Initiative will present a free web cast on research on effective conflicts of interest compliance measures. A link for registering can be found here.

The research was conducted by a working group of ECI members, which Mark Snyderman of Laureate Education and I chaired.  He and I hope you can attend.

Conflict of Interest at Harvard and the Need for Deterrence

We are pleased to have this guest post from Jameson W. Doig, Visiting Research Professor of Government, Dartmouth College  and Professor Emeritus at the Woodrow Wilson School of Public and International Affairs.

On September 12, the Journal of the American Medical Association carried an important story regarding conflict-of-interest in research carried out at Harvard.  In the 1960s, the chairman of Harvard’s Nutrition Department and two of his researchers were given $50,000 (in today’s dollars) to provide a critical review of studies that had identified Sugar as a significant factor in coronary heart disease. Recently discovered files indicate that the Harvard researchers were in close contact with the Sugar Research Foundation, and that they shaped their analysis so it raised doubts about research studies that identified sugar as a causal factor (they suggested that instead “fat” had a key role in causing heart disease). On reviewing a draft, a SRF official said he was pleased with the results. The role of the SRF in financing and partially guiding the study was not revealed in the researchers’ report, which was published in the New England Journal of Medicine in 1967.

The study was completed in 1967 and all three researchers have now died. Even so, the case raises important issues in the field of deterrence. In my view, Harvard should review the evidence described in the JAMA article, and if the integrity of the researchers’ work was compromised significantly by their contacts with the sugar industry, the University should consider public action — formally announcing the negative findings, perhaps removing any Harvard awards given to the three, etc. Action of this kind should help to deter other researchers who may be tempted to carry out research shaped to benefit the funder. (If the allegations in the article are incorrect, the Harvard review should publicly challenge the JAMA implication of unprofessional faculty behavior.)

Although professional rules now ask researchers to reveal their funding sources, it is reasonable to expect that some will not fully comply. More important, revealing funding sources may not be a sufficient deterrent, when large sums to finance research and complex studies are involved. For example, Coca-Cola has recently funded studies on the links between sugary drinks and obesity; and the National Confectioners Association has financed and been actively involved in studies that raise doubts that eating candy is a factor in child obesity. The candy studies were carried out by researchers at two universities, in collaboration with an industry consultant. To protect the reputation of their own institutions, and to improve the quality of research said to benefit the public, university officials should actively monitor apparent conflicts of interest and take punitive action when appropriate.

Would a Trump presidency spell the end of ethics and compliance?

Many years ago, I helped provide E&C training to a group of Russians visiting the U.S. The apparent hope of the session sponsor (the Commerce Department) was that these individuals would use our information to implement programs in Russian companies. The visitors seemed interested in the presentations but at one point indicated that what they needed was not so much practice pointers on technical issues as a home government that supported the basic notion of E&C.

The logic of this point was obvious even before it was made – but I have never forgotten hearing it articulated. I have also never stopped giving thanks for living and working in a country where the basic notion of E&C is supported by the government. When one thinks about those countries where E&C is either ignored or worse, having the type of support that both Republican and Democratic administrations have shown for E&C for the past quarter century is truly a blessing of liberty – a blessing which plays a substantial role in promoting honest business practices, fair returns for shareholders, safe and respectful workplaces and a healthy environment.

Could that be lost in a Trump presidency?

I should stress at the outset that I’m no fan of Hillary Clinton’s ethics. I never bought her explanation of how she made a small fortune in commodity trading; am very uneasy about many of her and her husband’s paid speeches (less so about the Clinton Foundation); and think what she did with her email was, for want of a better word, deplorable. But I don’t view her as an existential threat to E&C, which I do with Donald Trump.

I see this on two levels.

First is the ethics dimension – and specifically Trump’s “tone at the top.” Based on the campaign he has run to date his ethical tone is deeply problematic – characterized, as it certainly can be, by a near total absence of humility (which, in my view, is the most underappreciated ethical quality); an equal lack of empathy and respect for others; a view that the ends always justify the means; a lack of respect for the law (most recently, the laws of war ); and the greatest penchant for lying I have ever seen in any human being  (including in my nearly twenty years as a white collar criminal defense lawyer).

While – as with all matters involving ethical culture – measuring the impact of a leader’s tone is an inexact science, we would do well to remember these words of Justice Brandeis: “Our Government is the potent, the omnipresent teacher. For good or for ill, it teaches the whole people by its example.” The example set by a President Trump would, in my view, be utterly poisonous, reaching into not only businesses but also the governmental and possibly even personal (family and community) spheres.

The second dimension is, of course, compliance – and concerns various substantive areas of risk where instead of zero tolerance he seems to favor either zero or substantially reduced enforcement or himself appears to be a violator. Among these are corruption (he has said the FCPA is a horrible law ); conflicts of interest ; anti-discrimination/anti-harassment ; fraud (think of Trump University case and his practice of not paying suppliers); and gutting environmental laws .

When you take these areas off the E&C table, there’s not much left. Moreover, a lowering tide could wreck all boats, with each cutback feeding a broader acceptance of social irresponsibility by businesses.

Having said all this, I don’t think a Trump presidency would truly be the death of E&C. Other countries’ governments presumably would continue their respective efforts to promote E&C, and at least some state attorneys general would seek to fill the void, as would plaintiffs’ lawyers. Perhaps more importantly, many companies would continue to see strong E&C as good for business, in maintaining the trust of customers and shareholders and being a preferred place to work.

But a Trump presidency would almost certainly hurt E&C – the only real question to my mind is: How much? And the casualties would be all of us.

NOTE TO READERS: I AM TRAVELLING FOR THE FIRST PART OF THIS COMING WEEK AND SO MAY BE DELAYED IN POSTING ANY COMMENTS.