Conflict of Interest Blog

Join the Citizens’ Climate Lobby

An Op-Ed piece in the NY Times last month  began: One day, ideally in the not-too-distant future, when Congress finally passes major legislation to curb carbon emissions — to reduce the environmental and economic harm caused by climate change — Americans will owe a big thank you to the perseverance and discipline of the Citizens’ Climate Lobby.

Climate change may be the greatest ethical issue of our time. The potential peril is overwhelming – even soul crushing – to contemplate. The path to safety seems partly blocked by a structural conflict of interest: those contributing to climate change risk are largely different from those who – because they are young or not yet born – will bear the cost of the risk taking. And to these challenges must be added the paralyzing effect of “tribal thinking,” which – particularly of late – poses a grave threat to ethical thought and deed in many realms.

That’s the bad news. The good news – at least it was news to me – is that there is a group with the vision and the organizational skills to take on the tribal thinking part of the challenge.

As described on its web site, Citizens’ Climate Lobby is a non-profit, non-partisan, grassroots advocacy organization focused on national policies to address climate change. Our consistently respectful, non-partisan approach to climate education is designed to create a broad, sustainable foundation for climate action across all geographic regions and political inclinations. By building upon shared values rather than partisan divides, and empowering our supporters to work in keeping with the concerns of their local communities, we work towards the adoption of fair, effective, and sustainable climate change solutions.

CCL was founded in 2007 and has been growing rapidly. This past week, more than a thousand of its citizen advocates came to Washington to hold meetings with about 500 Senate and House offices. They are clearly well organized.

CCL helped establish the Climate Solutions Caucus in the House of Representatives. There are now 42 members, with membership kept even between Democrats and Republicans. This group’s bipartisan spirit was recently praised by Republican Congressperson Mark Sanford.

CCL’s policy proposal – which is described fully on the website – is market-based and revenue neutral. This should make it appealing to conservatives. Indeed, among the members of CCL’s very impressive advisory board is former Secretary of State George Schultz.

CCL has an excellent set of values. One value – particularly relevant to combatting tribal thinking – is Relationships: We take the most generous approach to other people as possible — appreciation, gratitude, and respect. We listen, we work to find common values, and we endeavor to understand our own biases. We are honest and firm. We know that there is a place for protest, but our approach is to build consensus — that’s what will bring enduring change. That’s why elected officials and their staff, no matter what their politics, say they are happy to see us — and mean it.

This seems like a winning formula for building consensus around climate change. Indeed, the approach should be considered in addressing a host of seemingly intractable political problems.

I encourage you to learn more about CCL by visiting their website and reading the Times article.

And, for a post on the related topic of humility as an ethical value, click here.

Behavioral Ethics and Compliance Index – 2017 Edition

It is that time of year – time to update the Behavioral Ethics and Compliance Index.  As with past editions, I have linked each  post to only one index topic, but most of them are relevant to several topics.

Also, in the coming month, Ethical Systems will be publishing an e-book on behavioral ethics and compliance that I co-authored with their CEO Azish Filabi.  I’ll post an announcement when that happens.

INTRODUCTION 

– Business ethics research for your whole company (with Jon Haidt)

– Overview of the need for behavioral ethics and compliance

Behavioral ethics and compliance: strong and specific medicine

– Behavioral C&E and its limits

Another piece on limits

– Behavioral compliance: the will and the way

Behavioral ethics: back to school edition

BEHAVIORAL ETHICS AND COMPLIANCE PROGRAM COMPONENTS

Risk assessment

–  Being rushed as a risk

–  Too big for ethical failure?

– “Inner controls”

– Is the Road to Risk Paved with Good Intentions?

– Slippery slopes

– Senior managers

– Long-term relationships

– How does your compliance and ethics program deal with “conformity bias”? 

– Money and morals: Can behavioral ethics help “Mister Green” behave himself? 

– Risk assessment and “morality science”

 Advanced tone at the top

Communications and training

– “Point of risk” compliance

–  Publishing annual C&E reports

– Behavioral ethics and just-in-time communications

– Values, culture and effective compliance communications

– Behavioral ethics teaching and training

– Moral intuitionism and ethics training

Reverse behavioral ethics

The shockingly low price of virtue

Positioning the C&E office

– What can be done about “framing” risks

Accountability

– Behavioral Ethics and Management Accountability for Compliance and Ethics Failures

– Redrawing corporate fault lines using behavioral ethics

– The “inner voice” telling us that someone may be watching

–  The Wells Fargo case and behavioral ethics

Whistle-blowing

– Include me out: whistle-blowing and a “larger loyalty”

Incentives/personnel measures

– Hiring, promotions and other personnel measures for ethical organizations

Board oversight of compliance

– Behavioral ethics and C-Suite behavior

– Behavioral ethics and compliance: what the board of directors should ask

Corporate culture

– Is Wall Street a bad ethical neighborhood?

– Too close to the line: a convergence of culture, law and behavioral ethics

–  Ethical culture and ethical instincts

Values-based approach to C&E

 A core value for our behavioral age

– Values, structural compliance, behavioral ethics …and Dilbert

Appropriate responses to violations

– Exemplary ethical recoveries

BEHAVIORAL ETHICS AND SUBSTANTIVE AREAS OF COMPLIANCE RISK

Conflicts of interest/corruption

– Does disclosure really mitigate conflicts of interest?

– Disclosure and COIs (Part Two)

– Other people’s COI standards

– Gifts, entertainment and “soft-core” corruption

– The science of disclosure gets more interesting – and useful for C&E programs

– Gamblers, strippers, loss aversion and conflicts of interest

– COIs and “magical thinking”

– Inherent conflicts of interest

Specialty bias

Insider trading

– Insider trading, behavioral ethics and effective “inner controls” 

– Insider trading, private corruption and behavioral ethics

Legal ethics

– Using behavioral ethics to reduce legal ethics risks

OTHER POSTS ABOUT BEHAVIORAL ETHICS AND COMPLIANCE

– New proof that good ethics is good business

How ethically confident should we be?

– An ethical duty of open-mindedness?

– How many ways can behavioral ethics improve compliance?

– Meet “Homo Duplex” – a new ethics super-hero?

– Behavioral ethics and reality-based law

Risk assessment for the little guy

For larger companies or those in highly regulated areas of business, there is often a lot to do in assessing compliance and ethics risk.

But for many other organizations, risk assessment can be done with relatively little cost or disruption, as described in this article from the most recent issue of Compliance & Ethics Professional magazine (p2 of PDF).

A core value for our behavioral age

Groucho Marx famously said: “Those are my principles, and if you don’t like them… well, I have others.” When it comes to companies committing to follow key principles to guide their behavior – what are often called “core values” – there is clearly no shortage of options. Indeed, this posting on the Threads web site offers 500 ideas for those in the market for values.

One value that I see occasionally (but not frequently) selected for “core” status is humility. Kellogg, for instance, includes humility among several other core values.  Humility is not principally about ethics – Kellogg embraces an integrity value too (as is the case with a large number of companies). But I do see humility as having an important role to play in promoting compliance and ethics in business organizations, in several ways.

First, humility is a logical and arguably inevitable response to the vast body of behavioral ethics research showing “we are not as ethical as we think.”  Thinking and acting with humility is indeed a way of operationalizing behavioral ethics. (For a list of behavioral ethics and compliance posts click here. Also, please see this recent article in the NY Times on behavioral ethics and the notion of “servant leadership.”)

Second, humility is well suited for addressing ethical challenges that are based not on the purposeful failure to be honest but on the less well-appreciated dangers of being careless. (For a post on that click here.) Recognizing the limits of one’s abilities – which is part of being humble –  should help underscore the need for carefulness.

Finally, humility has the potential to resonate deeply in our political, as well as business, culture. By this I mean humility can help form part of a broader mutually supporting relationship between business ethics and what might be called societal ethics of the sort described in other posts.

From a professional viewpoint the benefits to the business side are of most immediate interest to me, but as a citizen (hopefully in the broad sense) I know that the societal dimension is of greater importance. So, let me close by quoting what is one of the best (albeit largely forgotten) expressions of humility’s role in societal ethics, which  can be found in Learned Hand’s “Spirit of Liberty” speech: “The spirit of liberty is the spirit that is not too sure that it is right [and] which seeks to understand the minds of other men and women…”  Delivered in 1944 – when the US and other democracies were engaged in a truly existential battle for survival – these words have never been more compelling than they are today.

Moral hazard: the final compliance frontier?

Moral hazard exists when there is a gap between the interests of those who can create risks and those who bear the consequences of risk taking. Moral hazard is not the same as conflict of interest, but is conflict like. As described in various prior posts,  C&E programs need to take moral hazard into account in identifying and mitigating risk.

This week, the Society of Corporate Compliance & Ethics  published the results of a survey which showed that “despite the importance of compensation in affecting risk compliance [personnel] rarely play[] a role in evaluating incentive programs” at their respective companies.  The report noted: “just 23% report reviewing the plan prior to the plan’s approval. Just 8% do so after it is approved, and 52% report that the compliance team never reviews the plan. The balance did not know whether the incentive plan is reviewed.”

While disappointing, these numbers are not surprising. Indeed, based on what I have seen at many companies, I would have expected that the percentage of those who reviewed an incentive plan prior to its approval to be even lower than the survey results.

But practices in this key area could change, given – as the SCCE survey notes – the recent publication of  the Department of Justice’s compliance program evaluation guidance document which suggests that prosecutors assessing programs ask (among other questions):  How has the company considered the potential negative compliance implications of its incentives and rewards? Of course, the question does not necessarily mean that compliance professionals need to be part of this determination. But surely the consideration would be seen by the government as more serious (and more informed) if they were involved.

As well, involving the compliance staff in this determination can be seen as empowering them. Such involvement – if made known throughout the company, as it should be – enhances Compliance’s “clout,” which has long been viewed by Justice as fundamental to an effective C&E program.

Also,, note that there are many other ways that C&E can be incented – as described in this post from the FCPA Blog. But all companies, in my view, should involve Compliance in reviewing incentive plans.

Finally, I recently suggested that ethical thinking from the business realm can fortify ethics at the societal level. Understanding the pernicious effects of moral hazard in the two  highly consequential areas of climate change and irresponsible fiscal policies may be a way in which such fortification can work. (For a related post on “Two conflicts of the apocalypse” click here.) Indeed, while the notion of moral hazard being a final frontier has one meaning in terms of C&E program practices, it has a more urgent significance when thought of in terms of these risks.

Compliance stays in the game

Last week the Ethics & Compliance Initiative (the ECI) held its annual conference and marked the 25th anniversary of the founding meeting of one of the group’s predecessor entities – the Ethics Officer Association (the EOA). The conference covered a wide range of topics (Mark Snyderman and I discussed the ECI conflict of interest benchmarking research that was the subject of a prior post) but the clear highlight of the event was the keynote address by Attorney General Jeff Sessions.

Based upon some of what he has said and done outside the C&E realm I’ve not been a big fan of the AG, but I was relieved by two aspects of his message to the hundreds of C&E officers in the room and many thousands who were not present. First, he said that the government “will continue to strongly enforce the Foreign Corrupt Practices Act and other anti-corruption laws.”  This is important not only because corruption is an incredibly harmful phenomenon which must be relentlessly combatted but also because the internal controls provision of the FCPA effectively requires compliance measures beyond those that are purely anticorruption focused. Second, he said: “when we make charging decisions, we will continue to take into account whether companies have good compliance programs.” This is important because enforcement-related incentives such as this are a big part of what persuades companies to develop strong C&E programs. (Indeed, it is no coincidence that the EOA was founded shortly after the legal standards inaugurating this policy approach – the Federal Sentencing Guidelines for Organizations – went into effect.)

Of course, the AG’s positions presumably would be viewed by many people as simply a matter of  common sense . But in other areas – such as climate change and fiscal responsibility – the Trump administration has seemingly abandoned reason. So, when counting our blessings in these times, nothing should be taken for granted. And, the government’s continuing to support C&E (through enforcement policy) is indeed a blessing, even if its logic is obvious.

At the founding EOA meeting in 1992 there were fewer than twenty ethics officers present. Since then C&E programs have spread throughout the world, playing a key role in preventing and detecting not only corruption but also terrorism, collusion, fraud, conflicts of interest, pollution, harassment, discrimination, human trafficking, labor law transgressions, privacy violations, unsafe products and unhealthy working conditions, among other things.  These programs are, of course, imperfect in many ways. But a vast number  of people are better for their now being part of the business mainstream.

Ultimately, the full promise of C&E programs goes beyond the business realm to nurturing habits of mind that can be helpful to addressing a wider range of challenges than corporate law abidance and ethicality. Among other things, such habits could include thinking systemically about risk, having a deep appreciation for the interests of other individuals, insisting on transparency where it is reasonable to do so, embracing meaningful approaches to accountability for doing what is right and for stopping what is wrong and protecting truth telling at all costs. None of these were invented by C&E practitioners. But for many millions of Americans and others there is now a steady reminder through C&E programs of the importance of thinking in these and related ways – and this could provide a foundation for promoting greater ethicality in the  broader societal realm. (See this prior post for the somewhat similar suggestion that ethical thinking in the private sphere can strengthen C&E  in the business world.)

So, hats off to the AG (at least for the moment). And, full speed ahead with the C&E movement.

Treating suppliers ethically

Just as (according to Dostoyevsky) “[t]he degree of civilization in a society can be judged by entering its prisons…” so can the degree of ethicality in a company be judged – at least in part – by assessing how it treats its vendors. While not as vulnerable as prisoners, of course, vendors do tend to be an easier target of abusive treatment than are other classes of a company’s stakeholders. Indeed, this vulnerability was part of the reason for the widespread revulsion at press accounts of Donald Trump’s not paying many of his company’s vendors, as described in this story last year in USA Today.

However, at least based on my experience, the ethical treatment of vendors is often not on the radar screen of C&E programs, at least not to a meaningful degree. In that respect the issue is a bit like corporate tax practices, a hugely important area for ethical consideration  that is rarely treated as within the scope of a C&E program (as discussed in page 27 of this e-book).

Earlier this month a law went into effect in the United Kingdom requiring large companies to disclose certain information about payment practices regarding suppliers. The specifics of the law can be found in this article by the Pillsbury Winthrop law firm and, needless to say, companies doing business in the UK should understand and take whatever steps are necessary to comply with the law – aspects of which do sound somewhat tricky.   My point in alerting readers of the COI Blog to this development, however,  is somewhat different: to suggest that the law provides a welcome occasion for C&E officers to urge their companies to think broadly about C&E issues regarding the treatment of a company’s suppliers, if they have not already done so. Hopefully, this can lead to greater emphasis in risk assessment, training and other parts of a C&E program on doing right by suppliers.

This is important principally because it is the ethical thing to do. However, it is compelling  as a matter of compliance logic as well. In that regard, I can recall from client experience two instances of the mistreatment of suppliers (in particular, lying) causing those suppliers to confer with each other in a defensive but potentially harmful and unlawful  manner. Doubtless there are many other examples of this kind too – and I hope the spirit of the UK law can reach beyond the area of payments and lead to better compliance and ethics generally in the relationships between customers and suppliers.

Mozart’s timeless question

In the film Amadeus, the Emperor tells Mozart: “Your work is ingenious. It’s quality work. And there are simply too many notes, that’s all. Cut a few and it will be perfect.” The composer responds: “Which few did you have in mind, Majesty?” This exchange was brought to mind by an essay in Stanford Law Review On Line by Todd Hough, who teaches at Indiana University’s business school, “Cadillac Compliance” Breakdown.

Hough argues that “Corporate America wants—and believes it is getting—top notch compliance programs. But instead of the Cadillac, companies are ending up with a Chevy. Why is this? My research suggests the answer stems from two interrelated phenomena. First, corporate compliance is becoming increasingly ‘criminalized’; that is, corporations are now approaching compliance primarily through a criminal law lens. Second, as compliance programs become more criminalized they impose unintended behavioral consequences on corporate employees by creating opportunities for them to rationalize their unethical and illegal acts. Understanding these phenomena provides insight into the current failures of corporate compliance, but also how companies can best devise effective means of combating future corporate wrongdoing.”

I am generally sympathetic with his point of view, and indeed view Hough’s article as valuable for the C&E field. But still I have two concerns.

First, I think it is incorrect  to suggest that compliance programs are becoming criminalized. In fact, they have been that way from the beginning – which, most C&E practitioners would say, was the advent of the distinctly criminal Corporate Sentencing Guidelines in 1991. The notion of a golden age of truly voluntary compliance is essentially a myth, as noted in this prior post (although I should stress Hough does not put it that way).

Moreover, the fact that compliance programs are driven by criminal law does not mean that they are shaped by criminal law. The various components of compliance programs (such as risk assessment or auditing) are, in my view, based on ideas and experience involving management more so than law.

Second, his principal  recommendation for enhancing compliance programs is to build on the learnings of the behavioral ethics field. I certainly don’t disagree with this. It is indeed a point I have been making for many years in this blog and elsewhere and which has informed my advisory work for companies for even longer. Moreover, his particular suggestions in this regard  – concerning training, incentives and other C&E program elements  – seem sound.

Note that while the recommendations do seem useful, having developed similar approaches for corporate clients I don’t see behavioral ethics as transforming corporate compliance in profound ways. A personal metric on this point: in a typical 100-page compliance assessment report I draft, on average only two of those pages will be devoted to behavioral ethics. (If there was more to say I would definitely say it.)

Moreover, Hough argues that conventional compliance programs can essentially contribute to wrongdoing. There are various aspects to this, and I won’t try to address them all here,  but in large measure they come down to the view that too much emphasis on controls combined with the very large capacity to rationalize that we all have  delegitimizes compliance programs and thereby contributes to wrongdoing.   In an earlier post regarding a similar argument made by another scholar (whose work Hough indeed cites) I questioned whether this is really what happens in cases of corporate crime:   “According to his paper, laboratory experiments have shown that assuming a distrustful attitude toward individuals (which controls inherently do) causes those individuals to act in a less compliant/ethical manner. I have not read the research that he cites, but question whether anything done in a laboratory can sufficiently replicate the effect of the real-world conditions – particularly the pressures and risks, both of which can be extreme – that business people face when it comes to dealing with corruption. Indeed, in my – concededly anecdotal – experience, many business people welcome controls, as controls can help minimize the prospect of going to prison for making a wrong decision or having one’s employer economically ruined based on a colleague’s malfeasance. (This is particularly true with risk areas involving complex, often non-obvious rules – such as corruption, and also competition law and export controls.) Viewed in this light, having anti-corruption controls is no more disrespectful than is going to a doctor for an annual checkup.”

Coming back to where we started, for those would propose major cutbacks on controls, I’d respond with Mozart’s question: Which ones?

Finally, and at the risk of being redundant, I should stress that I found Hough’s article very helpful and I encourage you to read it.  And, I don’t want to diminish the curiosity practitioners may have for the behavioral ethics field. Rather, my goal is purely one of expectations management.

Cross references:

Behavioral ethics: the will and the way

In search of “Goldilocks compliance”

Welcome to Conflict of Interest World!

How can conflicts of interest harm individuals, organizations and society?

My latest column in Compliance & Ethics Professional (page 2 of attached PDF) counts the ways.

I hope you find it interesting.

Do stock options discourage whistleblowing?

Paying hush money is big business, and hardly a day goes by without some press account of a company or powerful individual buying the silence of those with knowledge of wrongdoing. Sometimes this involves settling individual claims with confidentiality provisions – such as today’s story in the NY Times about the various settlements Fox News has paid to silence individuals who claimed they were sexually harassed by that organization’s Bill O’Reilly.  But of perhaps of greater interest to C&E personnel (or at least to me) are what could be considered structural inhibitions on whistleblowing.

Andrew Call, Simi Kedia and Shivaram Rajgopal recently published research they conducted on the relationship between companies issuing stock grants to their employees and employees at such organizations reporting fraud. As described on HBR.org, the possible connection between receiving stock options and deciding to blow the whistle is twofold. First, “the value of stock options is directly tied to the value of the firm’s stock, and … whistleblowing allegations result in an immediate decline in the firm’s stock price, [so] employees stand to lose financially when they blow the whistle. In addition, employee stock options typically have vesting terms that require employees to wait a few years before they can exercise their options, which may act as a disincentive to blowing the whistle before they’re able to exercise their options.”

Their research approach and findings were as follows:

“Using a Stanford Law School database, we identified a sample of 663 firms that were alleged to have engaged in financial misreporting and were subject to class action shareholder litigation in U.S. federal court from 1996–2011. We examined the number of stock options granted to rank-and-file employees during the period of alleged misreporting, and we found that these firms granted more stock options during the misreporting period than did a benchmark sample of 663 similar firms that were not being investigated for financial misreporting. Option grants by these misreporting firms varied over time. Specifically, misreporting firms granted 14% more stock options to rank-and-file employees when they were allegedly misreporting their financials, but the number of options they granted decreased by 32% after they appeared to stop misreporting. These findings suggest that these firms granted additional stock options strategically during periods of alleged misreporting. We also found that these efforts are effective. Misreporting firms that granted more stock options to rank-and-file employees were less likely to be exposed by a whistleblower. Approximately 10% of the firms in our sample were subject to a whistleblowing allegation. Firms that avoided a whistleblower granted 78% more stock options than these firms did not.”

 These are certainly interesting findings, although one wonders if the results would be similar with a study of exclusively post Dodd-Frank cases, given how that 2010 law has greatly enhanced the incentives for whistleblowing in public companies. I also have a hard time picturing a meeting of senior executives and human resources personnel agreeing to a strategy of using stock options to buy employee silence. I’m not saying this never happens but doubt it happens a lot – given the personal risks that participating in such a scheme would create for those involved. However, I can definitely see how this would happen in the poorly lit realm of what is understood but not spoken.

Regardless of how this incentive manifests itself, I think C&E professionals should be aware of it in assessing and responding to the challenge of encouraging employees to internally report wrongdoing in their organizations. For some companies the key will be in increasing disincentives for not reporting, such as imposing serious economic penalties for senior managers on whose watch the wrongdoing occurred regardless of fault by such individuals. For other companies, softer incentives might be what is needed – such as the appeal to a “larger loyalty” described in this previous post on behavioral ethics and whistleblowing. For still others, having a point of risk” communication strategy  around the granting of the option – also a behavioral ethics inspired approach – might be what is called for.

Finally, the study also raises a different issue: should C&E personnel receive stock options? I know of no research on this issue, but this post – which  explores the related area of incentive compensation for “governance monitors” (general counsel and internal auditors)  – may be of interest to readers facing this issue in their organizations.