Policies and Procedures

In addition to code provisions, some companies have stand-alone COI policy documents, with more detailed standards and procedures. When does it make sense for a business organization to have such a policy, and what standards and procedures should be in a document of this kind?

Does your compliance and ethics program have a “constitution”?

The U.S. Constitution is not,  as the poet James Russell Lowell once reminded us, “a machine that would go of itself,” and neither is a compliance and ethics program.  But, having a constitution can help a C&E program stand the test of time.

In the latest issue of Compliance and Ethics Professional I explore how a C&E program charter can serve in this role, and what such a constitution should generally entail.  If you’d like to learn more please click here and go to the second page of the PDF.

Breaking news: just-published study shows that COI policies can…work!

One of the sources of frustration of toiling in the C&E field is the relatively small amount of data from the workplace on the efficacy of various program measures in actually reducing wrongdoing and otherwise promoting ethical conduct.   While unfortunate, this dearth of proof is not surprising; after all, what company would allow some or all of its employee population to serve as a control group for an “ethics experiment”?

But, as suggested by this article published yesterday in Science Daily, part of this proof gap has been filled by a recent study:  “Psychiatrists who are exposed to conflict-of-interest (COI) policies during their residency are less likely to prescribe brand-name antidepressants after graduation than those who trained in residency programs without such policies, according to a new study by researchers from the Perelman School of Medicine at the University of Pennsylvania. The study is the first of its kind to show that exposure to COI policies for physicians during residency training — in this case, psychiatrists — is effective in lowering their post-graduation rates of prescriptions for brand medications, including heavily promoted and brand reformulated antidepressants.” The study will be published in the February issue of Medical Care.

Note that while evidently precedent setting in terms of medical COIs, there is other  data – from the behavioral ethics field –  showing that well-timed exposure to a rule or ethical standard can  impact behavior in desirable ways. That research – and the ways in which its teachings might form the basis of effective C&E communications strategies – is discussed here.

Is your company ethical, or merely compliant?

According to press accounts last week, the Securities and Exchange Commission has decided not to bring insider trading charges against former Berkshire Hathaway executive David Sokol. Last year that company’s CEO, Warren Buffett,  fired Sokol for allegedly violating its internal “insider trading rules by failing to disclose his purchase of Lubrizol shares, less than four weeks after starting talks with Citigroup bankers on acquiring all the shares in the chemicals company that Berkshire Hathaway did not already own.” The value of Sokol’s investment had risen from about $10 million at the time of purchase to about $13 million when Berkshire agreed to the acquisition several months later.  However, the SEC decided that it could not prove that the information – while clearly non-public – was “material,” which is an essential element of any insider trading case.  Nonetheless, according to one story, “Berkshire followers said … the SEC’s decision is unlikely to sway Mr. Buffett, who has long held his top executives to high ethical standards.”

Many companies say that they require that their employees not only abide by the law but also maintain high ethical standards.  But what does that actually mean in practice?

Perhaps the best way to see if ethics – as opposed to narrowly focused compliance – really matters at a company is to ask (as I do when I conduct assessments of  C&E programs) if the company has ever forgone a significant business advantage that would have been legal but not ethical to pursue/maintain. (This can include discrete business  transactions, campaigns, strategies, relations with other organizations or allowing the continued employment of a star performer who has engaged in ethically dubious conduct but has not broken the  law.)  Very often the answer to this inquiry is no.

A second test of whether a company truly promotes ethical, as well as compliance-based, conduct, is checking whether its risk assessment expressly includes an ethics dimension.  For more on what this means see this article from the CCI web site.

A third such test is to see where a company sets the bar for key areas of conduct in its policies – including insider trading (a topic which, because it is mostly conflict-of- interest based, is of particular interest to this blog).  Examples include limitations on short sales, transactions involving options and “churning.”  While not necessarily involving insider trading, each of these entails actions which, when engaged in by insiders, can hurt a company’s reputation or create incentives for the insider to engage in conduct that is not in the company’s interest. And the same is true for the conduct at issue in the Berkshire Hathaway case.

Note – I’m definitely not suggesting that these three tests are the only relevant measurements of ethicality by corporations. There are indeed many others.  But hopefully they will be of use to some organizations which, like Berkshire Hathaway, seek to hold their employees (and particularly their leaders) to a higher standard.

Conflicts of Interest – a matter of perception?

By Simon Webley

A day doesn’t seem to go by without a news story about a politician or business person who has failed to recognise that they have is a conflict of interest. When this comes to light, they pay the price with their reputation. 

In the Institute of Business Ethic’s  ( IBE) 2010 Survey  of Corporate Ethics Policies & Programmes  (available to download here), ‘managing conflicts of interest’ was identified by 70% of respondents as important to their organisation. Yet guidance provided about managing conflicts of interest seems to be failing to make an impact.

Why do these scandals continue to happen?

The answer I would suggest, is because conflicts of interest are as much about perception, as they are about reality.

Perhaps the most difficult aspect of the topic is where some cultural and regional customs may seem to run contrary to what others perceive as conflicts of interest.  For example, the Chinese practice of leveraging guanxi (special relationships) has been a traditionally accepted (and expected) approach for facilitating favourable circumstances for organisations and individuals.  In Africa, where family bonds are highly valued, nepotism is a common practice, and an employee may face ostracism for not hiring a relative for a position at the firm.  However, most Western-based multinationals actively discourage allowing personal relationships to influence an employee’s business judgment. 

It is important not to underestimate the difficulty of this issue. There are some regions where employees feel that hiring a brother, for example, will be in the best interest of the company as well as the right thing to do.

In general, many employees of companies with international operations may be unclear as to what constitutes a conflict of interest.  Companies have to be particularly diligent to develop conflict of interest standards and communicate these to their staff throughout the world.

 The following list highlights examples that companies should address:

– Participation on boards and panels

– Consulting arrangements

– Gifts and entertainment

– Relatives and friends

– Outside employment

– Personal payment for services (speeches, articles, etc.)

– Personal investments/transactions

– Relations with suppliers/vendors

Guidance on this issue should briefly explain why avoiding conflicts of interest is important for the organisation. For example:  an employee’s personal relationships may be perceived to compromise his/her business judgment; and, decisions clouded by personal interests can negatively influence the long-term welfare of the organisation. Good guidance is for an employee to declare the conflict and then remove themselves from the decision-making process.  (For further help on this issue, please see the IBE’s Good Practice Guide Globalising a Business Ethics Programme.)

As valuable as codes of ethics and policies are in guiding staff, the example from leadership is the most crucial element when it comes to influencing behaviour. This is where’ tone at the top’, that oft repeated phrase, is so important.  If staff see that their leaders (whether they be senior management, board members, or department heads) declare any potential conflict and do so with integrity, then they are likely to follow suit.

 Simon Webley is Research Director, Institute of Business Ethics. He can be reached at S.Webley@ibe.org.uk.

 

Conflicts of interest and behavioral ethics in the news: 031012

More on the Goldman Sachs/El Paso case: El Paso’s own lawyers had warned of conflicts, but the company rejected the advice (would love to know why) and a good overall analysis of what the case means:  “Goldman’s brazenness in this deal is nothing short of breathtaking. It is just another example of why Goldman’s reputation has been dented as questions have circled about the firm’s loyalty to its clients over itself. Other firms have conflicts, but rarely do you hear about them being so incestuous. A Morgan Stanley banker involved in the deal wrote in an e-mail at the time: ‘This is GS at its most shameless.’ What’s even more surprising about Goldman’s role working for El Paso is that it came just six months after the firm issued a new set of guidelines by its ‘business standards committee.’ The firm had just agreed to a $550 million settlement with the Securities and Exchange Commission over allegations that it knowingly sold its clients financial instruments meant to fail.” Note:  El Paso’s shareholders did approve the sale to Kinder Morgan this week (no surprise-  in the absence of a competing bid), but will now seek to show that the transaction was, in the words of the court, “tainted by disloyalty,” entitling them to damages. 

From the world of medicine: “the majority of U.S. medical schools have implemented strong conflict-of-interest policies this year, according to the 2011-2012 American Medical Student Association (AMSA) PharmFree Scorecard. Released today, the Scorecard finds that 102 of 152 medical schools (67%) now receive a grade of A or B for their policies governing pharmaceutical industry interaction with medical school faculty and students, compared with 79 last year.”  And, conflictofinterest.net has a good roundup of recent stories about conflicts in the realms of science and medicine (lots of interesting stuff here).

And what ethicists can learn from scientists: a story about two experiments showing that a) individuals are much more likely to make ethical choices when they are not rushed and b) individuals are much more likely to make ethical choices when they are reminded right before the decision about ethical standards. In our ongoing  behavioral ethics series, we’ve written about similar findings – and what they could mean for  C&E programs  (specifically having to do, in the case of the first result, with risk assessment; and  in the case of the second, with the importance of “just-in-time” ethics communications).   Hopefully, these most recent findings will draw further attention to the ways in which behavioral ethics can improve C&E programs.

 

 

 

Conflict of Interest Policies for Non-Profit Organizations

An earlier posting discussed the important – and certainly non-intuitive – finding of behavioral ethics research that doing good can actually increase the risk of doing bad.  In addition to an unexpectedly high likelihood of wrongdoing, those in the business of doing good – e.g., charities, foundations and other non-profits – may face outsized impacts from ethical missteps, particularly related to COIs, given their need to maintain the trust of donors and others to fulfill their respective missions.  In this post we begin to explore measures that non-profits can take to address COI risks.

According to the National Council of Non-Profits, a “policy governing conflicts of interests is perhaps the most important policy a nonprofit board can adopt. To have the most impact, the policy should be in writing and the board (and staff) should review the policy regularly. Often people are unaware that their activities are in conflict with the best interests of the nonprofit so a goal for many organizations is to simply raise awareness and cultivate a ‘culture of candor.’ It is helpful to take time at a board meeting annually to discuss the types of situations that could result in a conflict between the best interests of the nonprofit – and the self-interest of a staff member or board member.” Indeed, the Internal Revenue Service – which has an oversight role over charities in U.S. – expressly recommends that they develop a COI policy .

Non-profits seeking to draft or revise their COI policies can find plenty of publicly available examples from which to draw ideas and language (including some at the National Council of Non-Profits web site).  For instance, the COI policy of the Gates Foundation  contains a clear and comprehensive articulation of what generally would be  considered a COI at the Foundation; a discussion of the types of situations that could give rise to COIs there; requirements concerning disclosure and management of COIs, including mandating the involvement of the legal team in these matters (see this post on the need for independence in COI  management measures); detailed guidance on COI issues regarding the receipt of directors’ fees, authors’ royalties and like matters (for further information on COI issues in serving on outside boards see this post); a provision on outside employment, with – understandably – greater restrictions placed on high ranking employees; and discussions of a range of other COI issues relevant to the foundation, including those concerning matching grants and employee political activities.  The Gates Foundation policy also has an extensive series COI-related FAQs that could be an invaluable source of ideas for those drafting/revising a COI policy for another non-profit.

But, by bringing attention to this resource I don’t mean to suggest that non-profits should simply adopt what the Gates Foundation, or any other organization, has done regarding COIs.  Different non-profits could have COI issues that are, relatively speaking, unique.  For instance, this article about COI policies for cooperative groceries – a very different sort of organization than a foundation –  identifies a series of “emotional conflicts of interest” that may pose risks for organizations of that kind. (E.g., “The board president’s daughter is a co-op employee. After she is denied a raise of the size she had expected, her father begins bringing up concerns at board meetings about the fairness of the pay raise system and staff turnover due to low pay.”)  As with any other sort of COI mitigation effort, the key for non-profits is to engage in some form of risk assessment before designing policies or other compliance measures. And, of course, the effort should include determining what any relevant legal requirements or expectations are for the entity regarding COIs.

Finally, understanding the COI risks of non-profits is important not only to board and staff members of such organizations but also employees of for-profit organizations who deal with non-profits, under the general imperative (often espoused in this blog) of not causing conflict in others.

A future post will discuss COI training for non-profits.

 

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

 

 

Special Super Bowl Edition of the Conflict of Interest Blog

While the NFL’s code of conduct for fans doesn’t mention COIs (it is more about not throwing objects on the field.) the Super Bowl is a perennial source of COI issues.  Indeed, Super Bowl tickets received by a US Secretary of Agriculture from a company his department regulated played a central role in a major COI prosecution in the 1990’s – although the Secretary was acquitted and the company’s conviction on a related matter (involving US Open tickets, among other things) was overturned by the Supreme Court.

The case evidently didn’t put an end to government officials getting Super Bowl tickets from those with whom they have official business.  As noted in this post last year by Judy Nadler, senior fellow in government ethics at the Markkula Center for Applied Ethics: “I spoke with a reporter recently who was writing about gifts elected officials were taking but not disclosing. More troubling, many of the officeholders said they ‘couldn’t remember’ whether or not they had gone to the Super Bowl courtesy of a major business interest.”  (Easy to see how one could forget that!)

More common, though, is a business providing Super Bowl tickets to individuals in the private sector, particularly to customers.  Indeed, Super Bowl tickets are frequently the subject of discussions in codes of conduct.  For instance, the Home Depot’s code provides, in relevant part: “In the event that the recipient is willing to pay face value for a ticket or other gifts and entertainment, when in fact the market value is significantly higher than the face value (e.g. Super Bowl or Masters Tournament tickets), the associate must still have the item approved in advance in accordance with this policy.”

As with many COI issues, the devil is in the details regarding the propriety of giving or receiving Super Bowl tickets, and here are a few questions to ask in deciding whether to give:

-Would someone from your company attend the event with the potential recipient or would it be an out-and-out gift?

– What does the recipient’s company’s policy say about gifts and entertainment?

– Does the recipient’s supervisor know about the offer?

– What is the function of the proposed recipient in her company?  (Purchasing, of course, is most obvious from a risk perspective, but others – e.g., an external auditor or even supplier in some instances –  could raise COI risks, too.)

– What is the state of play in terms of new/existing business with the recipient’s company?

– What other costs  (e.g. air travel) would be borne by your company in connection with attending the event?

– Is the recipient an employee of a government agency (including a state-owned enterprise)? Even if not, do they do business with the government – which, in some instances, might be risk causing at least from a reputational perspective?

Finally, two questions about process:

– Is the decision of whether give or not to give reviewed by the compliance officer or other function (e.g., law department) that is independent of the part of the business proposing the invite?

– Are the bases for decisions sufficiently documented?

But, all this is for next year. For now, just enjoy the game!  And, go Giants!  (Disclosure: I’m from NJ.)