Standards and Procedures

Setting meaningful but also feasible standards of conduct can be among the most challenging aspects of COI compliance efforts, as is the related area of COI processes (regarding, e.g., disclosure and approval), both of whch will be explored in the sub-categories to this section of the blog.

Domestic bribery and code of conduct waivers

It was – at least according to this Blog – the most interesting COI story of 2015 (as of February of that year): the head of the New York/New Jersey Port Authority (the PA)  – David Samson – had persuaded United Airlines to reinstate a money-losing route that was convenient for his personal use in return for his giving them favorable treatment on certain PA matters. But what has happened since? And what can C&E professionals learn from it?

In July of 2016, Samson “pleaded guilty to one charge of bribery for accepting a benefit of more than $5,000 from” the airline. “At the same time, United–which was not criminally charged–agreed to pay a fine of $2.25 million and pledged to institute ‘substantial reforms’ to its compliance program.”  And earlier this month the airline settled related charges with the Securities and Exchange Commission.

Above all, that settlement – which involved violations of the FCPA’s books-and-records and internal accounting controls provisions – is a reminder that an effective anti-corruption compliance program must be addressed to domestic  bribery, as well as the foreign kind. In that regard, it is worth remembering that the US is not at or near the top of the Transparency International Corruption Perception Index: it is tied for 16th. And for certain parts of the country – including New Jersey, where Samson worked (and I live) – the picture is worse.

Yet, in my experience some companies don’t address domestic bribery risks with the same rigor that they do foreign ones – even those involving “cleaner” countries than the US.  So, this settlement may be a useful opportunity for companies to consider whether their anti-corruption policies and procedures – including risk assessment – are sufficient to address domestic bribery.

Less significant but perhaps more interesting to C&E practitioners is the SEC’s discussion of the issue of code of conduct waiver – and specifically the failure to get a waiver of the code’s gift provision in connection with the reinstatement of the unprofitable route. The SEC noted that a companion document to the code had provided that: “exceptions would be granted only in accordance with the following procedure: Generally, requests for exceptions must be submitted in writing to the Director – Ethics and Compliance Program.  Approvals for an exception will also be in writing and must be obtained in advance of the action requiring the exception.”  Yet “no one at United sought a waiver of United’s Code of Business Conduct prior to initiating the … Route for Samson’s personal benefit. Nor did anyone at United seek or obtain an exception to Continental’s Ethics and Compliance Guidelines [which was still in effect following the merger of the two carriers]  prior to initiating the … Route. As a result, no written record reflecting the authorization for the … Route was prepared or maintained, as required by United’s Policies.”

Code of conduct waiver-related requirements are based on, among other things,  rules of the New York Stock Exchange and SEC . They derive,, to some extent, from the Enron case.  Yet in recent years I’ve heard very little about them. That may be because the NYSE and SEC standards apply to a narrow band of senior officials at public companies. Yet waiver requirements can go beyond this, as United’s ostensibly did.

So, is there any takeaway for C&E professionals from this aspect of the United case? One idea would be to include questions about waivers in audit interviews – which might pick up information that a question about violations might miss. A second is to include a discussion of waivers in training boards and senior executives – who may have at one point known the Enron-related origins of the waiver provision requirement but have likely forgotten this piece of C&E history.

Finally, for those revising their codes of conduct, one might consider requiring that waivers be granted only upon a clear showing that doing so would be in the best interests of the Company – and that all meaningful circumstances surrounding a waiver be documented in a complete and accurate way. Indeed, given that the SEC has taken the occasion of the United case to speak about code waivers, this is an area where companies should take a moment to make sure they are doing everything right.

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A code of conduct for Caesar’s wife

“Follow the money” is as good a rule as any for an assessment of compliance risk, and this is surely true for conflicts of interest.   In many companies that trail leads to procurement – and often to the understanding that those involved in buying goods and services for a company on a day-to-day basis must be above any suspicion.

Increasingly (at least from what I can see) procurement activity is being centralized in enterprise-wide procurement functions.  Much of the impetus for this has nothing to do with conflicts of interest – but, rather, arises from a need to bring more professionalism to procurement and to get the benefit of buying in large quantities, among other things. However, centralization is also a plus from a COI prevention perspective, as it is easier to monitor and otherwise mitigate COI risks in a small group than in the much larger general employee population.

Such C&E measures sometimes include having a specific (and typically very short) code of conduct for the procurement department (in addition to the general code). Among the types of COI issues that could be covered are those relating to gifts, entertainment, travel and donations – meaning these codes can have more restrictive rules about such activities  for procurement staff than for the rest of the employee population. Other types of COIs are typically addressed in these codes as well (e.g., having an ownership interest in or receiving other income from a supplier).

Of course, procurement codes should cover issues beyond  those in the COI area. Confidential information (meaning that of suppliers) is one such topic.  Another is antitrust, with a focus on the oft-neglected buy side.

Reviewing such a code should be part of the on-boarding process for new procurement employees.  As well, periodic training on its key provisions should be provided.  And, one should consider certifications by procurement employees too.

I should emphasize that not every company needs a code like this. However, in my view there are many companies that don’t but should consider developing one.

Finally, there is more to a “Caesar’s wife” approach to compliance for procurement than a code, training and certification. Companies should also be alert to “point-of-risk” compliance opportunities (a concept explored in a recent post). For instance, when a procurement department member  leaves a company to go work for a supplier and has knowledge of pricing and other sensitive information of other suppliers (meaning her new employer’s competitors) the exiting process should include  a reminder of the continuing obligation to keep information of this sort confidential.  And, somewhat more drastically, for higher risk business lines or geographies, rotating procurement assignments may be what it takes to be truly above suspicion.

 

Tending to personal matters on company time

Last week the Institute of Business Ethics published its 2015 Ethics at Work survey of employees in the UK and Western Europe, available for free download here.  One of the findings was that “employees tend to be more lenient towards conducting personal activities during work hours, than other practices.”

For instance, in Western Europe (France, Germany, Italy and Spain), more than 90% of respondents found it unacceptable to pretend to be sick to take the  day off,  charge personal entertainment to their employer or engage in “minor fiddling of travel expenses.” Eighty-five percent thought it was not okay to “use company petrol for personal mileage” and 76% said the same of “favoring family or friends when recruiting or awarding contracts.” However, only 59% had such a view of using the internet for personal use during work hours and only 52% said that it was wrong for employees to make personal calls from work.

Frankly, I’m surprised that the disapproval percentages for the last two questions were as high as they were.  To the extent that respondents could tell (from instruction, context or otherwise) that they were part of an ethics survey perhaps that – based on the notion of “framing” –  played a role in the results. But regardless of this methodological quibble, the authors’ conclusions about employees’ views of personal use of company time and resources are almost surely sound.

In this connection, they note that the fairly widespread acceptability of “using the internet during hours is perhaps indicative of the way in which lines between work and home have increasingly become blurred over the past few years, as the 21st Century business landscape becomes increasingly mobile and flexible and less reliant on employees being physically present in the office.” This makes sense to me, and I think that a successful conflicts of interest/use of company  resources regime is one that accepts these (and other similar) modern realities.

That is, for many employees (particularly those with young children), a total bar on using phone or intranet for personal purposes is simply impractical, and thus cannot be a true ethical issue – as there is effectively no choice involved. The same is obviously not true with respect to fudging expenses or faking sick days.

The alternative, harsher view would be that embodied in a classic episode of the TV series The Office (the US one), concerning (among other things) a “time theft” policy applicable to the company – under which even a four-second yawn is seen as a transgression.  Besides being impractical and unfair, branding reasonable use of company time/facilities as morally wrong could actually lead to other, more worrisome wrongdoing – by making reasonable uses the first step on a “slippery slope,” as described here.

On the other hand, reasonable personal use really should be limited to uses that a) are truly personal, and do not further other business  interests; and b) cannot harm the company by subjecting its tangible or intangible property or other interests to risk. For instance, many years ago a client of mine learned that an employee was using company phones to run an “escort service.”  Although he apparently did so only during his lunch hour, the reputational harm to the company was clear enough to justify firing him.

Finally, and in a somewhat related vein, you might find of interest this prior post on the connections between ethical standards at work and those in our home lives.

Are conflicts of interest policies a violation of labor law?

In recent years, an unfortunate – in my view – line of decisions and reports has been issued by the U.S. National Labor Relations Board (“the NLRB”) holding that various aspects of company policies violate the National Labor Relations Act (“the Act”).  For those looking to learn more about this area generally, a good place to start is with this article by Joe Murphy in a recent issue of Compliance & Ethics Professional.  Of particular concern to readers of the COI Blog might be a decision handed down by the NLRB  in June – in Remington Lodging & Hospitality, LLC d/b/a The Sheraton Anchorage – finding that a generic conflict of interest policy in an employer’s handbook was unlawful under the Act.  The case can be found here, but – given the procedural history involved – readers may wish instead to review this summary of it published by attorneys at the Arent Fox law firm.

The case may be seen as an instance of bad facts making bad law, as the respondent company had asserted that certain employees had violated its COI policy by engaging in what were clearly protected activities under the Act (presenting a boycott petition to management).  Based on this, all three members of the NLRB panel hearing the case found that the company had engaged in an unfair labor practice.

However, two of the panel members also found that the COI policy was unlawful on its face. As noted in the Arent Fox summary, the majority found that “employees would reasonably interpret the rule prohibiting them from having a ‘conflict of interest’ with the Respondent as encompassing activities protected by the Act. Particularly when viewed in the context of the Respondent’s other unlawfully overbroad rules, ‘employees would reasonably fear that the rule prohibits any conduct the Respondent may consider to be detrimental to its image or reputation or to present a ‘conflict’ with its interests, such as informational picketing, strikes, or other economic pressure.’”

The third member of the panel – while agreeing “with the majority that the Respondent violated …the Act when it applied the rule against conflicts of interest to restrict employees’ [protected] activity…. disagreed with the majority’s additional finding that the rule against conflicts of interest was unlawful on its face. ‘Employers have a legitimate interest in preventing employees from maintaining a conflict of interest, whether they compete directly against the employer, exploit sensitive employer information for personal gain, or have a fiduciary interest that runs counter to the employer’s enterprise.’ Therefore, he wrote ‘I do not agree with my colleagues’ conclusion that employees would reasonably understand the conflict-of-interest rule as one that extends to employees’ efforts to unionize or improve their terms or conditions of employment.’ In his view, ‘the rule, on its face, does not reasonably suggest that efforts to unionize or improve terms and conditions of employment are prohibited.’ He also noted that the challenged rule was immediately adjacent to a rule in Respondent’s handbook stating: ‘I understand that it is against company policy to have an economic, social or family relationship with someone that I supervise or who supervises me and I agree to report such relationships.’ He claimed that this context ‘bolsters my conclusion that the Respondent’s rule merely conveys a prohibition on truly disabling conflicts and not a restriction on activities protected by the Act.’”

I wholeheartedly agree with this concurrence (and the authors of the Arent Fox piece) and add that in my 25 years of creating, enhancing and assessing C&E programs I have seen zero indication (until this case) that generic COI provisions are likely to be interpreted as limiting activities protected by labor law. Murphy’s general analysis of the NLRB’s approach to C&E policies applies with particular force to this recent decision: “what the NLRB has done here is venture into the field of Compliance and Ethics without close consultation with those in the field and without sufficient regard for the important public policy behind compliance and ethics programs.”

Beyond this, the underlying assumption of the decision is that the efforts of working people to act through labor unions are in fact disloyal to such individuals’ employers.  While ostensibly a “pro-labor” holding, the implication here is potentially anti-labor.

One hopes that this will be fixed before too long – by the NLRB itself, or some court.

 

The most interesting conflict of interest case of the (still young) year

The most prominent COI story in the past few days comes to us from Mexico where, as described in The Economist, that country’s president Enrique Peña Nieto “announced that he, his wife and his finance minister will become the first subjects of a conflict-of-interest investigation” that was “triggered by revelations that [they] bought houses on credit from affiliates of a building firm that has benefited from government contracts.” But for me the most intriguing story of the week (and indeed the year, at least so far) comes from the ethical wonderland that I call my home – New Jersey.

As reported initially by the Bergen Record:   “Federal prosecutors have [launched a probe] into a flight route initiated by United [Airlines] while [David] Samson was chairman of the [Port Authority, which] operates [Newark Liberty Airport]. The route provided non-stop service between Newark and Columbia Metropolitan Airport in South Carolina — about 50 miles from a home where Samson often spent weekends with his wife. United halted the non-stop route on April 1 of last year, just three days after Samson resigned under a cloud. Samson referred to the twice-a-week route — with a flight leaving Newark on Thursday evenings and another returning on Monday mornings — as ‘the chairman’s flight,’ one source said. Federal aviation records show that during the 19 months United offered the non-stop service, the 50-seat planes that flew the route were, on average, only about half full. United… was in regular negotiations with the Port Authority and the Christie administration during Samson’s tenure over issues that included expansion of the airline’s service to Atlantic City and the extension of the PATH train to Newark…” A story from NJ.Com added that the  flight’s booking rate of 50% was significantly lower than “the rate of 85 percent or higher common among carriers” and also that the Chair of the NJ assembly’s transportation committee said the benefit to United of running this unprofitable route “could be PATH. It could be how much they pay for landing planes. It could be for how flights are dispatched at the airport. It could be a multitude of things. And it could be none of them.”

Assuming for the sake of discussion that it is indeed at least one of those or other financial benefits, the case should be interesting to COI aficionados  for several reasons.

First, the main law enforcement challenges to investigating the matter will likely be (as it is many COI/corruption cases) proving wrongful intent.  Presumably, Samson knew enough not to document what was seemingly happening here (although his comments about the “chairman’s flight” may suggest otherwise),  but what about United?  Given how cost conscious airlines have been in recent years, one imagines that someone at the company would have needed to document why they were running half full planes.  Moreover, for various reasons this seems like the sort of arrangement that would have been known at a reasonably high level in the company (although finding documentation of that may be a taller order).

Second, it will also be interesting to see what role, if any, United’s compliance program played in these events. In light of how many people at the airline could well have had some suspicion about these flights, it would be pretty damning if none of them called the C&E helpline. On the other hand, if the issue was raised internally and buried, that would be even worse.

Third, it may be noteworthy that while the Company’s code of conduct does have a section called “When the government is the customer,” the bribery discussion there is limited to international transactions.   Perhaps like a lot of US companies, United’s compliance team failed to grasp the risks of homegrown corruption generally (and the Jersey variety in particular).  Other companies may wish to revisit their own codes to see if they could be subject to the same criticism.

Two final notes.  First, the facts of this case are just beginning to emerge and the speculations in my post should not be read to suggest that  Samson or United are necessarily guilty of corruption. Seriously.  Second, for an earlier story about a possible COI involving Samson (and his connections to the ethically challenged Christie administration) see this post  and the article linked to therein.

Does your company need a stand-alone conflicts of interest policy?

Last month, Pro Publica published an extensive report regarding a dispute on whether Goldman Sachs should be sanctioned by the Federal Reserve for failing to have a firm-wide policy on conflicts of interest.  An examiner for the Fed had argued in favor of such an action but the firm contended – successfully – that the COI provision in the company code of conduct coupled with COI policies for various of its divisions was good enough.

At least for C&E aficionados, the story is an interesting one (and the issue, in my view, a close call), particularly given Goldman Sachs’ recent COI history.  (See this post and this one.)   But for readers of this blog the piece may be most useful as an occasion to ask: Does my company have the COI policy that it needs?

To begin, a great many businesses don’t need a stand-alone COI policy. For many what’s in the code of conduct is policy enough. But there are, in my view, quite a few companies that should have stand-alone policies but don’t.

Five things to ask in a COI policy needs assessment

Certainly where companies have client relationships that could give rise to COIs there is a good reason to have a stand-alone policy, as such businesses generally face a greater array of COI risks than do others. Such risks tend to warrant a fuller discussion of COI standards and mitigation than can fit into a code of conduct. Put otherwise., companies that have relationships of trust with clients tend to have higher COI risks – both in terms of likelihood and impact – than do other sorts of businesses, and that should be reflected in how formal and extensive the related mitigation should be.

But other types of organizations should  consider drafting stand-alone policies too, at least if they:

– Have had more than their share of COIs in recent years, as a stand-alone policy can help signal to key constituencies resolve in dealing appropriately with COIs.

– Face more diverse, complex, non-obvious or culturally challenging COI possibilities than the average company has.  The more there is to say about different sorts of COI risks, the greater the need for a stand-alone policy, as there simply won’t be enough room in the code to do justice to all pertinent issues.

– Have significant COI-related process needs – in such areas as disclosure, management and auditing. Here too the code may not offer enough space to deal with the company’s requirements.

– Face heightened COI expectations for other reasons (e.g., non-profits, or other organizations that could be held to a “Caesar’s wife” standard of ethicality).

And don’t forget organizational justice

Even companies that don’t fit into any of the above categories should consider developing a stand-alone COI policy as a means of promoting “organizational justice.” As noted in this earlier post: “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.” Implementing a stand-alone COI policy can thus, in my view, help elevate the confidence employees have in the overall ethicality of their companies. Of course, to do so the policy must be sufficiently promoted and enforced.  But being successful here could have a ripple effect – by enhancing trust that management is committed to doing the right thing generally, which can be utterly vital to compliance and ethics program efficacy.

Note that while this consideration presumably applies to all companies, it does not mean that all companies need stand-alone COI policies.  But it is a factor that all companies should weigh in determining whether to implement such a policy.

Drafting a policy

If one does opt to create a stand-alone COI policy there are obviously lots of choices to be made in determining the content of the policy, and the links below to prior posts in the COI Blog might be useful in that regard.

To start, you might see this overview,  which includes links to several leading companies’ policies (that could be helpful samples from a form – as well as substance – perspective).

Regarding the key question of what COIs to address in the policy, a fairly comprehensive list is included in this post about certifications (the content of which is equally applicable to policies).

Here are some more specific discussions:

–  G&E generally  and gifts between employees.

Supervising family members in the workplace.

Moonlighting.

– Serving on another company’s board.

Next, regarding standards for allowing COIs to continue and related process issues, see this post and this one.

Finally, note that within the above posts there are links to many other posts and resources that might be useful in drafting or revising a COI policy.

Gamblers, strippers, loss aversion and conflicts of interest

What is the most potent type of conflict of interest?  To my mind,  those involving family members – as discussed in this earlier post on nepotism – are generally the strongest of all, given how deeply rooted  our instincts to help our kin are.

But being in another’s debt would seem to be pretty powerful too – because of the control of one’s life that it can place in the hands of others.   Moreover, compared to COIs involving an “upside”  (e.g., moonlighting for one of your employer’s vendors) “debt conflicts” seem  more likely to corrupt behavior – in part because of  the behaviorist phenomenon of  “loss aversion,” which holds that seeking to avoid a loss is generally a more potent force in shaping behavior than is achieving a gain.  Indeed, you don’t need to peer deep beneath the mind’s surface to grasp the power of debt for, as Dickens’ Mister Micawber observed using plain old arithmetic,  the smallest debt can clearly  be the source of large-scale ruin. (“Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”) Thus, on various operative levels, a debt-based conflict can be particularly pernicious.

The most interesting recent “debt conflict of interest” case come to us from the U.S. Securities and Exchange  which found that “certified public accountant James T. Adams repeatedly accepted tens of thousands of dollars in casino markers while he was the advisory partner on subsidiary Deloitte & Touche’s audit of a casino gaming corporation.  A marker” –  the SEC pointed out, for those few unfortunate souls who have never seen Guys and Dolls –  “is an instrument utilized by a casino customer to receive gaming chips drawn against the customer’s line of credit at the casino.  Adams opened a line of credit with a casino run by the gaming corporation client and used the casino markers to draw on that line of credit.  Adams concealed his casino markers from Deloitte & Touche and lied to another partner when asked if he had casino markers from audit clients of the firm.”  Based on this obviously egregious behavior (which, I should add, involved far greater sums than those discussed by Mister Micawber), Adams – who ironically had also been Deloitte’s Chief Risk Officer – agreed to be “suspended for at least two years from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.”

This was as clear a debt conflict case as one might hope to find (meaning, of course, hope never to find again).  But debt also comes in less obvious shapes too.

Consider this recent story from a trial now being held in the UK, the salient points of which (for this blog at least) are as follows: “A former UBS AG … banker told a London court that paying $7,100 for strippers to entertain consultants advising a German utility on a disputed derivatives deal didn’t create a conflict of interest.”   Looked at it as an “upside conflict” – meaning the consultants receiving free entertainment – maybe it is indeed not a powerful a COI (although personally having never been to a strip joint that’s just a guess).   But this particular sort of upside has an element of “debt conflict” too: given the embarrassing nature of the expenditure the consultants could well be concerned that their dirty secret would be revealed, i.e., they would likely be indebted to the bank for keeping quiet.   Of course, there would be reason enough to hide $7100 worth of even wholesome recreation paid for by a vendor, but it presumably has less potential to embarrass – and thus cause serious reputational loss – than does being entertained by strippers.

Finally, how should information about “debt conflicts” be used in C&E programs?  Certainly, debt should be included in the interests section of  the code of conduct or COI policies – which it usually, but not always, is.  Moreover, if one is providing examples of COIs in training and other form of C&E communications it may be worth mentioning there as well.  The point here is not merely to identify debt as one of many sources of potential COI, but to help give examples of COIs that will resonate with employees  – which I think debt-related ones often will do, precisely because of the above-described control aspect. And powerful examples of the effects of COIs can help to strengthen compliance in this area generally.

Strong ethics medicine: best practice COI policies for academic medical centers

In the universe of conflicts of interest, perhaps none are more significant – and worthy of study…. and action – than are those  involving doctors and health care industry (e.g., pharma, medical devices) companies.

On the one hand,  these types of conflicts are widely recognized to be very damaging.  Indeed, when I last compiled my largest  federal corporate criminal  fine list, three of the top four  cases of all time involved such COIs (though with a new entrant  to be added to this list  –   the SAC insider trading case – one should now say three of the top five).  On the other hand, this is one of the few areas where there is actually research to show that  good policies can in fact mitigate conflicts – as described in this earlier post

But that raises the question: what constitutes a best practice policy?

A new and useful resource in that regard is  this recently published article from Compliance Today by friend of the COI Blog Bill Sacks of HCCS,  which is based on a study issued by the Pew Charitable Trust late last year on best practice COI policies for academic medical centers. While most readers of this blog (to my knowledge) do not work in the health care area, C&E practitioners of all types (or others who are COI aficionados) might be interested in this case study of what strong COI-related mitigation can look like, and find useful ideas in it for dealing with COIs in their own respective fields.

Supervising spouses and other family members in the workplace

A story earlier this week in the NY Daily News  reported:  “The doctor picked by [NYC] Mayor de Blasio to run the municipal hospital system was slapped with a conflict-of-interest ruling after his wife went to work for the hospital he was overseeing. The city Conflicts of Interest Board issued its ruling against [the doctor] in 2008, but allowed the arrangement to continue as long as [he] avoided matters involving his wife…”  The particulars of the case are not especially interesting, but it did serve to remind me that in the more than two years of its existence the COI Blog has yet to cover the often important issue of supervising family members at work.

But first a disclosure: my parents met in a workplace (the newsroom of the Minneapolis Tribune, in the 1940’s), where my father (then a night city editor) supervised my mother (then a police reporter) and, but for the personal relationship they formed there, I literally would not exist.  So, I have what could be called an existential bias on this issue.  On the other hand, at least judging by the classic film about journalists about that era – His Girl Friday – maybe workplace relationships weren’t  prominent on the ethical radar in the industry then, so perhaps I’ve over-disclosed (which comes with writing a COI blog, and for which my mother will hopefully forgive me).

But in the contemporary world, conflict-of-interest issues involving supervision of family members in the workplace can be among the most sensitive that a C&E officer ever faces.  Often one (and sometimes both) of the individuals involved is at a high level within the corporate hierarchy, making the issue as inviting to approach as a field of landmines.  Moreover, because of the strong loyalty instincts that people tend to have about their families, allegations about conflicts of this sort often trigger strong defensive reactions – as discussed in this earlier post  (which should be read mainly  for the immortal story about the late Mayor Daley’s saying – with respect to his having the city of Chicago do business with one of his children:  “If I can’t help my sons, then [my critics] can kiss my ass.”)

On the other hand, other employees may feel deeply resentful of those involved – particularly where the relatives in question are seen (rightly or wrongly) as receiving favored treatment and benefiting from job-related opportunities that otherwise might have gone to such other employees.  The others could also feel stifled in how they do their work.  For instance,  many employees might  be  uncomfortable criticizing a favorite business idea that the spouse of a senior executive has – even if they  think it is no good. Unlike most other COIs, those involving family members on the job tend to be very visible  – and grating, possible even on an everyday basis.

Not surprisingly,  many companies’ COI policies address the issue of supervision of family members.  A somewhat typical policy of this sort is the following from Tower Bank: “The potential for conflict of interest clearly exists if your spouse, partner or immediate family member also works at the Company and is in a direct reporting relationship with you. Officers or employees should not directly supervise, report to, or be in a position to influence the hiring, work assignments or evaluations of someone with whom they have a romantic or familial relationship.”

Of course, a direct reporting relationship between spouses is widely seen as being problematic – and that part of the rule should be easy to apply.  But the “being in a position to influence” part of the rule is much broader, and presumably anyone higher up in a reporting chain is in such a position regardless of how many layers there are in between.

Still, the more layers there are, the more checks against abuse exist – even if they are not strong checks (since they rely on subordinates in preventing and detecting conflicts by their workplace supervisors).  One company that relies explicitly on the number of such layers is United Technologies, whose policy asks the question, “[i]s it a Code of Ethics violation for my spouse and myself to work in the same department at our UTC Division?” and provides this answer: “In most instances this would not be a problem as long as neither employee reported to the other. A sufficient number of reporting levels (at least three) between supervisor and family member must exist to preclude conflict of interest issues.” While not a cure-all, this seems like a strong approach to me.

A final point: given the nature of this particular type of conflict the concern is often less actual COIs than apparent ones.  For this reason, effective mitigation must address the issue of what will employees think about a proposed solution to such a COI – including the broader question of whether such a solution will undermine the workforce’s view of management’s commitment to ethics in general.   More on apparent COIs can be found here, but the bottom line is that this is among the most difficult types of COI to mitigate.

What counts as a conflict of interest policy?

Conflict of interest policies were in the news last week.   The first story comes from the world of medical schools. As described in a recent issue of Science Codex, “U.S. medical schools have made significant progress to strengthen their management of clinical conflicts of interest (CCOI), but a new study demonstrates that most schools still lag behind national standards. The Institute on Medicine as a Profession …study, which compared changes in schools’ policies in a dozen areas from 2008 to 2011, reveals that institutions are racing from the bottom to the middle, not to the top. In 2011, nearly two-thirds of medical schools still lacked policies to limit ties to industry in at least one area explored, including gifts, meals, drug samples, and payments for travel, consulting, and speaking. Only 16% met national standards in at least half of the areas, and no school met all the standards.”  This finding is unfortunate because –as discussed in an earlier posting – COI policies in medical schools have been shown by research to be effective in actually reducing COIs.

A different type of COI policy story concerned a whistleblower lawsuit brought by a “former senior bank examiner for the Federal Reserve Bank of New York [against] her ex-employer, which claim[ed] she was fired because she refused to change her findings that Goldman Sachs Group Inc. … lacked a firm-wide conflict-of-interest policy.”  As best I can tell from the various pieces about the case, the examiner felt that although the firm had divisional COI policies and a COI section in its code of conduct it was deficient in that it lacked a stand-alone, firm-wide document in policy form addressing COIs of the sort that was evidently common in other investment banks.    Of course, as with any lawsuit, we will learn more here as the case  progresses.  But the initial complaint alone does raise what is for the COI Blog an interesting question: what exactly counts as a COI policy?

The answer here will depend on the context.   For many (indeed most) organizations a code of conduct provision on COIs is policy enough.  Indeed, as can be seen from some of the links in this earlier post, COI provisions of a code can be as detailed as those in a stand-alone policy.

But for large, complex organizations – and particularly those with complex COI issues, as an investment bank likely has and Goldman Sachs clearly has had (see posts here and here) – a stand-alone, firm-wide policy seems like a good idea, as a way of ensuring sufficient attention is devoted to the area and that standards are applied thoroughly and consistently throughout the organization.   And, it is hard to see what the argument against having such a policy would be.

This is not to suggest that I think that there is merit to the whistleblower’s claim or that the firm was deficient in this respect.  Rather, as with most news-related posts on this blog, I’m only using the story of the day to make a more general point about COIs.