Conflict of Interest Blog

Come to the Advanced Compliance & Ethics Workshop

I am honored to have been selected to chair the Practising Law Institute’s Advanced Compliance & Ethics Workshop in NYC on October 28 and 29.

Information about program topics and our stellar faculty is available here.

I hope to see you then and there.

Conflicts of interest: why we fight

The current attention to President Trump’s using his official position to bring business to his properties – discussed here – has drawn national (and even global) focus on the area of conflicts of interest. It is thus an opportune time for the COI Blog to review some basic principles.

First, as Justice Louis Brandeis famously said: “Our government is the potent, the omnipresent teacher. For good or for ill, it teaches the whole people by its example.” While Brandeis was speaking about violations of law the point seems just as applicable to ethics.

Second, and as one would expect, the impact of COIs can go beyond the economic value of the transaction at issue. 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 used to 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:

– 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.

Finally, and returning to the issue of Trump’s COIs, the negative impact of presidential impunity regarding COIs is particularly worrisome in a way that is unique in our history.  In the coming years we will be compelled to make sacrifices to address increasingly urgent needs regarding climate change and public debt. If government’s motives on these and other critical issues are subject to question due to COI’s then the (already small, in my view) likelihood of sufficient sacrifice being made is further diminished, with potentially catastrophic consequences for our country and planet. (For more on the link between morality-based sacrifice and the success of human societies see Jonathan Haidt’s The Righteous Mind.)

See you at SCCE?

Later this month I’ll be speaking at the SCCE  18th annual Compliance & Ethics Institute in National Harbor Maryland.  I’ll be presenting in sessions on 100 + Years of Business Ethics: Learn About the Future from Masters of the Profession (together with my long-time colleagues Steve Priest, Carrie Penman and Ed Petry – Sunday morning, session P7) and on Leverage Legal Developments to Advance Your Program (together with my law partner Rebecca Walker – Tuesday afternoon, session 705).

Readers of the COI Blog attending the conference  are encouraged to use the occasion to say hello.

Free webinar on risk assessment

On September 11 at 1 Eastern I’ll be presenting a free webinar  on best practices in compliance and ethics risk assessment. The webinar is  sponsored by Syntrio  and my co-presenter will be  Jason Lunday. He and I hope you can attend.

How deep is the ocean? The latest on Trump’s conflicts of interest

In a report on President Trump’s conflict of interest published last week, the Citizens for Responsibility and Ethics  in Washington  (CREW)  noted that it had “tallied 2,310 conflicts resulting from President Trump’s decision to retain his business interests.” Highlights include the following:

– The president has visited his properties 362 times at taxpayer expense during his administration, sometimes visiting more than one of them in a single day. In 2019 alone, he has visited his properties 81 times, helping to further establish them as centers of political power. The number of days where President Trump has spent time at a Trump-branded property account for almost a third of the days he’s been president.

– One-hundred eleven officials from 65 foreign governments, including 57 foreign countries, have made 137 visits to a Trump property, raising the question of how much foreign money has been spent at Trump’s properties.

– Additionally, CREW has recorded 630 visits to Trump properties from at least 250 Trump administration officials. This includes high-level White House staff, members of Trump’s cabinet, and individual agency employees. So far this year, CREW has recorded 198 visits by White House officials. Ivanka Trump—who has an ownership interest in the Trump hotel in D.C.—and her husband Jared Kushner, both senior White House advisors, are the most frequent executive branch officials to visit Trump properties, other than the president himself. Jared has made 28 known visits, while Ivanka has made 23.

– Members of Congress have flocked to President Trump’s properties, despite their constitutional oversight responsibility to provide a check on the executive branch as it relates to President Trump’s conflicts of interest. Throughout his two and a half years as president, 90 members of Congress have made 188 visits to a Trump property.

– Forty-seven state officials, including 20 Republican governors, have made 64 visits to Trump properties, sometimes resulting in state taxpayer funds being spent there.

– President Trump has used the presidency to provide free publicity for his properties, which he still profits from as president. Over the course of his presidency, Trump has tweeted about or mentioned one of his properties on 159 occasions, and White House officials have followed suit: Members of Trump’s White House have mentioned a Trump property 65 times, sometimes in the course of their official duties.

– Political groups have hosted 63 events at Trump properties since President Trump took office, selling wealthy donors access to the administration while also enriching the president. Seventeen of these have been for Trump-linked groups, and another six have been hosted by groups linked to Vice President Mike Pence. Trump Victory, the joint fundraising arm of Trump’s 2020 election committee and the RNC, has hosted six events at Trump properties just this year, four of which were attended by the President himself. In all, the RNC and other Republican Party groups have had 28 events at Trump properties.

– Twenty Trump administration officials have attended 38 political events at a Trump property, giving wealthy donors who fund spending at the president’s businesses access to top officials to discuss their pet issues while they enrich President Trump personally.

-Political groups have spent $5.9 million at Trump properties since President Trump took office. So far this year, political groups have spent $1.1 million at Trump properties. In more than a decade prior to his run for president, Trump’s businesses never received more than $100,000 from political groups in a single year.

– The Trump Hotel in Washington, D.C. is the top beneficiary of this political spending. In just over two and a half years, the hotel has raked in $2.4 million in traceable political spending.

– Foreign governments and foreign government-linked organizations have hosted 12 events at Trump properties since the president took office. These events have been attended by at least 19 administration officials.

This is a stupendous record of corruption – and one that, as the report notes, is likely incomplete. CREW is performing an important public service by keeping track of and analyzing this sordid mess.

But will it matter? The presidential election next year and how voters respond to Trump’s conflicts of interest may prove to be the most consequential ethics test in our country’s history. And it is not Trump who will be tested in  that contest –  it is us.

(Postscript:  less than a day after my posting the above piece Trump made an overt and sustained public pitch for the next G-7 meeting to be held at one of his hotels. A morally normal person would feel some sense of disgrace if found doing this sort of thing.  But Trump seems to view it as a badge of honor, as proof that he  – like a modern-day Raskolnikov – is above the morality of the “little people.”) 

What is in a name?

A recent letter to the editor of Nature argues:

Transparency about competing interests is essential when reporting scientific data. However, use of the term ‘conflict of interests’ for such declarations can be misleading in some biomedical papers. A genuine example of a conflict of interest is when academic researchers are financially rewarded for their work by commercial partners. The situation can be more nuanced for reports of biomedical discoveries that could be applied in clinical situations. After all, developing such treatments for patients is a moral obligation for academic researchers, both to their funders and to society — even though it can mean working with biotechnology or pharmaceutical companies. Disclosing a financial arrangement as a ‘conflict of interest’ under such circumstances implies that engagement with for-profit companies is a nefarious activity, potentially at odds with what society expects from biomedical scientists. In that context, a ‘declaration of interest’ would be a more accurate term for a mandatory and transparent disclosure of financial relationships. A ‘conflict of interest’ should instead be reserved for authors who cannot document efforts to translate their discoveries to the clinic. (The author of the letter is  René Bernards of the Netherlands Cancer Institute.)

I do not know enough about biomedical research conflicts of interest to gauge the merits of this suggestion, but I would be surprised if some scientists couldn’t  still have a conflict of interest even if they translated their discoveries to the clinic. However, the larger point about a COI disclosure seeming to unfairly suggest nefarious conduct basically seems sound.

More generally, I believe that in organizations of all kind,  policies, training and disclosure documents should communicate that not all ostensibly conflicting interests are  wrongful. (This point is sometimes made, but  in my view  not often enough.) The alternative may be to discourage desirable conduct and to drive other conduct underground.

Expert product reviews

In Expert Product Reviews and Conflict of InterestTom Hamami  writes: “Many firms that produce expert product reviews have a vested interest in increased consumption of the products they review. The classic example is the Michelin Guide, which reviews restaurants, originally conceived to stimulate usage of automobiles and therefore also demand for automobile-related goods and services. The result is a conflict of interest; such firms have financial incentive to give better reviews than products merit… [Hamami] compare[d] video game reviews from two sources: one a video game magazine owned by a game retailer and the other a game website that does not sell games. The goal of the research is to evaluate to what extent, if any, the retailer-owned outlet inflates its reviews in order to boost sales. …, [Hamami indeed found] some evidence of increased inflation in periods shortly following the release of a game’s corresponding piece of hardware. Other literature on this industry finds that reviews have the largest effect on the sales of low-quality games, and [indeed he finds] evidence of review inflation for [such] games. These results are consistent with theoretical predictions for a firm that optimizes the trade-off between sales revenue and the reputational costs associated with biasing reviews.” On the other hand, “somewhat surprisingly, [he finds] no evidence of seasonal variation despite the increased demand for video games in the fourth quarter of the year.”

So, a mixed picture – and one that is indeed consistent with the author’s review of relevant literature on COIs of this sort. E.g., one study finds “evidence of a strong positive influence of advertising on media coverage in the fashion journalism industry…” But another finds “minimal differences between the reviews of two wine publications, one of which accepts advertising and one of which does not…”

How much does this matter?

Assuming that the COI is disclosed or is otherwise apparent – as I imagine is so  in the great majority of cases – there is evidently no “information deficiency,” a key factor in evaluating both the likelihood and impact of a COI.  Nor do the COIs reviewed by Hamami seem to be of the sort that the average buyer cannot evaluate on her own (as might be true, for example, of pharmaceutical or complex financial products). Indeed, the very focus on “reputational costs” suggests that consumers do appreciate and take into account the negative impact of a COI on the publisher of product reviews.

But even disclosed and understood COIs generally do have a pernicious effect on our society, as they can contribute to the cynicism that many feel about the press and business world. I don t know how to weigh that against the other factors mentioned above, but it is certainly part of the picture.

 

20 best practices in conducting risk assessment

A new whitepaper published by Syntrio.

I hope you find it useful.

DOJ Issues New Compliance Program Evaluation Standards

My latest column in Compliance & Ethics Professional.

I hope you find it useful.

Extra compliance for high-risk-potential employees

In “The Power Few of Corporate Compliance,” 53 Georgia Law Review 128 (2018), Todd Haugh of Indiana University’s Kelley School of Business argues: “Corporate compliance in most companies is carried out under the assumption that unethical and illegal conduct occurs in a more or less predictable fashion. That is, although corporate leaders may not know precisely when, where, or how compliance failures will occur, they assume that unethical employee conduct will be sprinkled throughout the company in a roughly normal distribution, exposing the firm to compliance risk but in a controllable manner. This assumption underlies many of the common tools of compliance—standardized codes of conduct, firmwide compliance trainings, and uniform audit and monitoring practices. Because regulators also operate under this assumption, what is deemed an ‘effective’ compliance program often turns on the program’s breadth and consistent application. But compliance failures—lapses of ethical decision making that are the precursors to corporate crime—do not necessarily conform to this baseline assumption.”

I agree that in many – but certainly not all – companies there is too much emphasis on C&E breadth and too little on depth. Indeed, many years ago, Joe Murphy  – who can be justly called “the father of compliance” – cautioned against overreliance on employee compliance surveys with the memorable words “criminal conspiracies do not operate by majority rule.” I also recall a CEO advising me, as I set out to conduct a risk assessment of his company, “not to spread the peanut butter too thinly.” Moreover, compliance program evaluation standards recently issued by the Justice Department’s Criminal and Antitrust divisions  will likely cause more companies to make their respective programs risk based.

Haugh further argues that: “Extreme failures are more likely the result of small groups of individuals acting unethically or illegally, who by virtue of their social and organizational networks account for an outsized amount of bad conduct, and therefore harm. These individuals are the power few of corporate compliance…Companies seeking to improve compliance, and therefore corporate governance, should no longer focus indiscriminately on organizational culture writ large. Instead of designing compliance programs aimed generally at promoting ethical culture as suggested by the Organizational Sentencing Guidelines and adopted by regulators and compliance professionals, compliance should be approached from a behavioral ethics risk management paradigm. Compliance efforts should target those individuals within the company whose unethical decision-making pose the greatest risk according to behavioral and organizational factors such as job task, leadership role, propensity to rationalize wrongdoing, and social and organizational networks. This risk-based approach may be consistent with current compliance efforts to improve companies’ ‘tone at the top,’ assuming that is where the behavioral ethics risk lies. But it also recognizes that the focus of these efforts may correctly bypass the C-suite in order to lessen the significant compliance risk caused by the power few, wherever they may be within an organization.”

Being of the behavioral persuasion I generally agree with this too. But I do think there will always be a need for enterprise-wide compliance efforts, both as an operational and symbolic matter.

Finally, Haugh identifies other compliance program recommendations based on the “power few” theory including:

– “Identify employee ethics during the hiring stage.”

– “Identify the power few in the organization…Once identified, these employees are monitored for risk-taking behavior, and how they manage it factors into promotion and compensation decisions.”

– “To ensure unethical employee decision-making is properly targeted, companies ‘need to frame [their] training around . . . specific, risky job tasks ‘.”

– “Finally, as ethical employees advance in the company and become hubs of influence themselves, they should be leveraged as ‘behavioral compliance ambassadors.’”

These are generally sound ideas and to some extent are already in use (as Haugh notes), particularly the risk-based training one. Still, having what is in effect an employee integrity watch list may be a tough sell in many companies.