Compliance

In this section we examine how the various “tools” of a C&E program can be deployed to mitigate COIs, as well as other matters regarding the interaction of COIs and C&E programs. Please see the various sub-categories for information about each of these tools.

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

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.

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.

A complimentary e-Book on compliance & ethics risk assessment

Corporate Compliance Insights has just published a complimentary e-Book –  Compliance & Ethics Risk Assessment: Concepts, Methods and New Directions, based mostly on my CCI risk assessment columns over the past few years, but also including other materials.  The book covers a wide array of risk assessment ideas, methods, practices, tools and other noteworthy items  concerning  risk assessment scope and methodology;  approaches to different risk areas (e.g., competition law and corruption);  mitigation measures; the interplay of risk assessment and program assessment; and the ethics and social science dimensions of risk assessment.

The book can be downloaded here

I hope you find it useful

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.

An important real-world conflict of interest experiment

In today’s NY Times, Michael Greenstone, an economics professor at MIT, writes about a study on auditor COIs that he –  together with Esther Duflo of M.I.T.;  and Rohini Pande  and Nicholas Ryan, both of Harvard – recently published.   The study was conducted in Gujarat, India, where industrial plants with high pollution risks are required  “to hire and pay auditors to check air and water pollution levels three times annually and then submit a yearly report to” a governmental body. In the study, for a randomly selected set of companies, but not for a control group, “auditors were paid a fixed fee from a central pool of money, a subset of the audits was chosen to have its findings re-examined, and auditors received payments for accurate reports, judged by comparisons with the re-examinations. The control group continued under the status quo system in which auditors were chosen and paid by the plants they were auditing.”

The results of this real-world experiment  powerfully demonstrate the impact on the ethicality of conduct that financial incentives can have – even on the judgment of individuals who, by virtue of their professional norms, are supposed to be resistant to COIs.  That is: “While many of the plants violated the pollution standards, few of the auditors in the control group reported these violations. In the case of particulate matter, an especially harmful air pollutant, auditors reported that only 7 percent of industrial plants violated the pollution standard. In reality, 59 percent of plants exceeded it.” However, “[t]he rules changes [in the experiment] caused the auditors to report more truthfully. In the restructured market, auditors were 80 percent less likely to falsely report a pollution reading as in compliance, and their reported pollution readings were 50 to 70 percent higher than when they were working in the status quo system. This difference was as large even when comparing reports of auditors working simultaneously under the two systems. Finally, and most important, the plants that were required to use the new auditing system significantly reduced their emissions of air and water pollution, relative to the plants operating in the status quo system. Presumably, this was because the plants’ operators understood that the regulators were receiving more accurate information and would follow up on it.”

Three comments on this important study.

First, while most directly relevant to auditors, these results can, I believe, be broadly applicable to COIs generally.  That is, if professionals who are trained to rise above COIs fare this poorly, one can only imagine the impact of COIs on the rest of us.

Second, the more important compliance and ethics program efforts become to society, the greater the need for not just C&E auditing but other forms of checking – such as monitoring, as was discussed in a piece in Corporate Compliance Insights.   But monitoring  (as a general matter) is even less independent than is auditing, so this recent study underscores  the considerable  challenges for making forms of checking beyond auditing effective.

Third, research to determine “what works”   is vitally important for the C&E field to mature and realize its full promise,  and real-world studies such as this one can be particularly valuable in that regard.  Interestingly, another article in today’s NY Times describes how in the UK there is now an government-run effort (headed by a “Behavioral Insights Team”) to use research to determine what works with respect to various public policies, including some compliance-related ones. I hope that the US and other countries will follow the UK’s lead here.

Finally, here is a prior post on auditor COIs

 

Mitigating holiday cheer: what’s new in gifts and entertainment compliance

It is that time of year again, and so we look once more at what’s new under the C&E officer’s tree to help with the timeless challenge of gifts and entertainment (G&E)  compliance.

First, in what seems like just yesterday (because  it was just yesterday), “[a]n employee of Deutsche Bank‘s Japanese brokerage unit was arrested on … suspicion of showering a local pension fund manager with expensive meals, golf outings and trips overseas in return for some 1 billion yen in investments,”  as reported by the NY Times,   The piece continues: “The wining and dining of corporate pension fund executives had, in fact, become commonplace at Deutsche Securities, which set up shop in Tokyo in 2005, [t]he Nikkei business daily said. In some cases, the feasting got so out of hand that employees filed the mounting expenses over many days in a bid not to attract attention, the paper said. The [Securities and Exchange Surveillance Commission] advised that the government reprimand Tokyo-based Deutsche Securities over its conduct.”

This story is still developing, but it seems like a huge black eye for the bank.  However, presumably the lessons of how one of the world’s largest financial institutions could allow this type of very damaging conduct to occur will be a gift to others seeking to stay out of trouble.  (Among other things, this case could show why high-risk organizations need to do more  G&E monitoring, but that’s just a guess.)

Indeed, one of the most useful things that C&E officers can do regarding G&E is to keep track of others’ missteps in this treacherous area – and use that information in training and periodic communications to employees.   A helpful stocking stuffer in that regard is   this chart recently prepared by K&L Gates partners Amy Sommers and Matt Morley showing FCPA enforcement actions involving gift-giving in China, which I found via one of Tom Fox’s many excellent writings on anti-corruption compliance.

Another G&E  goody  to consider getting for that hard-to-please C&E officer on your shopping list is this recently published article “Honing a compliant gifts policy: the trends we are seeing today,” by Laura Flippin of DLA Piper. Among these trends:  “setting global limits on the amount that may be spent on any single meal, with three tiers covering low, medium and high cost markets. …Limiting gift giving, globally, to no more than $50 worth of low-value items which may be given at any one time to a single individual, with a cap of no more than four gifts annually…Requiring all gifts to be sourced centrally by procurement and prohibiting the use of vouchers or gift cards that can be easily converted to cash….Mandating prior written approval from a regional or above-country compliance officer if an employee wants to provide more than two gifts yearly to any single recipient (whether or not a government official) …Using a specific, documented process to address hospitality provided for high-profile, unique events in countries where the company has a large presence or business interests – for instance, the London Olympics.”

Of course, global companies increasingly need to keep track of the increasing number of “local” G&E laws and regulations, e.g., those of Nigeria – presented here by ethixBase  (the publisher of the COI Blog).  EthixBase has compiled  domestic gift giving rules from more than 80 countries – something that should bring joy to even the most Scrooge-like C&E officer of a global company.

Finally, some recent possibly relevant articles from our own back pages:

-          Gifts, entertainment and “soft core” corruption.

-          Complying with customers’ COI requirements.

-          COIs and industry culture.

Ho, ho, ho…

 

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.