Conflict of Interest Blog

How ethically confident should we be?

My favorite Marxist philosopher – Groucho – once said: “I have nothing but confidence in you, and very little of that.” But the same is not true of how much confidence we tend to have in ourselves.

An article last week in the Slovak Spectator  reported that “one of the findings of a survey conducted by the Slovak Compliance Centre… in 2014 [was that] ‘[t]he companies seem to be quite sceptical of the conduct of other market players while expressing relative confidence in ethical conduct inside their own organisations,…” I imagine that one would find similar asymmetry of views  nearly anywhere in the world.

Indeed, much of the field of “behavioral ethics” is addressed to proving that “we are not as ethical as we think.”  Prior posts on behavioral ethics can be found here.

The view of human nature underlying this key insight predates the behavioral ethics field.  Perhaps most famously, Judge Learned Hand said in 1944:  “The spirit of liberty is the spirit which is not too sure that it is right.” I believe that this is a good way to view the spirit of compliance and ethics too.

At least as applied to C&E, this is not to say that we should be relativistic about what is right.  Rather, we should be skeptical about our ability to do what is right when pressures or temptations pull us in the wrong direction. Those likely to be confronted by risks of misconduct (e.g., corruption or competition law violations) should strive to be ethically alert – which is not always consistent with being highly confident.

Indeed, while the focus on corporate culture is a generally a very positive development in the C&E field, it carries the danger that having a strong culture could be seen as obviating the need for the regular “blocking and tackling” that C&E programs are based on.  This is particularly true of glorification of – and over-reliance in some companies  on –  the “tone at the top.”

On the other hand, one should also be skeptical about the value of pessimism. Given how relatively new the C&E field is – and the tendency for many to view it as a fad which has overstayed its welcome – a truly pessimistic view can effectively scuttle a compliance program.

That is, some degree of optimism is absolutely necessary for the effective operation of a C&E program – whether it is a salesperson choosing to forgo a questionable business opportunity or a mid-level manager deciding whether to call the hotline. Optimism is also necessary for boards of directors and senior managers in determining whether to invest the substantial time and other company resources needed to develop and maintain an effective C&E program, particularly given that the empirical case for such programs is still a work in progress.

For every company, the right C&E confidence quotient will be different.  But all should to some degree be both skeptical and optimistic.

A dream remit for the new DOJ compliance counsel

The biggest C&E-related news of the summer to date is the story last week (as reported here by NPR) that “Justice Department lawyers who prosecute errant corporations and executives are bringing in a new member to the team — a full-time expert in compliance programs. Andrew Weissmann, who leads the Fraud Section in the criminal division at the Justice Department, said the new hire is all part of a plan to reduce corporate crime. ‘We are seeking to assure that companies have tough but realistic compliance programs that detect and deter individual wrongdoing by executives,’ Weissmann said. ‘Importantly, our compliance counsel will be instrumental in ferreting out whether a corporate compliance program is truly effective or a mere paper tiger.’ Officials have settled on a candidate, whom they declined to name while that person undergoes a requisite background check. Sometime in the next six to eight weeks, the compliance hire will join other subject-matter experts — such as accountants and forensic specialists — who work alongside prosecutors in the criminal division at the Justice Department.”

The idea of the DOJ’s having C&E expertise in-house is not a new one.  Indeed, in a report published by the Conference Board in 2009 –  Ethics and Compliance Enforcement Decisions – the Information Gap (available to Conference Board members here)  –  Ronald Berenbeim and I argued that the DOJ and other agencies needed to take various measures to develop such expertise.  And, an advisory group to the Ethics Resource Center suggested something similar in a report issued in 2012.  But, given that we now have an Attorney General with a genuine appreciation for the importance of C&E programs –   as is clear from this interview of her in 2013 in Compliance and Ethics Professional   – this is evidently an idea whose time had come.

Of course, by itself it may not seem like a big step – particularly since in the FCPA realm the DOJ has already developed some expertise through its dealing with the internal controls part of that law.  But the recognition implicit in this step that C&E is a field of knowledge for which expertise matters is symbolically quite important. And, depending on how the new counsel’s role is defined, it could actually be valuable operationally as well.

First, the new counsel should do more to publicize cases of companies getting credit for compliance programs in DOJ enforcement decisions.  I.e., he or she should help fill what the 2009 Conference Board report referred to as an “information gap.” This should be easy to do, and is presumably already part of his or her remit.

Second, one hopes that – at least with time – the compliance counsel will help parts of DOJ beyond the Fraud Section which Mr. Weissman leads to give credit to effective compliance programs.  This would include the various local federal prosecutors’ offices which – based on a survey the Justice Department distributed for the Conference Board report – traditionally have not done much to promote compliance programs, at least not publicly. Continuing my remit reverie, he or she should also work to change the policy of the Antitrust Division of refusing to give meaningful credit for C&E programs, as discussed here).

Third, one might wish that the new counsel will help other governmental bodies better understand and support C&E.  This could include state attorneys general (a group we also surveyed for the Conference Board report, with equally dispiriting results), the NLRB (see this recent post) and many others.

Finally, returning to the recognition of C&E as a field of knowledge, the counsel could help the government become both more of a contributor to and consumer of relevant social science.  (One place to start on this is the Ethical Systems project.) That is, while there is already a need for C&E expertise – in companies, as well as the government – the field is a new one,  and there is much more to learn and teach.

So, there’s definitely stuff here which dreams are made of – at least for C&E dreamers.  But given how long it took for this small (and obvious) step to happen, there’s also plenty of reason for patience.

Are conflicts of interest policies a violation of labor law?

In recent years, an unfortunate – in my view – line of decisions and reports has been issued by the U.S. National Labor Relations Board (“the NLRB”) holding that various aspects of company policies violate the National Labor Relations Act (“the Act”).  For those looking to learn more about this area generally, a good place to start is with this article by Joe Murphy in a recent issue of Compliance & Ethics Professional.  Of particular concern to readers of the COI Blog might be a decision handed down by the NLRB  in June – in Remington Lodging & Hospitality, LLC d/b/a The Sheraton Anchorage – finding that a generic conflict of interest policy in an employer’s handbook was unlawful under the Act.  The case can be found here, but – given the procedural history involved – readers may wish instead to review this summary of it published by attorneys at the Arent Fox law firm.

The case may be seen as an instance of bad facts making bad law, as the respondent company had asserted that certain employees had violated its COI policy by engaging in what were clearly protected activities under the Act (presenting a boycott petition to management).  Based on this, all three members of the NLRB panel hearing the case found that the company had engaged in an unfair labor practice.

However, two of the panel members also found that the COI policy was unlawful on its face. As noted in the Arent Fox summary, the majority found that “employees would reasonably interpret the rule prohibiting them from having a ‘conflict of interest’ with the Respondent as encompassing activities protected by the Act. Particularly when viewed in the context of the Respondent’s other unlawfully overbroad rules, ‘employees would reasonably fear that the rule prohibits any conduct the Respondent may consider to be detrimental to its image or reputation or to present a ‘conflict’ with its interests, such as informational picketing, strikes, or other economic pressure.’”

The third member of the panel – while agreeing “with the majority that the Respondent violated …the Act when it applied the rule against conflicts of interest to restrict employees’ [protected] activity…. disagreed with the majority’s additional finding that the rule against conflicts of interest was unlawful on its face. ‘Employers have a legitimate interest in preventing employees from maintaining a conflict of interest, whether they compete directly against the employer, exploit sensitive employer information for personal gain, or have a fiduciary interest that runs counter to the employer’s enterprise.’ Therefore, he wrote ‘I do not agree with my colleagues’ conclusion that employees would reasonably understand the conflict-of-interest rule as one that extends to employees’ efforts to unionize or improve their terms or conditions of employment.’ In his view, ‘the rule, on its face, does not reasonably suggest that efforts to unionize or improve terms and conditions of employment are prohibited.’ He also noted that the challenged rule was immediately adjacent to a rule in Respondent’s handbook stating: ‘I understand that it is against company policy to have an economic, social or family relationship with someone that I supervise or who supervises me and I agree to report such relationships.’ He claimed that this context ‘bolsters my conclusion that the Respondent’s rule merely conveys a prohibition on truly disabling conflicts and not a restriction on activities protected by the Act.’”

I wholeheartedly agree with this concurrence (and the authors of the Arent Fox piece) and add that in my 25 years of creating, enhancing and assessing C&E programs I have seen zero indication (until this case) that generic COI provisions are likely to be interpreted as limiting activities protected by labor law. Murphy’s general analysis of the NLRB’s approach to C&E policies applies with particular force to this recent decision: “what the NLRB has done here is venture into the field of Compliance and Ethics without close consultation with those in the field and without sufficient regard for the important public policy behind compliance and ethics programs.”

Beyond this, the underlying assumption of the decision is that the efforts of working people to act through labor unions are in fact disloyal to such individuals’ employers.  While ostensibly a “pro-labor” holding, the implication here is potentially anti-labor.

One hopes that this will be fixed before too long – by the NLRB itself, or some court.


More on conflicts of interest and corporate boards

Director COIs are in the news again.

First, the Wall Street Journal reported last week: “Generic-drug maker Mylan NV moved into new headquarters in December 2013 after buying vacant land in an office park near Pittsburgh and erecting a five-story building for about 700 employees. The company hasn’t publicly disclosed that the office park’s main developer is Rodney Piatt, Mylan’s vice chairman, lead independent director and compensation-committee chief. The new headquarters was a big boost for the mixed-use real-estate development, called Southpointe II, where all the land has been sold and some of the last buildings are now rising.”  As the article further describes, Piatt sold his interest in two parcels to a business partner for nominal amounts,   who in turn sold the parcels to Mylan for several million dollars each, but that does not mean that Piatt received no benefit from the dealings: “Mylan’s decision to build the new headquarters may have helped boost the value of Mr. Piatt’s other holdings in [the development]. After local officials in 2011 approved permits and rezoning for a plan that included the headquarters, a firm managed by Mr. Piatt sold a nearby hotel for $14.8 million, property records show. Mylan’s plans helped spur interest from retailers to sign leases, says… the business partner of Mr. Piatt. ‘The more people there are in offices, the more demand there is for lunches’ and other services,… .”

While there is presumably more to this story than what appears in the article, it is hard to argue with the take of corporate governance expert Charles Elson: “’The optics are terrible. Pittsburgh is a big town with no shortage of real estate. Either they could have gone somewhere else, or [Mr. Piatt] could have relinquished the directorship and eliminated the conflict.’”

The second article – which appeared this past weekend in the New York Times –  is no less interesting: “Consider a document recently filed in a 2013 shareholder lawsuit against directors of Dish Network, the television provider based in Englewood, Colo., which contends that the company’s co-opted board cost its investors at least $800 million in one recent episode. The document also provides some seriously good, well, dish on personal and family ties between Charles W. Ergen, the company’s co-founder and chief executive, and two Dish directors the company identifies as independent in its regulatory filings. Lawyers for Dish shareholders found, for example, that the family of Tom A. Ortolf, a director who is head of CMC, a private investment firm, has taken numerous hiking trips with Mr. Ergen’s family. Another fun fact unearthed in the case: Four invitees to a 17-person bachelor party for Mr. Ortolf’s son were Ergen family members. Then there’s the note Mr. Ortolf sent after Mr. Ergen offered two Super Bowl tickets. “I love you man!” the director exulted. George Rogers Brokaw, a managing partner at Trafelet Brokaw & Company in New York, is another independent Dish director with personal ties to Mr. Ergen. Mr. Brokaw’s family hosted members of the Ergen clan at their homes in New York City and the Hamptons, the lawsuit says. Mr. Brokaw also provided advice on a job search to one of Mr. Ergen’s children. Cantey Ergen, Mr. Ergen’s wife and a Dish co-founder who is also a director at the company, is godmother to Mr. Brokaw’s son.” The Times piece further describes: “The close relationships between Mr. Ergen and his directors might not have mattered so much if not for a private investment he made in 2012 [which, the shareholders contend in their suit, represents a usurpation of a “corporate opportunity” belonging to the company] “that could generate personal profits for Mr. Ergen of perhaps $800 million. After shareholders sued, contending that the transaction was a breach of the chief executive’s duty to Dish, a special litigation committee of the company’s board was formed to investigate the deal. As it turned out, Mr. Ortolf and Mr. Brokaw were appointed to two of the committee’s three posts.”

There’s lots to be said about director conflicts  (see prior posts collected here ) but perhaps the overarching point is that a big part of the reason that the position of corporate director exists is to ameliorate the conflict-of-interest-like “agency problem” that comes from executives managing other people’s (i.e., shareholders’) money.  Since directors’ COIs can raise questions about the ability of a board to perform this vital function, they can be especially pernicious.  For this reason, it is part of a director’s job,  I believe, to avoid situations that  give governance experts like Charles Elson just cause to berate them publicly for creating terrible optics, as he did the Mylan directors.  Put otherwise,  directors have to be attentive not only to actual COIs but apparent ones too.

Of course, every member of a public company board would swear that they are familiar with this principle.  But what is less well appreciated is just how difficult mitigating an apparent conflict can be – and particularly so for powerful people with complex business dealings. For more on what is involved in mitigating apparent COIs see this earlier post.  On the other hand, maybe the Mylan board did understand how challenging mitigating the apparent COI facing them would be, and so opted for non-disclosure. Of course, once uncovered, non-disclosure itself contributes to the appearance of wrongdoing.

Turning to the other case of the week, while the Dish directors might feel that the various purely social ties described in the Times piece are not the stuff of conflicts, the conception of COIs under Delaware law does indeed encompass non-financial relationships, as established by an important (but sometimes forgotten) case in 2003 involving the directors of Oracle. As  described in this article about fiduciary duties,  the court there  held that “a director must base his or her decision on the merits of the subject matter rather than ‘extraneous considerations or influences’ and that a director may be ‘compromised if he is beholden to an interested person.’ Most importantly, the court stated that ‘[b]eholden in this sense does not mean just owing in the financial sense, it can also flow out of ‘personal or other relationships’ to the interested party.”

The Magna Carta, compliance and ethics

A brief birthday salute to the Great Charter in the July issue of Compliance & Ethics Professional (second page of PDF).

I hope you find it of interest.

Behavioral ethics and compliance – what to do about “framing” risks

Over the past few years, the COI Blog has devoted a fair bit of attention to considering what “behavioral ethics” can mean for corporate compliance programs.  An index of these writings can be found here.  Conspicuously absent from this compilation was anything on the important behavioral concept of “framing.”

But blogs abhor a vacuum, and fortunately this gap has now been filled courtesy of an excellent article by Scott Killingsworth (of the Bryan Cave law firm) in the latest issue of Ethisphere magazine.  As he notes:

Psychologists have much to say about the phenomenon of “framing”—the process by which we decide “What kind of situation is this? What rules and expectations apply?” How we frame a situation affects our thinking and our behavior. We know, for example, that merely framing an issue as a “business matter” can invoke narrow rules of decision that shove non-business considerations, including ethical concerns, out of the picture. Tragic examples of this “strictly business” framing include Ford’s cost/benefit-driven decision to pay damages rather than recall explosion-prone Pintos, and the ill-fated launch of space shuttle Challenger after engineers’ safety objections were overruled with a simple “We have to make a management decision.” We are surprisingly susceptible to external cues about how a situation should be framed. For example, researchers have found that simply renaming “The Community Game” as “The Wall Street Game” cuts cooperation in half: the business frame suggests not only what is expected of us, but what tactics we should expect from our opponent.

There’s much more to this article, but I won’t quote or summarize anything else as I encourage you to read the original. However, I do want to add two thoughts about what framing means from a C&E program perspective.

The first is pretty obvious: framing – and other key behavioral ethics concepts – should be part of C&E training.  In particular, companies should consider including a high-level review of behavioral ethics concepts (with examples) for general employee training and a more detailed version for senior managers and “controls” personnel.

The second is less obvious: these dangers underscore the importance of having a C&E  officer whose “reach” makes it likely that she’ll be at the table when framing risks  first surface.  Moreover, that may be an additional reason to have a CECO who also wears the General Counsel hat (as discussed in this recent post),  since by definition these risks don’t appear to be ethics-based; i.e., the GC in most companies is more likely to be part of what is ostensibly a general business discussion than is a non-GC CECO.

General counsel as chief ethics and compliance officer

Woody Allen once wrote: “Why pork was proscribed by Hebraic law is still unclear, and some scholars believe that the Torah merely suggested not eating pork at certain restaurants.” Something similar can be said about general counsels serving as chief ethics and compliance officers.

The dispute about GCs wearing the CECO hat as well also has porcine-related origins – Senator Charles Grassley’s famously saying: “It doesn’t take a pig farmer from Iowa to smell the stench of conflict in that arrangement.” But based on my experience with hundreds of companies’ C&E programs,  the Senator’s sweeping proclamation doesn’t hold up for all organizations. While  there are indeed certain situations where the CECO should be independent of the GC – e.g., the company is in an industry where the government has voiced a preference for such reporting structures – plenty of times  the opposite is true and the principal effect of  being “independent” is being powerless.

Earlier this month LRN made a significant contribution to this debate with its 2015 Ethics and Compliance Effectiveness Report (which is available for download here). The survey which served as the basis for that report found that: “Among our respondents, 29% are led by CECOs reporting to the CEO, but not all of them get the same-sized seat at the C-Suite table. Roughly half of them also serve as general counsels, and these two-hatted stalwarts run programs significantly more effective than those of their one-capped colleagues.”

I won’t try to summarize the study’s methodology or  all of the specific findings on program efficacy, but one result really stood out for me: “Fully 68% of the GC/CECOs see the primary mandate of their programs as ensuring ethical behaviors and the alignment of decision making and conduct with core values, while that is true of only 41% of the dedicated CECOs. By contrast, 59% of those full-timers see their primary mandate as ensuring compliance rules and regulations, a position taken by only 32% of the GC/ CECOs. As we have previously determined, values based programs outperform rules-based programs by almost every measure.”

There’s plenty more in the study that challenges the orthodox view on this topic, and I encourage you to read it.


Inherent conflicts of interest and behavioral ethics

At his trial for Libor rigging, evidence was introduced last week that former trader Tom Hayes had told the Serious Frauds Office that “many of the people responsible for submitting panel banks’ Libor rates also traded products linked to the rate, creating an inherent conflict of interest” and that “’[n]ot even Mother Teresa wouldn’t manipulate Libor if she was trading it,…’”

While obviously somewhat self-serving, this colorful bit of analysis still  helps to underscore the overarching behavioral ethics point that to reduce the risk of ethical transgression often one cannot always count on the characters of those involved.  Rather, the situation will play the decisive role.

Inherent COIs are an instance of that. Granted, they are just one of many such types, but they may also be more common than most others, and hence worth further study.

And beyond an area of interest to behavioral ethicist scholars, seeing some COIs as being inherent (or near to inherent) can be useful to others, too, such as:

– C&E professionals, who should consider the category of inherent COIs in their risk assessments.

– Senior managers and directors, who should – as part of their C&E program oversight – make sure that nothing their company is doing or contemplating doing falls into (or anywhere near) this category of risk.

– Enforcement personnel, who often can find good fishing in the inherent COI waters.

– Individual business people, who – in making career decisions – should steer clear of jobs that could involve inherent conflicts of interest.

On this last point, Mr. Hayes would surely agree.

And on the point about the role of enforcement personnel, in my view the “fishing” shouldn’t be limited to those individuals who succumbed to the pull of the inherent COIs, but should also include the senior managers and directors who allowed the COIs to exist in their respective organizations. (For further reading on how a behavioral understanding of ethics and compliance should inform our approach to liability see this earlier post.)

(Thanks to Scott Killingsworth of the Bryan Cave law firm for letting me know about this story.)

The compliance officer as spy (among other unusual roles)

I was on a conference panel this week discussing compliance officer reporting relationships and the topic of C&E officers reporting to the audit committee came up.  I stated my general view: strong informational reporting by the C&E officer is always a good thing, but with administrative reporting the picture is mixed. (In brief, I think that the latter type of reporting can contribute to C&E office independence and “clout,” but some audit committees might not be able to provide C&E officers with the day-to-day supervision that a general counsel does, resulting in their becoming organizational orphans.) One of my co-panelists then voiced a different reason for being chary of administrative reporting to the audit committee:  other employees might take this to mean that the C&E officer is the board of directors’ “spy.”

In my nearly 25 years in the C&E field I’d never heard this view before.  My initial reaction is that it generally shouldn’t be an issue, but I also see the visceral logic of the concern.  Moreover, the person who made the comment is one of the nation’s most experienced C&E officers, and his saying it underscored for me that compliance professionals may have a view of issues relating to reporting relationships that many employees of their respective companies – who are typically less schooled in the basics of corporate governance  – may not share.

Somewhat similarly, I occasionally encounter companies where the C&E officer’s role includes representing the company in regulatory matters.   My general reaction to this has been that it is a negative with respect to the independence dimension – mostly in terms of how the C&E officer is viewed (as a defender, who might be reluctant to criticize her company) but also possibly how she acts (in ways she may not realize). On the other hand, perhaps dealing with regulators on behalf of their company would be seen as a plus in terms of clout.  As with the C&E officer as “spy,” it would be nice to know what the take of a general employee population – as opposed to C&E professionals – is on this issue.

Finally, what about  C&E officers who call themselves ombudspersons? I’ve always been troubled by this practice, as a true ombuds role requires institutional neutrality of a sort that few C&E officers have – and an employee might feel misled by this designation.  But perhaps none would actually notice or care.

Anyway, I would be interested in the views of readers of the COI Blog on these (or related) issues.

What should your risk assessment do for your compliance program?

On Monday June 1 I’m giving a presentation on risk assessment at PLI’s Compliance & Ethics Institute in NYC.  Here are the slides, which discuss, among other things:

– Fourteen specific things a risk assessment should do for your program – most of which are missed by many companies.

– How an assessment can also educate key people in your company about C&E, set useful boundaries for your program and maintain program momentum.

– The need for assessments to become more granular with time.

– How to develop an initial list of possible risks.

– What “cultural” factors should be considered in an assessment.

– Corruption and competition law assessments.

– A look into the future – the “demand side” of risk assessment.

There’s still time to sign up for the conference – which is also being web cast.
But for those who can be there in spirit only, I hope you find the slides useful.

Ps – this is my 20th year in a row speaking at the PLI compliance conference.  I wish I could say that it makes me feel proud, but mostly it makes me feel old.