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.

The cost of director and officer conflicts of interest just went up

In the vast realm of conflicts of interest those involving boards of directors tend to stand out. That is because part of the reason the role of corporate director even exists is to mitigate the conflict-of-interest-type tensions (which fall under the broad heading of “agency problems”) that managements may have vis a vis shareholders.  Moreover, while the role of officers obviously differs somewhat from that of director, the duty of loyalty that both owe shareholders is the same.

Director and officer COIs can arise in many settings but often the most consequential of these involves mergers. And, as described in a post last week in the D&O Diary:  ”Within the past few days, two merger objection settlements – one involving Activision Blizzard, Inc. and the other involving Freeport-McMoRan, Inc. — have been announced involving massive cash payments,… The Activision settlement may represent the largest cash settlement payment ever in a shareholder derivative lawsuit.” The post further describes that “[t]he common feature of these two cases that may account for the magnitude of the cash payments seems to be the conflicts of interest that were alleged to be part of the challenged transactions.”

The specific facts of these two cases – both of which are complex, as COI cases involving mergers typically are – may be less important than is what they (and another one last year involving News Corp, which is discussed in the same post) may mean for insurance costs to companies: “The rise of jumbo shareholder derivative lawsuit settlements has a number of implications. Among other things, it is a topic that will have to be taken into account as D&O insurance buyers consider how much insurance they will need to ensure that their interests are adequately protected.”

While most directly relevant to risk managers and others in companies in charge of securing D&O coverage,  I think C&E professionals also need to know about this development – because directors and officer of their companies  likely will and will be concerned about it.  And, hopefully this awareness will contribute to a greater overall sensitivity at high levels in companies to COIs generally – meaning that this may be a good time to train (or retrain – or schedule training of) your directors and officers on COIs.

For those looking to develop such training, here is a prior post on that topic.  And here are some other posts, portions of which might provide helpful ideas or information for training boards on COIs:

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

- CEOs’ ethical standards and the limits of compliance.

- Are private companies more ethical than public ones?

- Catching up on the backdating cases

- Behavioral ethics training.

- Catching up on CEO COIs.

- Catching up on director COIs.

- The largest derivative lawsuit settlements (from the D&O Diary).

Here are some pertinent words of wisdom from two good friends of the blog: Steve Priest (on keeping ethics training real) and Scott Killingsworth (on mitigating C-Suite risks).

Finally, if you are training your board, and want to use the occasion to look beyond the COI area to general C&E oversight by directors this recent article by Rebecca Walker and me  from Compliance and Ethics Professional magazine might be useful.

 

 

Risk assessment: law, economics, morality science…and liquor

Many years ago a client who was in the compliance department of a pharma company told me his strategy for conducting risk assessments.  He would schedule the interviews of sales people – a key, but typically difficult, constituency for nearly any risk assessment – to begin late in the work day, and after a while suggest that the discussion continue in a nearby bar.  As the drinks began to flow, so apparently did the information about risks.

Risk assessment is the foundation of an effective C&E program – certainly as a matter of common managerial sense, and increasingly as a matter of law.  In  connection with the latter, we recently passed the ten-year anniversary of the revised Sentencing Guidelines, which established risk assessment as an official C&E program expectation of the U.S. government; and on virtually the same day, the Italian government published important new competition law compliance  guidelines, discussed in this publication from the Baker & McKenzie law firm, which include a risk assessment component.

Still, meeting such expectations – by getting business people people to talk openly about the uncomfortable topic of risk – is as challenging as is anything in the C&E field.  So, what can you use to make these conversations succeed if, like most C&E professionals, your toolkit doesn’t include a liquor cabinet?

Part of the way for dealing with this challenge is to provide that the assessment is conducted under the company’s attorney-client privilege  and, beyond this, that no attribution to the sources of information will be included in the assessment report.  These are the tools of law, and deploying them can be essential to success in a risk assessment.

But offering confidentiality alone may not be enough because while it is typically in the clear interest of a company to have a thorough risk assessment, individuals’ interests often seem (and sometimes are) out of alignment with those of the organization. This is the realm of the economics-based concept of moral hazard, discussed in various prior posts of this blog that are collected here.

There is no panacea for dealing with this impediment – but hopefully one can make a persuasive appeal to an interviewee’s being a “C&E leader,” a formulation which seeks to blend considerations of personal and organizational benefit, to get the interviewee  to be truly helpful for the  risk assessment. Of course, for an approach such as this to work, it cannot be limited to the risk assessment process. Senior executives, and even the board of directors, need make clear through various intangible and occasionally tangible ways that such leadership is duly appreciated.

Finally, there is also a psychological dimension to the challenge of risk assessment.  As discussed in this recent article in Science  - “Morality beyond the lab” by Jesse Graham (which I learned of from the Ethics Unwrapped web site ),  various  “laboratory  studies have shown a ‘holier-than-thou’  effect, in which people over-optimistically predict their own future moral behavior but accurately predict the not-so-moral future behavior of others” – a view which has now been supported by the results of an important recent field study (by W. Hofmann, D. C. Wisneski, M. J. Brandt, L. J. Skitka, which is published in the same issue of Science). As summarized by Graham: “[T]he study suggests that moral life can largely be characterized by two kinds of events: noting one’s own good deeds and gossiping about the bad deeds of others.”

For those conducting risk assessments, the path suggested by this research is clear:  to the maximum degree possible, one should structure the inquiry so that it is not seen as asking about the interviewee’s own risks but those of others.  And, in providing information about others, at least in the aggregate, employees of an organization will likely be helping you analyze risks that in fact involve themselves.

One other point about the above-discussed research, which is that while I have highlighted its use for risk assessment there are other ways in which this aspect of  what Graham calls “morality science” can enhance the efficacy of a C&E program.  Mostly notably, it can be used in training and other communications to underscore the overarching behavioral ethics notion that “we are not  as ethical as we think,” which should help reinforce an appreciation for the help that C&E staff and other resources can provide to employees when  confronted with legal risks or ethical dilemmas.

For further reading on risk assessment, here’s a link to a complimentary e-book comprised mostly of my risk assessment columns in Corporate Compliance Insights.

For an index of posts on “behavioral ethics and compliance” please click here. 

Compliance programs and the culture of care

Samuel Johnson once said: “It is more from carelessness about truth than from intentionally lying that there is so much falsehood in the world.” And carelessness is obviously at the root of many other types of wrongdoing too.

In a keynote speech at the just-concluded SCCE  10th annual Compliance and Ethics Institute, FBI director James Comey spoke of the need for companies to have a “culture of care” when it comes to cyber-security.  (Unfortunately the speech is not yet published on the FBI web site, so I can’t link to the text.)  While focusing on cyber-security, Comey did indicate that the concept of a culture of care might have broader application to the world of compliance and ethics.

I think the concept is indeed potentially quite useful for C&E professionals.  But what might be included in such a culture?

One example is suggested by a presentation – Beyond Agency Theory: The Hidden and Heretofore Inaccessible Power of Integrity, by Michael Jensen and Werner Erhard – discussed in this earlier post. The authors argue that honesty requires more than sincerity: “When giving their word, most people do not consider fully what it will take to keep that word.  That is, people do not do a cost/benefit analysis on giving their word.  In effect, when giving their word, most people are merely sincere (well-meaning) or placating someone, and don’t even think about what it will take to keep their word. This failure to do a cost/benefit analysis on giving one’s word is irresponsible.”    This argument makes sense to me – and I think it would to Samuel Johnson  and James Comey as well.

And, as noted above, the need for carefulness goes beyond being honest.  More broadly, a culture of care would help shape an organization’s values, policies, procedures, risk assessment, approach to incentives and  C&E training and communications.  As well, carelessness would be addressed sufficiently through the investigations and disciplinary policy/process – something that too few companies do, as discussed here.  

Finally, I asked Steve Priest, a true master at diagnosing and shaping corporate cultures, what he thinks about the “culture of care” concept.  He said “Emphasizing a ‘culture of care’ makes great sense. However for many who do not understand the full sense in which James Comey used the phrase, it will seem soft. It isn’t soft, but to balance it I encourage organizations to aim for these three in your culture: care, competence and courage. Organizations and leaders that demonstrate care, competence and courage may not win every sprint, but they will win most marathons.”

I agree with Steve that care alone cannot a culture make.  And, as with virtually any part of a C&E program, one has to guard against overdoing it.   In this connection, nearly 20 years ago, I was concerned that my then eight-year-old daughter occasionally ran out into the street without checking for traffic – and so to help make her more careful I tried to get her to keep a “safety journal.”  I’m proud (in retrospect) to say that she refused – as my idea was a bit over the top, and this story from the archives of Kaplan family compliance history helps to remind me that one must be careful not to promote over-cautiousness.

 

Conflicts of interest, compliance programs and “magical thinking”

An article earlier this week in the New York Times takes on the issue of “Doctors’ Magical Thinking about Conflicts of Interest.”  The piece was prompted by a just-published study  which examined “the voting behavior and financial interests of almost 1,400 F.D.A. advisory committee members who took part in decisions for the Center for Drug and Evaluation Research from 1997 to 2011” and found a powerful correlation between a committee member having a  financial interest (e.g., a consulting relationship or ownership interest ) in a drug company whose product was up for review and the member’s voting in favor of the company – at least in circumstances where the member did not also have interests in the company’s competitors.

Of course, this is hardly a surprise, and the Times piece also recounts the findings of earlier studies showing strong correlations between financial connections (e.g., receiving gifts, entertainment or  travel from a pharma company) and professional decision making (e.g., prescribing that company’s drug). Nonetheless, some physicians “believe that they should be responsible for regulating themselves.”

However, such self regulation can’t work, the article notes,  because “our thinking about conflicts of interest isn’t always rational. A study of radiation oncologists  found that only 5 percent thought that they might be affected by gifts. But a third of them thought that other radiation oncologists would be affected.  Another study asked medical residents similar questions. More than 60 percent of them said that gifts could not influence their behavior; only 16 percent believed that other residents could remain uninfluenced. This ‘magical thinking’ that somehow we, ourselves, are immune to what we are sure will influence others is why conflict of interest regulations exist in the first place. We simply cannot be accurate judges of what’s affecting us.”

While the findings of these and similar studies are, of course, most relevant to conflicts involving doctors and life science companies, there is a broader learning here which, I think, is vitally important to C&E programs generally.  That is, they help to show that “we are not as ethical as we think” – a condition hardly limited to the field of medicine or to conflicts of interest, as has been discussed in various prior postings on this blog.

One of the overarching implications of this body of knowledge is that we humans need structures – for business organizations this means  C&E programs, but more broadly these have been called “ethical systems” – to help save us from falling victim to our seemingly innate sense of ethical over-confidence.  So, to make that case, C&E professionals should – in training or otherwise communicating with employees (particularly managers) and directors  - address the issue of “magical thinking” head-on.

Moreover, using the example of COIs to prove the larger point here may be an effective strategy, because employees are more likely to have experience with ethical challenges in this area  than with other major risks, such as corruption, competition law or fraud – which indeed may be so scary as to be largely unimaginable to many employees.  I.e., these and other “hard-core” C&E risk areas might be subject to an even greater amount of magical thinking than is done regarding COIs.  So, at least in some companies,  discussing COIs might offer the most accessible “gateway” to addressing the larger topic of ethical over-confidence.

“The inner voice that warns us somebody may be looking”

Within the treasure trove of H.L. Mencken’s sayings, this definition of “conscience” may be my favorite.  And, various studies have indeed shown that the sense that somebody may be watching can help promote ethical behavior.  Among these are  experiments exposing individuals to “eyespots” –  drawings which create a vague sense of being watched, even among those who know as a factual matter that they aren’t being seen. (See, e.g., this study, showing that exposure to eyespots can promote generosity.)

While actually deploying eyespots around the workplace is hardly a viable option for most companies, various technological advances offer not only the appearance of being watched but the actuality of it.  Such monitoring technologies can be particularly promising for promoting compliance by parts of a workforce for whom supervision is relatively remote – which is often the case for sales people.

For two other risk-related reasons, sales people can be a logical choice for C&E monitoring:

- Their incentives may not align well with those of their respective companies – a “moral hazard” condition.  (Indeed, in a risk assessment interview I conducted last week, the interviewee responded to a question about conflicts of interest by saying – only somewhat in jest – that the whole company sales force had such conflicts.)

- Sales people tend to be in a position to cause legal/ethical violations – e.g., corruption, collusion and fraud – much more than the average employee at a company.

But, while the case for monitoring sales people is strong as a general matter, obviously not all monitoring strategies are equally effective.  According to a paper published in the September 2014 issue of the Journal of Business Research, “Does transparency influence the ethical behavior of salespeople?” John E. Cicala, Alan J. Bush, Daniel L. Sherrell and George D. Deitz (rentable on Deep Dyve): “it is not the perception of visibility that drives sales persons behavior, but rather the perception of the likelihood of negative consequences resulting from management use of knowledge and information gained from technologically increased visibility.”

Of course, these results – based on an on-line survey which is described in the paper – presumably won’t surprise any C&E professionals. (Nor, likely, would they have impressed Mencken, who also said: “A professor must have a theory as a dog must have fleas” – although I should add that that’s just another chance to quote the great man – not a reflection of my view of this paper.) But, as with much of the social science research discussed in this blog, having data to back up what is intuitively known may be useful, particularly when seeking to make C&E reforms in a company that are being resisted.

Most relevant here is the often-contentious issue of how open a company is with its discipline for violations (meaning not just of sales persons but any employee).  While C&E professionals typically understand that true “public hangings” – i.e., full identification of individual transgressions and transgressors – can be undesirable for all sorts of reasons, there is still a lot that their respective companies can do in a general way to show that   negative consequences do exist for breaches of C&E  standards. Hopefully, this new research can help C&E professionals make such a case.

Liability for faking compliance – a new-fashioned type of deterrence?

I have long felt that C&E programs should do more to appeal to the better angels of our nature. (For more information on how “pro-social” qualities can be built on to promote more ethical workplaces, see this research page from the Ethical Systems web site.) But at the end of the day there will always be a place for good old-fashioned deterrence.

Deterrence, in the business realm, traditionally operates by punishing those who engage in conduct that harms others (e.g., corruption, collusion, pollution). But as C&E program expectations themselves become more central to promoting responsible behavior by companies,  it is inevitable that a more “upstream” form of deterrence should emerge – in which faking compliance is itself the punishable (or otherwise addressable) wrong.  Indeed, this could be considered “new-fashioned” type of deterrence.

The COI Blog has previously discussed two cases of this sort – one involving Goldman Sachs , the other S&P  – both having to do with allegedly false claims by the defendant firms that they had taken strong compliance measures against conflicts of interest.  And at the end of last month, another case was brought in which faking compliance was itself found to be a punishable wrong.

The case – In the Matter of Mark Sherman — can be found here, but readers may find more useful a post about it on the Harvard corporate governance blog by attorneys from the Ropes & Gray law firm.  As they note:

“On July 30, 2014, the Securities and Exchange Commission (“SEC”) advanced a novel theory of fraud against the former CEO (Marc Sherman) and CFO (Edward Cummings) of Quality Services Group, Inc. …, a Florida-based computer equipment company that filed for bankruptcy in 2009. The SEC alleged that the CEO misrepresented the extent of his involvement in evaluating internal controls and that the CEO and CFO knew of significant internal controls issues with the company’s inventory practices that they failed to disclose to investors and internal auditors. This case did not involve any restatement of financial statements or allegations of accounting fraud, merely disclosure issues around internal controls and involvement in a review of the same by senior management. The SEC’s approach has the potential to broaden practical exposure to liability for corporate officers who sign financial statements and certifications required under Section 302 of the Sarbanes-Oxley Act (‘SOX’). By advancing a theory of fraud premised on internal controls issues without establishing an actionable accounting misstatement, the SEC is continuing to demonstrate that it will extend the range of conduct for which it has historically pursued fraud claims against corporate officers.” (Emphasis added.)

Of course, there is much more that could be said about the various connections that the legal systems draws between violations of law and poor compliance than what’s in this and the other two cases mentioned above.  (See, for instance, this prior post about the SAC insider trading case brought last year - where the weakness of the company’s compliance program was used as a basis for finding corporate liability for insider trading by individual employees.) And, the notion of punishing fake (or otherwise weak) compliance efforts has long been part of enforcement strategies in highly regulated areas (e.g., broker-dealer compliance). But the Sherman case seems especially important, as it can be utilized in training corporate officers in public companies of all kinds on the need to be careful in executing their S-Ox certifications which, in turn, should lead them to have a greater appreciation of the value of strong compliance generally.

Finally, the Ropes & Gray post concludes with the following observation: “this case, which includes fraud charges in an accounting case without any restatement of financials, seems to represent an application of SEC’s ‘Broken Windows’ strategy first announced by Robert Khuzami and reiterated by Mary Jo White—to pursue small infractions on the theory that minor violations lead to larger ones—to the public company disclosure and accounting space.”  To this I would add that a “Broken Windows” strategy to preventing wrongdoing is also supported by behavioral ethics research (see this post ), and the Sherman case should also be a reminder for C&E officers to review whether their own companies’ deterrence systems  take this approach into account to a sufficient degree.

 

 

The Caterpillar criminal investigation: culture, risk and “informal” duties of trust

As described in an article in today’s Wall Street Journal  (which may require a subscription for access): “Ten thousand railcars a month roll into [the] sprawling [Terminal Island] port complex in Los Angeles County. While here, most are inspected by a subsidiary of Caterpillar Inc. [Progress Rail Services]. … When problems are found, the company repairs the railcars and charges the owner. Inspection workers, to hear some tell it, face pressure to produce billable repair work. Some workers have resorted to smashing brake parts with hammers, gouging wheels with chisels or using chains to yank handles loose, according to current and former employees. In a practice called ‘green repairs,’ they added, workers at times have replaced parts that weren’t broken and hid the old parts in their cars out of sight of auditors. One employee said he and others sometimes threw parts into the ocean.”

Caterpillar is being investigated by the US Attorney’s office in Los Angeles, and it should be emphasized that no charges have yet been brought.  Still, the article provides some nourishing food for thought about two key topics in the C&E field, as well as one narrower but, likely for some companies, dangerously under-appreciated risk.

First, there is the issue of culture.  As noted in the article, current and/or former employees told the Journal that while ‘[t]hey weren’t instructed to do [these things], …some managers made clear the workers would be replaced if they didn’t produce enough repair revenue…Current and former employees interviewed said those who found large numbers of parts to replace didn’t receive extra pay, but they tended to be favored by the supervisors and sometimes honored with employee-of-the-month recognition. Employees said newer workers sometimes learned bad habits from veterans. ‘I was trained to do everything the wrong way,’ one current worker said. ‘I basically fell into a bandit’s nest.’”

And then there’s this piece of information: “Three years ago, two workers who were fired from a Progress Rail repair shop in Florida filed lawsuits making allegations similar to what the U.S. attorney is looking into at Terminal Island…. A lawyer who represented the two said the suits were settled on terms that barred them from discussing the case.”

Again it should be emphasized that this is only an article – no charges have yet been brought.  But, if these allegations turn out to be founded, then clearly the culture in Caterpillar’s Progress Rail business will – under current enforcement policy – weigh in favor of bringing criminal charges against the company, meaning, in the first instance, the Progress Rail subsidiary.

But what about Caterpillar itself?  Here, the key issue may turn on whether Caterpillar conducted a meaningful risk assessment after it bought Progress Rail in 2006. I recall, from various conferences at that time, that Caterpillar had a C&E officer and program  – and so if it did not look closely at Progress’s risks (then or since) a prosecutor might well wonder why.

Finally, besides broad lessons about culture and risk assessment, the Caterpillar matter – depending, of course, on how it turns out – may reinforce a narrow but important learning about risk for some companies.  That is, when a company expands its business from just manufacturing goods to providing services it often enters a new realm of risk – because its employees are effectively in a relationship of trust with customers that involves opportunities and motives to cheat beyond those in the context in which it is used to operating.  As described in an earlier post in Corporate Compliance Insights,   risk assessments typically should include “[e]xamining whether a company has any relationships (with customers or others) where the need for good faith and candor might not be sufficiently understood by employees or third parties acting on its behalf. Relationships such as these – which tend to involve a high degree of trust but not necessarily a formal fiduciary duty – may be rife with ethics risk potential.”

Businesses facing this risk typically should consider enhanced C&E mitigation measures, and as the Caterpillar matter progresses (pun not intended) it will be interesting to see what – if anything – the company did on this front. (For further reading on informal fiduciary duties  see this post. )

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 .

 

Gamblers, strippers, loss aversion and conflicts of interest

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

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

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

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

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

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

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

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

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

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

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