Enforcement

“Organizational Justice” and Conflicts of Interest

According to research conducted by the Corporate Executive Board (the “CEB”) of about 600,000 employees of more than 140 companies, one of the most important steps to promoting compliance is maintaining “organizational justice.”  The CEB notes: “A firm’s culture has organizational justice when employees agree that 1) their firm responds quickly and consistently to proven unethical behavior and 2) that unethical behavior is not tolerated in their department.”

What does this have to do with conflicts of interest?

In many organizations COIs constitute one of the most common – and commonly observed – types of wrongdoing.  And, I believe that  – more so than with most types of C&E violations – when COIs that are harmful to a company are permitted to exist, that undermines the sense of justice within the organization.

The special harm that COIs can cause to organizational justice arises from their frequently personal nature: because COIs often involve a personal benefit to an individual employee that is denied to others, the latter (i.e., rule abiding employees) can feel personally harmed (from a relative perspective) by the COI in a way that they would not feel, for example, with an antitrust offense or violation of export regulations.  This  impact has been brought home to me in various client engagements, such as recently hearing at one company how employees “monitor” each other regarding COIs or from a focus group in another company where employees questioned the organization’s commitment to C&E generally based upon its handling of certain COIs.

Given the outsized impact that COIs can have on the overall efficacy of a company’s C&E program, addressing them effectively should be a top priority for companies.  That is, the danger of poor COI mitigation is not only the immediate impact  from individual COIs (e.g., distorted procurement or hiring decisions) but a broader risk to the entire program.

Of the 8 million stories in the Big City, here are the ones about conflicts of interest

An area of recurring challenge for many C&E regimes is setting the right level of discipline for a given violation (COI-related or otherwise), a task often complicated by the lack of available precedent for any given case.  For companies, precedent generally means prior internal case decisions that can meaningfully be used for guidance on a given matter.  But small or medium-sized organizations will often lack critical mass of this sort.  Occasionally, one learns of publicly available precedent from other entities in the private sector, although such instances are rare – and are typically limited to instances involving worst-case conduct.

In the public sector, however, more precedent is available. And, in the absence of anything else, public sector cases might be useful to a private sector entity looking for some guidance on meting out justice for COI transgressions.

For instance, the New York City Conflicts of Interest Board publishes a compendium of disciplinary actions concerning:

gifts,

misuse of official position,

misuse of time and resources,  

and many other types of COI-based wrongdoing.

Of course, disciplinary considerations in the public sector can differ from private sector ones in various ways.  But for some companies – particularly those with little else to go on – this information may be useful.

Moreover, for organizations doing business with public sector entities, the data base can be helpful for other purposes, including:

– risk assessment, specifically, identifying situations at the intersection of public and private sectors likely to give rise to COIs;  and

– developing “real-life” communications to employees on the causes and consequences of COIs.

When it comes to COIs, a good story can do a C&E program a world of good.

Behavioral Ethics and Management Accountability for Compliance and Ethics Failures

As discussed in the initial post in this series, behavioral ethics can help C&E officers prove important things about their programs that they already know anecdotally but which others might not accept in the absence of scientific data.  (The second post addressed what behavioral ethics teaches us about conflicts of interest and  third  described certain behavioral ethics implications for C&E communications.)  In this post we explore what behavioral ethics research can help to prove about what has long been an area of great challenge for many C&E programs: the need to hold managers responsible for the C&E transgressions of their subordinates.

A key tenet of behavioral ethics is “motivated blindness.” As described by Max Bazerman and Ann Tenbrunsel in a piece from the Harvard Business Review Blog Network : “mounting research shows that we often fail to notice others’ unethical behavior if it’s in our interest not to notice. This failure of oversight — called ‘motivated blindness’ — is unconscious and common.”  

Bazerman and Tenbrunsel recount the apparent impact of motivated blindness on what was one of the most jarring business ethics stories of 2011:  how “Warren Buffett, known for his embrace of ethical business practices, failed to understand the unethicality of [an important subordinate’s] actions when he learned of them, and intervene.”  They also argue that motivated blindness may have played a role in “the failure of major accounting firms to see the corruption in the books of the firms that they audit” and “the failure of security rating agencies to accurately gauge the riskiness of the instruments they rate…”

From the perspective of a C&E program, motivated blindness underscores the importance of the Sentencing Guidelines expectation that organizations should impose discipline on employees not only for engaging in wrongful conduct but “for failing to take reasonable steps to prevent or detect” wrongdoing by others  – something relatively few companies do well (and some don’t do at all).

To meet this important expectation, companies may wish to take the following measures:  

– build the notion of supervisory accountability into their policies – e.g., in the managers’ duties section of a code of conduct;

– speak forcefully to the issue in C&E training and other communications for managers;

– train investigators on the notion of managerial accountability and address it in the forms they use so that they are required to determine in all inquiries if a manager’s being asleep at the switch led to the violation in question;

– publicize (in an appropriate way) that managers have in fact been disciplined for supervisory lapses;

– have auditors take these requirements into account in their audits of investigative and disciplinary records.

Taken together, these steps will doubtless be seen as strong medicine – at least by some companies.  But behavioral ethics teaches that motivated blindness is a strong disease.

Our next post in this series  will be on behavioral ethics and C&E risk assessment.  And,  for a discussion of  an important book on behavioral ethics by Bazerman and Tenbrunsel – Blind Spots – please see the initial post in this series.