Codes

Nearly all corporate codes of conduct have COI provisions, but there is a great diversity of approaches to COIs in codes. This section will explore various issues in drafting COI provisions of general codes of conduct. It will also look at COI provisions in codes for suppliers, directors and others.

Global Challenges in Addressing Conflicts of Interest (Part Two)

By Lori Tansey Martens

In my last post, I outlined some of the challenges that global organizations face when implementing conflict of interest procedures throughout the world.  In this post, I make recommendations to help mitigate some of those challenges. 

Standards and Policies

First, many international employees will be unclear as to the definition of conflicts of interest.  Accordingly, conflict of interest standards should include a clear and precise definition of the concept.  Unfortunately many companies define conflicts of interest around the following lines: A conflict of interest occurs when you have personal interests which may conflict, or appear to conflict, with the company’s interests, or, A conflict of interest arises when we become involved, directly or indirectly, in activities that could impair, or be perceived to impair, our responsibility to act in the best interests of the company.

Sound familiar?  The problem with this type of definition is that it assumes that the employee’s and the company’s interests are at odds – the term ‘conflict’ itself is negative.  Yet, many international employees will see some of these situations not as conflicts, but as “win-wins,” both for themselves and for the company. 

If we could go back and rewrite our terminology on this topic, I would recommend that we talk about “Confluences of Interests” as opposed to “Conflicts of Interests”; however, I doubt that’s going to happen anytime soon.  But companies can certainly embed this concept into their definitions.  For example, companies can add the following to their standard conflict of interest definitions:  We may face situations where there is an overlap between our own personal interests, and the interests of the company.  Even when these situations appear to be in the best interests of both parties, they require particular care and scrutiny by your manager (or other appropriate company resource.)

The policy itself should also include “Q&As” that illustrate the nuances around some of the situations that can arise in an international context.  For example: Q.  In our region, the best supplier for a certain resource is a firm owned by our Managing Director’s wife.  To not buy from this firm will increase our costs significantly.  What should we do? A. In certain situations, the company may elect to do business with suppliers who are closely related to key personnel.  However, in all such cases, in order to promote transparency and to ensure fairness in supplier selection, the personal relationship must be disclosed to the Regional Director, who will make a determination as to the best course of action.

Another global concern is that some companies may consider employee involvement with certain non-profit organizations and charities to be a potential conflict of interest. However, companies should be aware that this is a particularly sensitive issue in Europe. Employees in Europe may view such concerns as a violation of their right to privacy. If companies include this element in the standard, the language should be very precise. For example, companies might specify that service in charities and nonprofit organizations “with aims that are overlapping or in direct conflict with the goals and aims of the Company” should be disclosed.

The standard or policy should also include a statement demonstrating respect for employees’ right to privacy for relationships that are outside the business sphere.  For example, “The Company respects the privacy of personal affairs of all employees, but employees must disclose situations that could result in real or perceived overlaps and/or conflicts between their personal interests and the interests of the Company.”

Finally, the policy should explain why managing confluences of interest are important for an organization. The rationale should extend to both potential ‘conflicts’ (e.g., an employee’s personal relationships may compromise his/her business judgment, decisions clouded by personal interests can negatively influence the long-term welfare of the organization, etc.) and ‘confluences’ (e.g., the company desires full transparency even in situations where both the company and the employee stand to benefit from the particular situation to ensure fairness, avoid misunderstandings, etc.)

Training

The same considerations for policy concerning definitions, illustrations and rationales, holds equally true for training.  Dedicated training on this topic is a must in many international locations given that, as discussed in the previous blog post, it may run counter to prevailing local culture and customs.  And similar to the formation of policy, the training needs to focus on not just the “what,” but the “why” and the “how,” using scenarios, case studies, and potentially even role-plays.

Processes

Multinational companies should avoid blanket prohibitions against all confluences of interest since situations may arise internationally that are unique and ambiguous. Likewise, there may be situations in which overlapping interests are unavoidable. If a company operates in small villages where all residents know each other, it could be difficult for staff to avoid business relationships with relatives or friends.  The conflict of interest processes can anticipate these situations and outline clear procedures for employees to follow.  For example, many companies place the focus on disclosure of these situations to management, or other appropriate company resource, either verbally or in writing, instead of forbidding such situations outright.

While conflicts of interest can pose global challenges, companies can anticipate and mitigate many of these concerns through well thought-out standards, dedicated training and adaptable procedures. 

And I’d like to thank my good friend Jeff Kaplan for allowing me to post on his blog site.  I’m hoping that you’ll agree that this was a good example of an entirely appropriate ‘confluence’ of interest!

Lori Tansey Martens, a 20-year veteran in global business ethics, is the President of the International Business Ethics Institute. The Institute helps companies develop effective global ethics and compliance programs. For more information, please visit www.business-ethics.org

 

 

Conflicts of interest in serving on another company’s board of directors

Some codes of conduct and C&E policies and certifications identify outside board service as a potential COI.   What should an  analysis of COIs of this sort  entail?  This is a topic about which relatively little has apparently been published.  Below are links to some helpful resources on it combined with a few hopefully helpful thoughts of my own.

First, in this post on the Business Ethics Blog, Chris MacDonald notes that serving on a board typically involves significant compensation (and hence should be considered an interest for COI purposes); an individual’s board member duties could conflict with her employee duties if the entities in question did business with each other; and given the sheer time commitment expected of board service, there could be a significant time-management conflict in situations of this sort.  This is a good foundation for analyzing COIs in these types of situations, to which one might add that even where the two entities don’t do business with each other a conflict could arise if they both do business with a given third party, i.e., employee of Company A joins the board of Company B, which is seeking to do business with Company C, a supplier to Company A.  (This would not necessarily be a COI – but, depending on a variety of circumstances, might be one.)

Second, another valuable post on this topic comes from Meghan Daniels of SAI Global – who offers various questions companies might ask when considering whether to allow an employee to join the board of another entity based on: a) the employee’s role at the company; b) the time commitment involved in the contemplated board service; c) the status of the external company; and d) the relationship between the two entities.

Third, here is a useful code provision on board service from a publicly available code of conduct:

Entergy recognizes that there may be limited cases where it is in the Company’s best interest for you to hold a position on the board of directors of a for-profit entity not affiliated with Entergy. However, the position must not place you or the Company in a potential conflict of interests situation, must meet all regulatory and legal requirements, and must be appropriately disclosed to all relevant parties. There are certain laws and regulations that can impact this service and you must discuss the situation with your supervisor and receive appropriate approvals prior to taking action.

Two points about this language: a) the need to make disclosure to “all relevant parties” is important, as disclosing to the company alone might not be enough; b) the policy appropriately focuses on the company’s interest in deciding the issue at hand.  Note, too, that the laws and regulations referenced here may be largely specific to the industry that this company is in, and being familiar with any relevant laws applicable to one’s own organization can be critically important for addressing issues of this sort.

Fourth, worth considering  (although perhaps of less immediately obvious relevance to our topic) is a judicial  decision in a case called Raley  v. Superior Court.  In Raley, the Court ordered the disqualification of a lawyer’s firm  from participation in a litigation against a corporation that was owned by a  trust, the trustee of which was a bank on whose board the lawyer sat, based, in part, upon the fact that the lawyer’s fiduciary duties to the bank and trust  “require him to make every reasonable effort to maximize” the assets of the  trust, which could lead to his acting contrary to the firm’s client in the litigation.

As relevant to the issue addressed in this posting, this language underscores  just how strong the ethical and legal duty that arises from board service is – which, in turn could support a strict approach  to determining COIs when an employee of one entity seeks to serve on the board  of another.  The case is indeed a reminder that serving on a board is serious business,  and before agreeing to such service an individual – and, if relevant, her  employer – should think through all that that entails from an ethical and legal  perspective.

Fifth, in some situations a company might decide to permit an employee to join another company’s board subject to management of any COIs flowing therefrom.  If going this route, all concerned need to consider the implicatons vis a vis the confidentiality of the latter’s information.

Finally, I  should stress that there are a host of possible advantages to an organization in  having one of its employees serving on the board of another entity (as reflected in the language from the Entergy code).  Here is a good piece identifying some of those   and my post should not be read as suggesting any presumption against  permitting such service – it is offered only to help identify what some of the  relevant COI issues might be.

Other People’s Conflicts

Samuel Johnson once famously said of some unfortunate soul, “He is not only dull himself, he is the cause of dullness in others,” and in this posting we’ll examine how companies can avoid the misfortune that sometimes comes from causing conflicts of interests in others.

To start, a brief bit of COI history.

Several years ago an advertising agency lost a highly lucrative account with Wal-Mart and – according to some press accounts at the time – part of the reason for the loss was the agency’s entertaining of a Wal-Mart executive in ways that allegedly caused her to violate that company’s code of conduct. Although the agency presumably violated no law, its loss of future revenue could be seen as costly as some of the largest criminal fines in history.

The case led many companies to add to their codes of conduct a requirement that in providing gifts, entertainment or travel to employees of third parties one must not cause those employees to violate their respective employers’ codes. But is such a provision by itself enough to mitigate risks of this kind?

For any given business organization, addressing this issue should, of course, be driven by an assessment of relevant risk. However, for all organizations it may be useful to consider the range of available C&E measures that can be taken here, and “work backwards” to determine if their respective risks warrant implementing the measure in question.

First, there is the language of the code itself. While at first blush a mandate that employees must not cause a violation seems strong, a preferable approach may be to specify that employees must ensure that they do not cause a violation. The latter sort of requirement (particularly if reinforced the right ways) suggests a higher and more meaningful burden on the employees who deal with third parties.

Second, companies can establish a practice of periodically collecting customers’ and other relevant third parties’ codes and disseminating gifts and entertainment language to at-risk employees and their respective managers. Even if it is not possible to do this for all third parties, the effort can be useful if codes for major customers are obtained.

Third, COI training can emphasize the importance of identifying and following relevant third-party standards. Fourth, companies can deploy “just-in-time” communications to at-risk employees around these issues.

Fifth, for organizations with relatively high risks in this area, managers can be required to monitor for compliance with third-party codes. Sixth, auditors might be tasked with including third-party standards in their audits.

Finally, note that this post deals with the topic of other people’s conflicts only at a very high level. There are many other aspects to this area. Indeed, the whole field of corruption by definition involves “causing conflicts in others,” and many of the largest criminal fines in history (specifically in the FCPA and health care fraud-and-abuse areas) have been precisely about that. The point of this post is to suggest that even without significant corruption risks, all organizations should consider whether they do enough to avoid creating third-party COIs.