Conflict of Interest Blog

A conflict of interest on the grandest of scales

Drought, floods, air pollution and political unrest. That is just part of the climate change nightmare we are leaving to future generations, as described in an important report issued late last week by the US government.

Most of the conflicts of interest discussed in this blog over the past six years have been individual COIs – where a person has interests that are actually (or apparently or potentially) at odds with those of her employer or other principal. To a lesser extent, we have also covered organizational COIs – where an entity (e.g., a health care provider or investment bank) has interests that conflict with those of persons or firms to whom they owe a duty of loyalty (as a matter of law or otherwise).

Far less common in our prior posts than either of these is a COI type that might be called a societal – meaning a set of circumstances where an individual or entity with relevant decision making power has interests that diverge from those of society as a whole (or least much thereof). Of course, if taken literally such a condition could be attributed to almost any individual or entity, but a societal COI analysis should focus on the cases of the greatest peril to society.

The most worrisome societal COIs (at least to me) are those where the interests of decision makers today do not align well with those of the people who will be affected by the former’s decisions in the future. Deficit spending is a good example of this. But the mother of all societal COIs is undoubtedly climate change.

What does it mean to be faced with a societal conflict of interest? As with any COI, affected decision makers should respond with a heightened sense of ethical duty – including demonstrating an appropriate tone at the top, being humble as well as virtuous, maintaining an alertness to risk and deploying compliance and ethics “tools” (e.g., communications, checking) as warranted.

But by their nature and size, societal COIs are much more difficult to mitigate than are other sorts. Ultimately, the most effective response is structural – meaning taking measures addressed to modifying the underlying COI conditions themselves.

However, this can be a daunting task. Given the political nature of some societal COIs, mitigation should (in my view)  be bi-partisan/moderate in nature to have real chance of succeeding. Moreover, as a matter of not just politics but also economics, I believe that such solutions should be as market based as is reasonably possible.

So, is it possible to do all of this?

Only time – of which we may have too little – will tell, but a very promising approach is the Carbon Fee and Dividend proposal by the Citizens Climate Lobby  (“CCL,” about which I have blogged before). As described on that organization’s web site: “A national, revenue-neutral carbon fee-and-dividend system …would place a predictable, steadily rising price on carbon, with all fees collected minus administrative costs returned to households as a monthly energy dividend. In just 20 years, studies show, such a system could reduce carbon emissions to 50% of 1990 levels while adding 2.8 million jobs to the American economy.” In short, this policy would help reduce the societal COI – as today’s decision makers would bear the costs of their undesirable actions, rather than continuing to push the burden almost entirely to the future, as is currently the case.

But does the plan have the potential to succeed in these bitterly partisan times? Importantly, CCL’s efforts are bolstered by those of the Climate Solutions Caucus in the House of Representatives consisting of 30 Republicans and 30 Democrats. Moreover, the fact that, unlike some other climate change proposals, this one is revenue neutral and market based gives it a real chance to secure support from across the political spectrum,

There is a lot more information about the Carbon Fee and Dividend on the CCL web site and I encourage you to read it and consider joining the organization, which seems to offer a solution that is as good a vehicle as any for mitigating this vast and potentially calamitous conflict between present and future interests.

Was the Grand Inquisitor right (about compliance)?

In Dostoevsky’s short story The Grand Inquisitor,  Jesus Christ returns to earth in Spain at the time of the Inquisition, only to be arrested by Church leaders. As explained by the Grand Inquisitor (courtesy of Wikipedia), “Jesus rejected [the Devil’s] three temptations in favor of freedom, but the Inquisitor thinks that Jesus has misjudged human nature. He does not believe that the vast majority of humanity can handle the freedom which Jesus has given them. The Inquisitor thus implies that Jesus, in giving humans freedom to choose, has excluded the majority of humanity from redemption and doomed it to suffer.”

In a very thoughtful and useful post last week in the FCPA Blog, noted C&E practitioner and scholar Carsten Tams celebrates the recent award of the Nobel prize in economics to behavioral scientist Richard Thaler. Among other things, as Tams notes, “Thaler advocates for an alternative, less coercive method for influencing behavior [than the predominant model]: a Nudge. In a book by the same title that Thaler co-authored with the eminent legal scholar Cass R. Sunstein, he defines a nudge as any aspect of a choice architecture that steers people’s behavior in a predictable way, without forbidding any options or significantly changing their economic incentives. Unlike mandates or fines, nudges are specifically designed to preserve freedom of choice and avoid coercion. To qualify as a nudge, the intervention must be easy and cheap to avoid. The goal of nudges is to make desired behaviors easier, simpler, or safer for people.”

I agree with Tams that behavioral ethics information and ideas offer many promising possibilities for enhancing corporate compliance programs. (See this index of prior posts on “behavioral ethics and compliance” and also this webcast from Ethical Systems.) But I also worry that when it comes to C&E programs, the Grand Inquisitor’s view of human nature may be at least partly right.

I say this not as a matter of principle. On such ground I reject that view completely. Rather, my concern is one of experience, borne of more than a quarter of a century developing, implementing and assessing C&E programs.

In that time, I can’t recall learning of anything suggesting that the employees of client organizations wanted more choice when it comes to C&E-related matters. And, I have seen and heard much to the contrary, as countless interviewees have praised their employer organizations for providing clear instructions – backed up by strict enforcement measures – on how to act when faced with C&E challenges. As one C&E practitioner said about what employees at his company asked from him: “They want me to tell them what to do.”

A more concrete way of looking at this is to note that while people generally cherish freedom, the freedom to make a mistake that can get them sent to prison for a long period of time is likely viewed less favorably.

I should stress that I do not generally follow – in my role as family member, friend and citizen – what might be called a Grand Inquisitor type perspective. (Presumably Dostoevsky didn’t either – and the story should be read more as a provocation than a statement of principles.)  It also does not define – I hope – most of my work in the C&E field.

Rather, it is offered as  just one perspective for possible inclusion in the larger mix of information about human nature that – from a behavioral ethics (or other) perspective – can  help guide us in developing and implementing effective C&E programs.

For more on the possible limits to behavioral ethics and compliance, see this post.

As if you didn’t already have enough to worry about

My latest column in Compliance & Ethics Professional  – available on page 2 of this PDF – examines the underappreciated risks of being sued for defamation arising from doing compliance work.

I hope you find it interesting.

Free web cast on behavioral ethics

On Wednesday September 27 at noon Eastern Azish Filabi of Ethical Systems and I will be speaking on a behavioral ethics web cast presented by the Ethics & Compliance Initiative. More information about the webcast can be found here.

Azish and I hope you can join us.

Come to the Advanced Compliance & Ethics Workshop

Its that time of year – time for the Practising Law Institute’s Advanced Compliance & Ethics Workshop, which Rebecca Walker and I are co-chairing.

You can attend on October 30-31 in NYC or on the web or on November 6-7 in San Francisco.

The agenda and list of our all-star faculty can be found here.

Rebecca and I hope you can make it.


The lawyer as whistleblower

When can a lawyer blow the whistle on her own client?

My latest column in Compliance & Ethics Professional (p2 of PDF) takes a look at this ethically fraught issue.

I hope you find it of interest.

Get the new behavioral ethics and compliance e-book

Ethical Systems has just published Head to Head: A conversation on behavioral science and ethics – by that organization’s CEO, Azish Filabi, and me.

Click here to download it for free.

What Can We Learn from the Latest “Open Payments” Data?

By Kevin Kovalsky and Bill Sacks, HealthStream*

The Center for Medicare and Medicaid Services published a new trove of payment data on June 30, 2017. Since 2013, the “Open Payments” database, created under the Affordable Care Act, has been used to collect and publish information about payments from medical device and drug companies to physicians and teaching hospitals. All payments above $10.00 are reported in various categories, including speaking fees, travel, research, gifts, and meals.

Under the theory that “Sunshine is the best disinfectant”, the hope was that publishing detailed information about industry payments to physicians would have a prophylactic effect on potential conflicts of interest. There was speculation that some physicians would stop taking money from big pharma if they had to answer questions about those payments from skeptical patients. Perhaps payments would be funneled more directly into research, rather than to physicians themselves?

So what does the latest data show? What kinds of trends can be seen? While it is difficult to draw conclusions based on the year to year fluctuations in payment data, we can begin to see trends by analyzing the data over three years.

The total dollar value of reported payments from industry has increased slightly, to $8.18 billion in 2016 from $8.09 billion in 2015 and $7.86 billion in 2014. In each of those years, more than 50% of all dollars went to research. Interestingly, the number of companies making payments dropped by more than 6%, from 1,614 in 2014 to 1,481 in 2016. Since few companies completely stop payments to physicians once they have started, this raises some interesting questions about consolidation in the industry. At the same time, the number of physicians accepting payments stayed level, dropping by a fraction from 632,000 in 2015 to 631,000 in 2016.

While total payments directed to research increased by 7.1% from 2014 to 2016, the amount paid directly to physicians for research decreased by 7.1%, from more than $102 million in 2014 to $95 million in 2016. From 2014 to 2016, general (non-research) payments to physicians also saw a slight decline, from $2.11 billion in 2014 to $2.07 billion in 2016.

While some have expressed concern at the 6.0% year to year jump in payments to physicians classified as “ownership or investment interests” (from $962 million in 2015 to more than $1.0 billion in 2016), the three-year trend is negative, with an overall 8.1% decline from 2014 to 2016.

While it is too early to tell if these trends will continue, it is clear that while the Open Payments database has not adversely affected the overall funding of industry research, it may be causing some physicians to take fewer direct payments, which could reduce, in some small way, the potential for conflicts of interest in medicine.

Bill Sacks is  Vice President, COI Product Management and Kevin Kovalsky is COI Product Manager at HCCS – A HealthStream Company.

Why avoiding conflicts of interest matters in the investment business

By Knut A. Rostad*

Introduction. This commentary would never be written in most professional settings today. The reason: avoiding conflicts obviously matters. It’s self-evident. Yet, in many quarters in brokerage and investment advice, it’s not self-evident at all. Instead, in these quarters conflicts are deemed quite acceptable or even beneficial. This is why the commonsense and logic in the voices of these eight investment advisers is important. In the market place today, they are usually overwhelmed by conflicted product recommendations that are packaged as “trusted advice”. This is why the research was conducted and this commentary was written.  

 On July 7th the Institute for the Fiduciary Standard released a white paper on Securities & Exchange Commission (SEC) registered investment advisers’ (RIAs) disclosure of various conflicts of interest. The disclosures are drawn the form ADV, an SEC required disclosure, of 135 RIAs. 1.This paper focuses on 25 of the 135 RIAs that go an additional step and further minimize their conflicts by refraining from certain practices. The 25 firms are identified and eight firm principals comment on ‘Why avoiding conflicts of interest matters.’

Their remarks address topics from the philosophical to the practical. They can be distilled to ‘Avoiding conflicts is essential to providing true advice.’ Of particular note:

– These firm principals believe their mandate is to avoid conflicts; it is not to disclose conflicts. Why? Disclosing conflicts can limit or taint the client relationship, add burdens to the firm and confuse staff.

– Avoiding conflicts reinforces objective advice. Clients sense the difference, that objective advice is not conflicted advice and a product recommendation. They sense the difference between a client advocate and a product advocate. With a client advocate, clients tend to be more trusting and respectful and have deeper advisor relationships. They show greater confidence in the advice rendered and in their own financial situation. This is powerful.

The eight advisors (and firms) are: Michael Delgass (Sontag Advisory), Derek Holman (EP Wealth Advisors), Joel Isaacson (Joel Isaacson & Company), Josh Itzoe (Greenspring Wealth Management), Ross Levin (Accredited Investors), Dan Moisand, (Moisand Fitzgerald Tamayo), Tom Orecchio   (Modera Wealth Management) and Patrick Sweeny (Symmetry).

The full remarks of each advisor are in the paper linked to above . Key excerpts are selected here.

Early career experiences in brokerage firms. Patrick Sweeny, “I was taken aback by how much pressure there was (at a brokerage) to sell proprietary products… Derek Holman adds he was told, “Success in the industry depends on selling and not on advising.” Tom Orecchio recalls he started in a firm with commissions and an annual sales contest where prizes and trips were awarded. “I was never comfortable. These incentives changed behavior and I did not like what I witnessed.”

Fees, planning versus asset growth. Joel Isaacson, “There is a tension between planning and asset management growth. Planning is as close to pure advice as we can get, where we can provide the greatest value.”

Clients: conflicts undermine the value of your advice. Ross Levin says his clients know, “They receive our advice for only one reason … we believe it our best advice.” Dan Moisand says it this way, “Clients take advice more to heart when they know it’s true advice.” Holman, who dropped insurance licenses three years ago, “There was always confusion when we would switch and disclose our sales biases. This was not the way we wanted to provide advice…. Straight fee only provides clarity and simplicity.”

Transparency. Sweeny stresses, “We take a lot of time to make sure investors understand what they are paying. Total cost transparency is so important.” Holman adds, “Most investors we meet pay more in fees but don’t see it. With us, they generally pay less, but see it. When investors don’t see the fees they tend to think the services are free.” Josh Itzoe, “Full fee transparency … (creates) a depth of trust you can’t get otherwise. At the wire houses we felt conflicts and the lack of fee transparency created more of an adversarial relationship.”

Conflicts, professionalism and trust. Michael Delgass points out how “Firm culture matters. We aim to “walk this walk”, in part, by embedding issues of fiduciary due care and loyalty into our annual employee and executive reviews. Itzoe, “There is no doubt in my mind that conflicts around compensation prevents the advisory industry from being recognized as a true profession.” Moisand says conflicts must be avoided because managing conflicts doesn’t cut it for clients or the firm. “Managing conflicts requires the firm follow additional procedures… I don’t worry about conflicts I avoid.” Levin concludes, “Nothing is completely without conflict, but reducing conflicts as much as possible increases the likelihood of receiving objective, client-centered advice.

* Knut A Rostad is president and founder of the Institute for the Fiduciary Standard. The Institute is a non-profit that exists to advance the fiduciary standard in investment and financial advice through research, education and advocacy. For more information see


The harm from conflicts you often can’t see

A few days ago Newsweek ran a piece on the Trump family’s “endless conflicts of interest,” describing in detail several dozen actual, apparent and potential conflicts, and related ethical infirmities. Another such list is maintained and periodically updated by The Atlantic. The sheer volume of these cases is so overwhelming that it may be worthwhile to step back and consider what the harm from COIs is as a general matter.

Over the years, one of the themes of this blog has been that the harm caused by COIs is often significantly underappreciated. Some of these posts are collected here.

Broadly speaking, COIs often give rise to two categories of harm: they encourage people to make undesirable decisions and discourage them from making desirable ones, as described in this post.  Neither type of harm is generally easy to spot but, of the two, the first – being incented to make bad decisions – is presumably more identifiable as a general matter than is the second – being discouraged from making good ones, as actions are typically more noticeable than inactions.

But an interesting and important case of the latter has been on display the past few days as Hui Chen – a highly regarded member of the compliance and ethics (“C&E”) community – has publicly explained her decision to leave her position as compliance counsel for the Justice Department’s Fraud Section. As described in The Washington Post : As a contractor for the Justice Department, Hui Chen would ask probing questions about companies’ inner workings to help determine whether they should be prosecuted for wrongdoing. But working in the Trump administration, Chen began to feel like a hypocrite. How could she ask companies about their conflicts of interest when the president was being sued over his? “How do I sit across the table from companies and ask about their policies on conflict of interest, when everybody had woken up and read the same news?” Chen said in an interview. “I didn’t want to be a part of the administration whose job it is to question others about these precise things.”

While this may seem like “inside baseball” to those outside of the C&E community, Hui Chen’s departure from Justice represents a loss for all who can be protected by strong C&E programs, meaning millions of shareholders, consumers, employees, taxpayers and others – in short, pretty much everyone.