Moral Hazard – Part Three: Intangible Interests, Monitoring By Boards

In prior postings, we introduced the concept of “moral hazard” (which, again, is principally based on economics, not ethics) to the Blog and considered how moral hazard risks can be addressed through appropriate attention to incentives, both positive and negative.  In this posting we discuss the less common form of intangible moral hazard based interests.

Consider the example of corporate support for political causes or candidates for public office (hopefully a good example to use in an election year).  In some instances, a senior manager with the power to make decisions  for a company regarding such support may use that power to embrace a candidate or cause even if doing so is against her company’s interests  (e.g., the cause or candidate’s positions may offend a large percentage of the company’s customers).   For the purposes of our example, assume further that the manager does not expect to be tangibly rewarded for providing the company’s support to the candidate, and thus may not have a true “interest” for COI purposes (at least not in the traditional sense).  Nonetheless, because of the manager’s political beliefs, she may cause the company to take risks in supporting the candidate that are unjustifiable from the organization’s perspective.  In other words, this is a case of an intangible moral hazard risk.

Of course, compared to other C&E risks (e.g., corruption, competition law) political support is not an area of great danger to most companies.  Nonetheless, presumably because of this potential for divergence of interests, it is in fact area of relatively significant amount of board oversight and other high-level compliance measures, as described in The Conference Board’s  Handbook on Corporate Political Activity Emerging Corporate Governance Issues.

I should emphasize that most moral hazard risks really are of the tangible variety – and come particularly from the area of compensation.  But as with COIs, organizations need to think broadly about moral hazard to have an effective C&E approach regarding all the ways in which employees might be moved to act inconsisently with  the interests of the organization.

Next up on the Blog: “behavioral ethics and compliance.”