Conflict of Interest Blog

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 www.thefiduciaryinstitute.org

 

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.

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.