Training and Communications

Training and other forms of communication play can be essential to mitigating any major C&E risk area. In this section of the blog we will explore various COI-specific training and communication issues.

Friendship – and the ties that blind (directors to conflicts of interest)

King Herod the Great had something of a problem: he had backed the losing side in the contest between Marc Antony and Octavian to rule Rome,  and now fully expected to lose his life for it.  But, as described in Jerusalem: the  Biography, by Simon Sebag Montefiore,  when they met he cleverly asked Octavian “not to consider whose friend he had been but ‘what sort of friend I am.’”  Octavian was evidently persuaded by this, for not only was Herod’s life spared but the size of his kingdom was increased.

Loyalty is, of course, fundamental to friendship.  But, while potentially more physically dangerous in the Roman Empire than it is today, friendship in our world can be ethically treacherous.

In “Will Disclosure of Friendship Ties between Directors and CEOs Yield Perverse Effects?”  (to be published in the July 2014 issue of the Accounting Review), Jacob M. Rose, Anna M. Rose, Carolyn Strand Norman and Cheri R. Mazza  describe how they conducted thought experiments involving both actual corporate directors and MBA students to determine  whether “directors who have  friendship ties with the CEO [are more likely that are directors without such friendships] to manage earnings to benefit the CEO in the short term while potentially sacrificing the welfare of the company in the long term” and also whether “public disclosure of friendship ties mitigate or exacerbate such behavior, and will disclosure of friendship ties influence investors’ perceptions of director decisions.”

Sadly but not surprisingly, their research  found “that friendship ties caused directors to be more willing to approve reductions to research and development (R&D) expenses that cause earnings to rise enough to meet the CEO’s minimum bonus target more often than  when the directors and CEO were not friends.” Seemingly more of a surprise, they also found that “disclosing friendship ties resulted in even greater reductions in R&D expenses and higher CEO bonuses than not disclosing friendship ties.”

But this latter finding is not so surprising – given other  behavioral research showing that disclosure can “morally license” individuals  to act inappropriately when faced with a conflict of interest ( as discussed in this   and other prior posts.) As described in a recent piece in the NY Times  by Gretchen Morgenson, one of the study’s authors explained: “When you disclose things, it may make you feel you’ve met your obligations…They’re not all that worried about doing something to help out the C.E.O. because everyone has had a fair warning.”

Morgenson added: “There are two messages in this study. One is for regulators: Simply disclosing a conflict or friendship does not eliminate its potential to create problems. The other,” again quoting one of the study’s authors (but echoing Herod) “is for investors: ‘Shareholders should take a more active role in finding out what kinds of relationships their boards and C.E.O.s have…and recognize the potential traps created by them’.”

For more on conflicts of interest and directors see the posts collected here .

 

CEOs’ ethical standards and the limits of compliance

I’m not one who sees ethics and compliance as operating in wholly distinct spheres, and have long felt that they closely complement each other.  (For more on the general relationship between the two  see this piece from the SCCE’s C&E journal.)  But, of course, they are not the same thing, and to some extent each has reach that the other doesn’t.

More specifically, for any given organization, the boundaries of compliance are – to a significant extent – defined by risk assessment.  Compliance-related risk assessment can and should be done in an expansive and innovative manner (as discussed in this complimentary e-book ) but it is ultimately finite in ways that are less applicable to true ethical standards.  And when it comes to CEOs – who have near infinite capacity for engaging in mischief in their companies – the latter form of protection can be particularly important.

To take the example of conflicts of interest, a  prior post described how CEO COIs can be different than those faced by the rest of us and a NY Times story last week seems to illustrate that point.  It concerns a company (Questcor Pharmaceuticals) which appears to have timed  various corporate announcements with an eye toward boosting its stock price in advance of sales by the CEO pursuant to a “10b5-1” plan (which is an automated procedure to sell stock at specified future dates based on prior instructions).  I should stress that the case for the CEO’s stock sales being the motivation for the scheduling of the announcements in question is wholly circumstantial.  Still, a commentator from Bloomberg who set out to debunk the case ran the numbers and ended up essentially “rebunking” it – i.e., supporting by statistical analysis, at least to some degree, what the Times suspects.

Not being statistically adept, I have nothing to add about the specifics of this case (other than to say I hope the company’s board conducts an independent inquiry of the matter).  Rather, I mention the story because I have to believe that this sort of conflict of interest – assuming, for the purposes of discussion here, that the theory of wrongdoing is well founded – is unlikely to show up in most risk assessments, and thus  this illustrates the earlier point about the limits of compliance.  But from an ethics perspective, no CEO  (or board member or “gatekeeper”) could reasonably believe that gaming a 10b5-1 plan in this way was okay, as it would involve using the company’s resources for purely private purposes (clearly an ethical breach – but perhaps less easily shown to be a legal one).

Indeed, it is precisely because a COI like this is so unpredictable – the Times story seemed to suggest that it was indeed something new under the sun – that it is potentially harmful. That is, when an unforeseeable COI emerges it raises the question: If the CEO is capable of doing this, what other mischief is he or she up to?

What this means  is that the  primary damage to the shareholders is not whatever costs can be directly traced back to timing corporate announcements for the personal benefit of a executive –  an exercise that  would likely be too speculative to be meaningful; and, even if the costs were measurable, they would likely end up being a small amount.  Rather, the harm flows from a general loss of trust by shareholders from learning that a CEO puts their interests second and – because a CEO can influence her company in so many ways – not being able to monitor all the avenues of possible betrayal that might exist.

Understanding that sort of more general harm is one of the important ways an ethical perspective can supplement a more narrow compliance-based one. And it is part of the reason that boards and senior executives need to understand the importance of truly operating pursuant with high ethical – as well as compliance-related – standards.

Finally, for those who’d like to read more related to this topic please see Scott Killingsworth’s excellent paper on C-Suite behavior, discussed and linked to in this earlier post

Are private companies more ethical than public ones?

To those in the C&E field, the notion that privately held companies could, as a group, be more ethical than publicly held ones seems implausible.  After all, public companies are required by law to be transparent in ways that private ones are not – and are also required to have various compliance measures that are not mandated for the latter.  Moreover, at least based on anecdotal evidence, when companies go from public to private they tend to cut back on their C&E programs.

But that might not be the whole picture.  As mentioned in a post last week, research in a recently published paper  – “The Value of Corporate Culture,” by Luigi Guiso, Paulo Sapienza  and Luigi Zingales   -  found that public firms seem to have a greater difficultly in maintaining cultures of integrity than do private ones.  In that earlier post we focused not on that finding but what could be described as the “headline” story of that piece: that “high levels of perceived integrity are positively correlated with good outcomes, in terms of higher productivity, profitability, better industrial relations, and higher level of attractiveness to prospective job applicants.”   Today, we return to the article to consider what could be the cause(s) of the link between private ownership and ethical cultures – for which the authors offer three possible explanations.

First, they note that there could be greater integrity-related communications challenges facing a public company than a private one: “if a violation of internal norms is discovered in a public corporation, in deciding the punishment, the CEO has to send two signals: an internal one to the managers and employees that also serves as deterrent for future violations and an external one to the market that maintains transparency of internal procedures. The latter poses the risk of being (wrongly) interpreted by the market as the tip of an iceberg rather than an isolated episode, inducing the top manager to dilute the punishment and the internal message. These complications may weaken integrity norms in publicly traded companies vis-à-vis private firms.”

This is indeed an interesting possibility, and something that I’ve not heard before.  But the very fact that I have not heard it mentioned previously – in more than two decades of advising companies on C&E matters, attending C&E conferences  and otherwise keeping track of the field –  makes me somewhat skeptical about it.

Second, the authors note: “Public ownership…changes …the trade-off between the costs and benefits of strict integrity norms…  If… some assets are not considered (or underappreciated in the short term), public ownership creates a distortion in decision making…” They further argue that integrity may in fact be underappreciated in the market, so that “a CEO who allocates company resources to maximize the current stock market value of a company will tend to underinvest in integrity.”

Unlike the first explanation, this one seems virtually self-evident, given the absence of any meaningful indication (at least of which I am aware) that capital markets really give sufficient weight to integrity cultures.  Fortunately, the above-noted “headline” finding of the authors’ research  -  linking ethical cultures with profitability and other desirable business outcomes –  itself has the power to change that, at least if it becomes widely appreciated and further developed by practitioners and researchers.

Finally, they state: “public ownership comes with a separation between ownership and control and the CEOs of a public corporation are not always driven solely by shareholder value maximization, since they do not fully internalize the cost of deviating from value maximization.”   This, too, seems compelling to me.  It has  its roots in Adam Smith’s powerful insight that “[M]anagers of other people’s money [rarely] watch over it with the same anxious vigilance with which . . . [they] watch over their own,”  and is, of course, broadly consistent the notion of “moral hazard,” about which much has previously been written in this blog and elsewhere.  

So, for C&E professionals what is the import of these findings?

For those who work in/with public companies I think the overriding lesson is that the board needs to be involved to a meaningful extent with the C&E program.  That is because directors are generally far better able to resist the pernicious effect of short-terming thinking and “moral hazard” on a company’s integrity culture than is management. Of course, much has already been written about the need for strong board oversight of compliance.  But, having the relevant data from this paper should help some directors who are under-involved with C&E see the business case for stepping up their game.

Private companies, meanwhile,  should not get cocky.  While good news for them in a general sense, the paper doesn’t mean the pressure is off.   Indeed, the overwhelming percentage of companies punished under the Federal Sentencing Guidelines tend to be small    – and therefore (I assume, though can’t be totally sure) are mostly private.  Moreover, as discussed in this recent posting on the D&O Diary  (which was based on the results of the Chubb 2013 Private Company Risk Survey): “‘private companies increasingly are at risk of professional and management liability from a vast range of events, including costly lawsuits, governmental fines, data theft and other criminal activities’.”’

An outline for core employee training on conflicts of interest

COI training is not a new topic for the blog. Prior posts have addressed training of board members  on conflicts;   cultural challenges to global COI training efforts  (through guest posts by Lori Tansey Martens); and  various forms of non-training communications addressed to COIs (through guest posts  by Joel Rogers), such as COI quizzes.  We have, as well, considered the implications of certain behavioral  ethics research for compliance training and communications generally  and recently done the same with respect to moral intuitionism.   Moreover, many of the various news stories covered in this blog over the past two years provide – we hope – useful material for some COI training.  However, we have never looked broadly at core COI training for employees, and so do that today.

What should such training entail? One approach would be to:

- Define COIs, perhaps using the fiduciary duty of loyalty (at least for US-based training) to underscore the potential seriousness of COI issues in the employment setting.

- Describe the potential harms that can be caused by COIs – not only in terms of corrupted decision making on the part of the conflicted party but also the potentially even greater harm that can flow from loss of trust by shareholders, employees, customers, suppliers and regulators, as well as the various ways in which COIs can give rise to legal liability for organizations and individuals. (Prior posts about some of these harms are collected here.)

- Explain what both apparent and potential COIs are and why they can be as harmful as actual  conflicts.  (Here are posts on apparent – and, to a lesser extent, potential – COIs.)

- Provide an overview of the organization’s abstain-or-disclose rules. (Here is a prior post on COI review processes.)

- Review need-to-know points about the most common forms of COIs  – conflicting financial/ownership-type interests conflicting employment-type interests; misuse of company resources; conflicts involving family members; and accepting gifts, entertainment, travel and the like (see posts collected here ).

- Depending on one’s industry, possibly explain the difference between individual and organizational COIs.

- If not already covered in other training  provided by the organization, include the mandate of  not  causing conflicts in others  (in effect, corruption-related risks  – although often a  more soft-core form than what is covered by anti-bribery laws) .

Finally COI training can provide a useful opportunity for discussing the important and interesting area of behavioral ethics, and particularly the overarching lesson of that field – we are not as ethical as we think, which underscores the importance of a strong approach to C&E programs generally and enhanced ethical awareness for managers in particular. (For more on this see behavioral ethics posts collected here.)

The science of disclosure gets more interesting – and useful for C&E programs

In “Nothing to Declare: Mandatory and Voluntary Disclosure Leads Advisors to Avoid Conflicts of Interest,” published last month in Psychological Science,    Sunita Sah   and George Loewenstein   note that “[p]rior research documents situations in which advisors— subject to unavoidable COIs—feel morally licensed to give more-biased advice when their conflict is disclosed,” as well other  factors suggesting that disclosure is often less of an effective mitigant than might be imagined.  (For more information on some of this research see this post on moral licensing and this one  on the pressure that individuals to whom disclosure is made might feel to accept the conflict.)  However, the authors argue – and support with the results of several experiments  that they conducted –   “[w]hen COIs are avoidable … the situation can change dramatically because the ability to avoid conflicts brings other motives into play.”

One of these motives is that “disclosure becomes a potential vehicle for demonstrating one’s own ethics …to signal to themselves and to others that they are honest and moral …and that they prioritize others’ interests over their own.”  A second motive is that “in many situations advisors benefit financially when advisees follow their advice… [and] disclosing the absence of conflicts increases the likelihood that the advice will be followed,…”

Sah and Loewenstein also note: “Evidence from the field complements [their] findings. The American Medical Student Association’s PharmFree Scorecards program (which grades COI policies at U.S. academic medical centers…) has been successful in encouraging many centers to implement stronger COI policies.  Similarly, mandatory disclosure of marketing costs for prescription drugs in the District of Columbia produced a downward trend in marketing expenditures by pharmaceutical companies, including gifts to physicians, from 2007 to 2010…”

The authors’ findings make sense to me.  Indeed, in one of the above-noted earlier posts I suggested that the research indicating that disclosure could be harmful in the professional advisor context because it creates pressure to accept the COI  may not apply to the same extent “in the setting of a business organization – with defined and enforced ethical standards regarding COIs, where one might be more concerned about looking bad to one’s colleagues (or bosses) than to the conflicted party.”

That is, the first of the two motivations that Sah and Lowenstein identify as relevant to disclosure – the desire to show one’s trustworthiness – is likely to be a powerful force in many business organizations given the often strong enforcement of COI rules that began with the Sarbanes-Oxley Act and which is also supported  by the general importance of “organizational justice” to C&E program efficacy and the specific relevance of COI enforcement to organizational justice.  (The other motivation, however, is much less applicable outside of the professional advisor context, and indeed the notion of mandatory versus avoidable COIs may also be more relevant to the advisor context than for business organizations.)

So, the results of this study seem like good news.  But is it news that C&E professionals – who operate more in the business organization rather than in the professional advisor context – can use to make their companies’ C&E programs stronger?   Or, is it – as one C&E professional I know recently said of much behavioral ethics – the stuff of “parlor games”? (Note: I don’t agree with this critique, but it is worth noting that C&E practitioners, as a group, don’t seem to be doing much with behavioral ethics findings.)

I think that this knowledge can in fact be put to use for C&E purposes.   That is, it suggests that in policies, training and other C&E communications, companies should emphasize how timely and complete COI disclosure may be important to an employee’s being seen as trustworthy within an organization – as well as by other important parties (e.g., customers or suppliers).

More broadly, C&E professionals should find ways to address this motivation in helping employees understand the business case (in terms of their careers)  not just for full COI disclosure  but for ethical excellence  generally. Of course, this approach already exists to varying  modest degrees in some C&E programs, but there is plenty of room for many organizations to do more in this regard.

Catching up on backdating

Many years ago, I heard a businessman who had been convicted of tax fraud describe how he and his confederates had, while their crime was underway, minimized the wrongfulness of what they were doing, which included backdating documents: we used to joke, he said, that we were so dedicated that sometimes we were still working as late in the year as “December 38th.”  While perhaps a cute story (at least for this time of year)  more relevant for C&E professionals  (and to conflict of interest history) are the backdating cases which began in 2005/2006 and involved the retroactive dating of stock options issued to corporate officers to a time preceding a run-up in the price of the company’s shares.  While the act of granting lucrative options was itself not itself problematic, the backdating was kept secret from the shareholders, who unwittingly were made to bear the cost of this largess and which therefore could  be seen as a securities fraud.

A large number of class action lawsuits were brought against directors and others for claimed breaches of fiduciary duty arising from this backdating, but in the years when this was happening many observers sought to minimize the wrongfulness of the conduct.  From much of the commentary at this time,  one could easily get a sense that these were mere technical violations and that it would all turn out to be much ado about nothing – i.e., no more serious than meeting a year-end deadline by working until “December 38th” seemed at the time it was happening.

However, in a recent post in the D&O Diary,  Adam Savett, Director, Class Action Services at KCC,  surveys the relevant cases and notes that “early prognosticators … were significantly off in predicting outcomes … of [these] cases.  The settlements were not insubstantial, having a combined value of more than $2.38 Billion….” Also, 82% of the cases settled – a considerably higher number than the historical average for securities class actions (65%).

Also noteworthy here is a comment on the D&O Diary  posted  by Michael Klausner  and Jason Hegland of the Stanford Law School to support Savett’s “point that the options backdating cases turned out to [be] serious…” They note: “Individual defendants made above-average personal, out-of-pocket payments into settlements of backdating cases” and “[t]he percentage of settlements paid fully or partially by insurers was lower in backdating cases than in other cases.”

How can C&E professionals use this page of history in training directors and officers?  Not to show that backdating is wrong, as I think that would (now) be seen as unnecessary.  Rather, and together with other scandals involving directors (see discussions collected here), the backdating cases can be used to make a more general point about the need for directors to have a heightened sense of ethical awareness. Put otherwise, directors and officers should not count on their instincts – or insurance – to save them from the consequences of an ethical lapse.

Behavioral ethics teaching and training

In “Teaching Behavioral Ethics” – which will be published next year by the Journal of Legal Studies Education, and a draft of which can be found here  - Robert Prentice of the McCombs School of Business at the University of Texas  presents his pedagogical approach to  behavioral ethics.  The paper should be useful not only to other business school professors in preparing their own ethics classes but also to C&E professionals who are considering training business people on “‘the next big thing’ in ethics…”

Prentice’s article describes in considerable detail what he covers in each session of his course. The first addresses why it is important to be ethical, including the many positive as well as negative reasons, and the second the sources of ethical judgments, with a key point being that such judgments tend to be more emotion based than is commonly realized.

The next few classes are about “Breaking down the defenses,” which make the overarching behaviorist point “we are not as ethical as we think” and which explore many key concepts in the field, including self-serving bias;  role morality; framing;  the effect of various environmental factors – such as time pressure and transparency – on ethical behavior;  obedience to authority; conformity bias; overconfidence; loss aversion; incrementalism; the tangible and the abstract; bounded ethicality; ethical fading; fundamental attribution error; and moral equilibrium.  Prentice also discusses research showing that “people are of two minds,” and “tend to be very good at thinking of themselves as good people who do as they should while simultaneously doing as they want,” as well as the related facts that we often don’t do a very good job in predicting the ethicality of future actions and are not especially accurate in remembering the ethicality of our past actions.  At various points in the paper he illustrates these phenomena not only with behavioral studies but also with well-known cases of legal/ethical transgression (e.g., Martha Stewart’s conviction for obstruction of justice as a possible manifestation of loss aversion).

The final part of Prentice’s course is aimed at helping students be their “best selves.” This begins with teaching the differences between the “should self” and the “want self,” and the importance of incorporating the needs of the want self in advance, e.g., by rehearsing what one would do if faced by a particular ethical dilemma. Also important to being one’s best self is “keeping one’s ethical antennae up….[to] always be looking for the ethical aspect of a decision so that [one's]  ethical values can be part of the frame through which” a problem is examined.  As well, Prentice exhorts his students to “monitor their own rationalizations,” and use pre-commitment devices to decrease the influence of the “want self.” Finally, he discusses research by Mary Gentile showing that more often than is appreciated, “one person can, even in the face of peer pressure or instructions from a superior, turn things in an ethical direction if only they will try.”

All told, this seems like a great course, and I wish that it could be taught in every company as well as in business school. Of course, those providing C&E training in the workplace typically are not given a semester’s worth of time to do so, and indeed there seems to be a recent trend in the field of C&E training – particularly given the “training fatigue” that one finds in some companies - to try to do more with even less.   However, I do think some of the behavioral notions discussed in Prentice’s article can be the basis of compelling workplace training.

First, the fact that it is a relatively new area of knowledge, that it is science based and that it is clearly interesting can make behavioral ethics more appealing to business people than a lot of traditional C&E training. Indeed, using behavioral ethics ideas and information can be a welcome relief from ”training fatigue.”

Second, the lessons about how to become our “best selves” are indeed quite practical, and for that reason should be welcome in the workplace.  Indeed, given the many careers that have been damaged/destroyed by  business people not keeping their “ethical antennae up,” these lessons should be seen as business survival skills.

Third, the totality of these studies showing we’re not as ethical as we think  helps makes the case – as well as any legal imperative ever could – for the need for companies to have strong C&E programs.  This should be part of any C&E training (as well, in my view, business school ethics classes), but is particularly important to include in training of boards of directors and senior managers.

Finally, directors and senior managers have an espescially strong need to learn about behavioral ethics research showing that those with power tend to be more ethically at risk than are others, as discussed in various prior posts – such as this one  (review of an important paper by Scott Killingsworth), this one  and this one, to which should be added this recently posted paper  about a study to showing that “employees higher in a hierarchy are more likely to engage in deception…” than are others.  To my mind, the prospect of helping companies with the politically sensitive task of bringing sufficient compliance focus to bear on their heavy hitters is as important as is any of the other possible real-world contributions of this promising and fascinating new field of knowledge.

Ethics training – making it real: part two of our interview with Steve Priest

In today’s post we conclude our interview with Steve Priest.  Information about Steve, and Part One of the interview, can be found here.

Should ethics training be a stand-alone offering or is ethics part of broader training (compliance, leadership, etc.)? Jeff, I wish I had 1%–even 1/10 of 1%–of the money companies have wasted on ethics and compliance training in the past 20 years. There is some evidence that training that is risk and role based—and is targeted, short and engaging—can improve employee perceptions of management commitment, and perhaps even decrease the likelihood that they will engage in stupid, unethical or non-compliant behavior. On the other hand, let’s look at the somewhat prominent school in Princeton, your beautiful town. Dan Ariely’s research there found that taking a week long morality course did not affect the rates at which Princeton students cheated in an experiment one week later. What did make a difference? A reminder right before the experiment about the school’s honor code. Short, sweet, targeted, proximate—these were the keys even before the Twitter/Angry Birds generation. So integration makes a lot of sense because we can have much more frequent, relevant touch points.

What works and what doesn’t when it comes to training boards on ethics?  Same question  with senior managers. In the past two months I had the opportunity to train the board of one of the world’s largest energy companies and one of the world’s largest retailers. In the latter case it was the third time they asked me. I think the secret is no secret: board members and senior leaders view themselves as very smart, successful, and ethical. And for the most part they are. Respecting that, and building training that is engaging and relevant to their roles and responsibilities works with senior leaders just like it does with front line employees. Cases and conversation make it real and relevant.

You’ve done ethics & compliance work in close to 50 countries.  Can you describe some of the pitfalls that one can face when training without being sufficiently attuned to the local culture? A number of years ago I was conducting training in Moscow when a person raised his hand and said “You are from Chicago, right?” “Yes.” “Well, I am from Yekaterinburg, and we have hundreds of missiles aimed at you right now.” Usually the defensiveness is not so overt, but it is always in the room.  The biggest danger is the perception of (misplaced) ethical superiority. That is, it is very easy for people to interpret that the reason that an American/Brit/etc. is coming over to conduct ethics/compliance training is because it is believed that the US/Great Britain is ethically superior to whatever country you are in. I address this head on first thing by talking about how I am from Chicago, listing several of the ethical challenges we have faced, and acknowledging that I don’t have all the answers but have become pretty good at thinking about these things. I also try to tap into local ethical heroes or foundations to illustrate that this is not a Western issue—ethics is important in every culture.

Thanks, Steve – wise words.

 

Complying with customers’ conflict of interest requirements

A federal indictment handed down this week charged a former CEO of CalPERS (the California Public Employees Retirement System), who had become a consultant to a “placement agent” just one day after leaving CalPERS,  with defrauding Apollo Global Management in connection with Apollo’s payment of  14 million dollars in fees to the placement agent for its role in persuading CalPERS to hire Apollo to manage some of its funds.  As charged in the indictment, Apollo asked the agent to have a CalPERS official sign a letter saying that they were aware of the placement agent’s role in getting Apollo the business, but CalPERSs’ officials – presumably concerned with the conflict of interest involved - refused to do so. So, the former CEO and a colleague at the placement agent allegedly created and presented to Apollo phony letters evidencing such approval.

This is a fairly unusual (as well as tangled) case and apparently leaves open a number of  important questions regarding CapPERS and Apollo.  But it also raises the broader and more general question which countless companies face on a frequent basis:  what should be done to ensure that one’s employees and agents are complying with a customer’s COI standards, (a topic we haven’t explored since the early days of the blog)?

There are a number of possibilities here, including the following:

- Mandating that your company’s employees/agents comply with relevant customer standards, i.e., building such an expectation into your code of conduct, other policies and agency agreements.

- Training and otherwise communicating periodically to at-risk employees and agents on such expectations.

- Making an effort to ensure that employees/agents are in fact aware of applicable customer standards, such as by collecting and distributing relevant sections (e.g., on gifts, entertainment and travel) of customer codes of conduct to employees/agents who deal with such parties.

- Including such standards in one’s audit protocols.

- Contacting the customer with respect to specific contemplated actions that could raise COI  issues under the customer’s policies or relevant law.

The last of these measures is, of course, the most delicate – and it is not something that companies tend to do for small-scale matters (e.g., taking a customer’s employee to lunch).  However, for potentially weightier COI issues it is often warranted (and, of course, should be done where required by law – as was the case in the CapPERS matter).

Finally, it is worth considering that there are different  types of effort that each of the above compliance measures can entail.  For instance, regarding the delicate but potentially important customer-contact-related measure one can require that:

- Written notice be given to the customer (e.g., the supervisor of an employee of a government agency who one would like to invite on a business trip) –  a one-way written communication.

- The customer confirm in writing its approval of the contemplated action (e.g., what Apollo sought to do here) -  a two-way written communication.

- There there be an in-person or telephonic contact with the customer – to avoid the type of fraud that happened in the CalPERs case.

Values, culture and effective compliance communications – the role of behavioral ethics

Compliance-related communications constitute a large part of the day-to-day work of many compliance-and-ethics departments.  But is this work being done in the most effective manner reasonably possible?

“Modeling the Message: Communicating Compliance through Organizational Values and Culture,” – published last fall by attorney  Scott Killingsworth in The Georgetown Journal of Legal Ethics  - provides a thoughtful examination of what we can learn about compliance  communications from various findings of behavioral science.  The article critiques the traditional approach to compliance communications – which focuses on avoidance of personal risks  – as being premised on a  “rational actor” theory that in recent years has been seriously undermined by the results of behavioral economics/ethics research. In this regard, Killingsworth argues: “Instead of conveying the message that compliance is non-negotiable, [the personal risk versus reward approach] implies that it may be negotiable if the price is right.”  An additional source of concern is that this way of communicating may send the implicit message “that management does not trust employees. Potential side effects of this message range from resentment, to an ‘us-versus-them’ attitude towards management, to a reverse-Pygmalion effect in which employees may tend to ‘live down’ to the low expectations that are projected upon them.”

As an alternative, Killingsworth draws upon the behaviorist concept of “framing” to suggest that communications framed in terms of values and ethics are more likely to be effective in reducing wrongdoing than are traditional compliance communications. In that connection, he describes a study showing “that over eighty percent of compliance choices [in the workplace] were motivated by internal perceptions of the legitimacy of the employer’s authority and by a sense of right and wrong, while less than twenty percent were driven by fear of punishment or expectation of reward.” A second benefit to the values-based approach is that it can better serve as “a source of internal guidance in novel situations” than does the traditional alternative.   Third, communications framed from the former perspective may enhance companies’ efforts to promote internal reporting of violations (obviously an important consideration in the Dodd-Frank era),  a contention that he bases on a study which showed that “the reporting of compliance violations encountered dramatically different effects depending on whether the subjects considered a particular infraction morally repugnant or not.”

As well as discussing communications per se, Killingsworth’s piece examines “the messages implicit in key company behaviors, which can either reinforce, undermine, or obliterate explicit compliance messages.”   So, while explicit communications are important, C&E officers must also “reach across functional boundaries to executive management and the human resources group and, if necessary, educate them about the principles of employee engagement and the value of consistent explicit and behavioral messaging that activates the employees’ values and brings out their [employees'] better natures.” The piece concludes with a list of other practical recommendations – concerning, among other things, culture assessments and communications strategies – for making all these good things happen.

Finally, I should emphasize that this posting only scratches the surface of what is in ”Modeling the Message: Communicating Compliance through Organizational Values and Culture,” and I strongly encourage both C&E professionals seeking to up their respective companies’ communications efforts and behavioral scientists seeking to learn more about how their work can be put to practical use in compliance programs to read the piece in full.