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.

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.

Catching up on CEO COIs

As noted in a previous post, CEO’s tend to have different COIs than the rest of us. Today’s post will look at a few CEO-related COI stories that have been in the news lately.

Most notably, yesterday the pharma company Novartis dropped a controversial plan to pay outgoing CEO Daniel Vasella up to $78 million over the course of six years. As described by Forbes, “The board had originally justified its decision in order to ‘protect’ the drug maker, since Vasella knows ‘the company’s business intimately, having built the leading R&D organization and personally recruited most of the top executives.’ In other words, the payoff was hush money designed to keep him from telling secrets to competitors.” The notion that a board could even consider paying a CEO something extra for keeping shareholder secrets is – at least on its face – pretty distressing.

Public sector organizations have CEO’s, too – and various press accounts have noted that super-lawyer Mary Jo White, who President Obama has nominated to head the Securities and Exchange Commission,  will need to take conflict avoidance measures if confirmed for that post.  But as noted in this recent story in Bloomberg News , while it is hardly unusual for a lawyer going from private practice to public service to have COIs of this sort, White’s particular contemplated mitigation approach to her potential COIs (which concern not only her law firm partnership but that of her husband, himself a prominent securities lawyer) appears to be of less than optimal efficacy.

I should stress that I don’t think there is any chance that White will personally act in a conflicted way in the discharge of her duties at the SEC.  But individual honesty is presumably not the end of the analysis regarding any leader’s COIs – and that is particularly so where a) the leader leads a government agency whose mandate includes, among other things, addressing COIs (at least in the financial services field);  b) that agency has an uneven record over the years in enforcing that mandate; and c) there is a reasonably strong concern among press and public that the reason for the agency’s shortfall is one of regulatory capture.

And speaking of the SEC, there is this story   from yesterday about a deposition of hedge fund chief Steve Cohen whose firm, SAC Capital, is being investigated for insider trading.  Cohen apparently testified: “I’ve read the compliance manual, but I don’t remember exactly what it says,’’ and, according to John Coffee, a noted securities-law professor at Columbia, “That’s a dangerous statement. The fact that he doesn’t know what’s in his compliance manual is useful to the SEC,” should it decide to pursue the firm on a “control person” theory of liability (which essentially involves supervisory neglect).

But is this really a COI issue?  It is in the sense that under Delaware law compliance oversight failures by directors and officers can be deemed a violation of the duty of loyalty, which – even if not technically involving a conflict – is from the same neck of the woods as COIs.

Finally, just today an internal investigation cleared former Chesapeake Energy CEO Aubrey McClendon of any “intentional wrongdoing” in connection with the controversial borrowing practices that were the subject of the prior post linked to at the top of this one.  But presumably it did not do the same with respect to creating an appearance of a conflict  – given the facts as described in the prior post, that could not be done with a straight face.  And with CEOs, proper appearances can matter just as much as avoiding actual COIs, as evidenced by the great costs and disruption that befell Chesapeake when the borrowing practices became known to the company’s shareholders and others.  Indeed, the company evidently continues to be the subject of an SEC investigation concerning these matters, and COI watchers may be able to look to the outcome of that inquiry for an early view of how seriously that agency will address conflicts in the era of Mary Jo White.

 

 

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.

Catching up on directors’ conflicts of interest

Directors’ conflicts of interest are one of the favorite topics of this blog.  Among our prior posts on this subject are this one on what to cover when training directors on COIs ,  this one on corporate charitable giving,  this one on board COIs in internal investigations and this one on COIs in connection with service on the board of a joint venture.  We’ve also addressed the need for directors to monitor the COIs of senior executives in their companies – and the dire consequences that can arise from a failure to do so.

So, what’s new in the area?

First, this recent story from Bloomberg news  reported on possible conflicts involving a prominent university’s board: “13.5 percent of Dartmouth’s $3.5 billion endowment is managed by firms that are related to trustees or investment committee members.” Dartmouth is not alone in this respect, but some schools do ban the practice, based on COI concerns: “Trustees shouldn’t manage university money because of the potential for self-dealing and other abuses, says Mark Williams, a former Federal Reserve bank examiner who teaches risk management at Boston University.  ‘Even the appearance of conflicts of interest can create reputational risk and harm the institution,’ Williams says. ‘The perception is almost as bad as the act of conflict. It does damage to that reputation, which has taken many universities centuries to create.’”

On the other side of the coin, the alumni in question have apparently been very generous in their gifts to the school, so it is arguable that on a net basis the practice is worthwhile – although balancing tangible gains against possible intangible losses is hardly an easy calculus to undertake in any meaningful way.  The piece also noted: “The potential conflicts can be thrown into high relief when funds lose money. As chairman of Yeshiva University’s investment committee, J. Ezra Merkin funneled the school’s money via his hedge funds to con man Bernard Madoff in return for fees. The $1.1 billion endowment lost $14.5 million when Madoff’s Ponzi scheme blew up in 2008.”

I don’t know what to add to this except the general comment that many non-profit organizations (i.e., not just universities) could use more rigor in their approaches to COIs. Here is a piece that speaks to that.

Second, this recent post, by Klaus J. Hopt, a professor and director (emeritus) at the Max-Planck-Institute for Comparative and International Private Law, in Hamburg,  on the Harvard Law School Forum for Corporate Governance makes an interesting comparison between the duty of loyalty owed by directors under US and UK law and the prevailing approach under the continental system:  “The duty of loyalty is highly developed in Anglo-American countries, but it has received more hesitant attention in continental European countries.” However, the piece notes: “More recently there are tendencies to more convergence [and] more attention is paid to prevention, remedies and enforcement.”

At the risk of sounding US centric (whereas I’m really just COI-centric), this does sound like a positive development.  Moreover, and beyond the scope of Professor Hopt’s paper (which can be downloaded via the Harvard site), it is interesting to consider that under Delaware law (in particular the Stone v Ritter case) a board’s compliance and ethics oversight duties are  actually based on the duty of loyalty – and perhaps the convergence will extend in that direction, as well.

Conflict of interview review processes

As prior posts have discussed, reviews of disclosed employee conflicts of interest pose a number of challenges. Disclosures may not truly mitigate conflicts.  Indeed, they may actually cause more wrongful COI-based conduct to occur than would be the case absent a disclosure.

Still, very few business organizations opt for a true “zero tolerance” approach to all COIs.  And for those that don’t, COI review processes are necessary for determining when a COI should be permitted to exist and under what conditions.

At a minimum, COI reviews should be conducted by an independent person or body.   Independence for these purposes means more than COI-free in the traditional sense.  It should also encompass the behavioral ethics concept of “motivated blindness,”  i.e., a reviewer should not be someone who may – due to the relationships involved – be inclined to approve a conflict-laden relationship or transaction.

For this reason, companies may wish to have COI reviews conducted by a C&E committee.  One obvious benefit to this approach is that there is “safety in numbers.” Another is that the committee will have or develop expertise (born of experience) in evaluating conflicts, which behavioral ethics research shows can be useful.    Offering less C&E protection – but still more than having COI reviews made by a line supervisor – is tasking a staff function, such as legal or HR,  for this job.

Of course, some companies do permit supervisors to approve COIs.  If this approach is adopted, companies should still seek to have a reasonable degree of rigor in the process by:

– requiring that any approvals be in writing and sought before engaging in a conflict-based transactions;

– providing and publicizing avenues for supervisors to ask questions of the C&E function when performing COI reviews; and

– including the issue of COI reviews in supervisor training – or, if this is impractical, providing written guidance (e.g., FAQs)  regarding such reviews.

Finally, companies should check on the supervisors’  actions in reviewing or approving COIs, such as through audits.

Training Directors on Conflicts of Interest: Six Pillars of Awareness

What do directors need to know about COIs – meaning, for our purposes, what should go into the COI-related training and other communications that they receive?

First, they should be trained on their own personal COI risks, meaning conflicts involving the directors themselves. “Corporate opportunities”  – discussed in this post  – is a kind of COI that a director might face.  Using company confidential information for personal benefit – such as in insider trading (e.g., the allegation in the Gupta/Galleon case)  – would be another, and there are, of course, many others to draw from, as well.

Second, directors should understand the need to monitor COIs of senior executives.  The Chesapeake case – discussed here   – is a pretty compelling vehicle for that sort of discussion. (Note: requirements of disclosure of “related party” transactions   are relevant to both this area of awareness and that concerning board members’ own COIs.)

Third, consistent with their Caremark duty, board members should be made aware of compliance measures regarding any high-risk conflict areas – so that they can ask informed questions about such measures. Here is a discussion of that from the FCPA Blog.

Fourth, training should touch on recent behavioral ethics research showing that disclosure may not mitigate COIs.   This emerging area of social science is relevant not only to the issue of whether to permit a conflict but also to designing COI management/monitoring plans.

Fifth, they should learn about the potentially devastating legal and other costs of COIs.   (On the other hand, one should make clear that not all allegations of COIs are meritorious.)  In addition to the costs imposed by the legal system and the marketplace, this part of the presentation should take note of the negative impact that COIs can have on employees’ larger sense of “organizational justice,” and what that can do to their faith in the company’s C&E program.

Sixth, such training should cover the area of “moral hazard” – a “cousin” of COI – and what it means regarding directors monitoring COIs in their companies.

Cross references: here is a post on the related topics of training senior managers on COIs   and another on service by company employees on other organizations’ boards .

CEOs’ COIs

F. Scott Fitzgerald famously said that “The rich are different than you and me,” and, along the same lines, CEO conflicts of interest can be pretty different than those involving people like you and me.  Consider this story – which likely would not have taken place with anyone other than a CEO – about what in going on at Chesapeake Energy.

As background, the company permits its CEO, Aubrey McClendon, to take personal stakes in the wells it drills.   By itself this arrangement – while unusual and controversial – does not, in my view, inherently involve a COI.  Indeed, one could argue that by investing side by side with the company, the CEO aligned his interests with those of the company’s shareholders.

However, “[i]n order to pay for stakes in new wells, McClendon borrowed money — using his stakes in existing wells as collateral — from a group that Chesapeake was trying to sell assets to. Investors complained that the arrangement raised a conflict of interest. They worried that Chesapeake might have sold its assets to the firm because the firm agreed to lend McClendon money, and not because the terms of the deal were the best Chesapeake could have received.  The arrangement was not previously disclosed to shareholders.” Or, as noted in another (more bluntly written) account:  “The overlapping relationship has led many analysts to say that there was at least the appearance of a conflict of interest since Mr. McClendon could give his lenders a sweetheart deal in exchange for a preferential interest rate on his loans.”  (Perhaps some of these analysts recall the harm caused by the tangled personal financial dealings of then CEO Bernard Ebbers at WorldCom.)

Where was the board – which included a former governor of Oklahoma and former US Senator – when this was going on? According to this story, Chesapeake’s general counsel initially claimed that the board “was fully aware of the existence of the loans” but the company soon reversed course on this.   As described by Ben Heineman, a former General Electric Co. general counsel who teaches corporate governance and business ethics at Harvard: “the Chesapeake board, in effect, is declaring that it would ‘rather just look ill-informed and negligent than complicit in McClendon’s deals.’”

Adding to this turmoil – a story has now surfaced of an undisclosed financial tie between the CEO and a director  (albeit one dating back several years).  And, the Securities and Exchange Commission has opened an internal  investigation.

What does all this mean for the shareholders (i.e.,  people like “you and me”)?  Many have apparently lost faith in senior management and the board, which has led to a massive loss in their investments in the company. This is, of course, entirely predictable when a CEO creates an apparent COI of this magnitude and the board – the only meaningful check on a CEO – is either negligent or complicit.

CEO conflicts really can be unique, not only in terms of what they are but also the impact they can have.