Individual and Organizational

Conflicts of interest in the press

One of the top COI stories of the past week concerned how ESPN’s financial relationship with the NFL  may have caused it to withdraw from  collaborating on a documentary about the league’s dealing with players’ traumatic head injuries.  Earlier in the month another sports news COI  issue – whether John Henry’s purchase of the Boston Globe would impact that paper’s coverage of the Red Sox, which Henry also owns – received a fair bit of attention. So did the purchase of the another paper  – the Washington Post by Amazon’s  Jeff Bezos,  which raised somewhat weightier COI concerns than did the Globe purchase.  This therefore seems like a good moment to take a look at press conflicts.

As with many areas of business-related conflicts,  press conflicts exist on two levels: organizational and individual.  Organizational conflicts arise out of the press ownership – e.g., the concern with the Henry and Bezos acquisitions, and other financial relationships at the entity level, e.g.,   ESPN’s deal to broadcast NFL games,  including, most obviously, relationships with advertisers. Of course, the more that newspapers are part of larger business entities, the greater the likelihood of such risks will be. With individual COI’s the interest is usually at the reporter (or perhaps editor or producer) level.

Additionally, in discerning the relevant ethical framework for press COIs  it is important to consider the press’s critical role in maintaining our democratic society.  That is, given that trust in the press is essential to maintaining that role – like other “market failures” discussed in this recent post – preventing harm to that trust arguably should not be left totally to the push and pull of market forces.   This would suggest the need for a strong legal or ethical approach to addressing COIs in the press.

However, any legal response of this sort would be problematic as a form of interference with press freedom.  For this reason, the  ethical (and compliance) measures to prevent COIs in the press should be especially potent.

This is not an area about which I had much prior knowledge, but I was pleased to learn that the NY Times has what appears to be a good set of standards  regarding COIs.  For instance, regarding advertising COI, the Times’ standards provide: “Our company and our local units treat advertisers as fairly and openly as they treat our audiences and news sources. The relationship between the company and advertisers rests on the understanding that news and advertising are separate – that those who deal with either one have distinct obligations and interests, and each group respects the other’s professional responsibilities” and goes on to set forth detailed guidance regarding a number of contexts in which the paper’s advertising and news functions might need to deal with each other.  With respect to individual COIs, the same source provides guidance on a)  journalists paying their own way to and at events they cover, b) receiving of gifts and entertainment;  c) steering clear of advice giving roles; d) entering competitions and contests; e) collaborations and testimonials;  f) public speaking and the receipt of speakers fees; g) family-based conflicts; h) financial conflicts; i) free-lance work; j) dealing with competitors; and k) social media use.

The Times standards make an interesting read for one who spends a lot of time reviewing C&E policies and procedures.  Indeed, it would be rare to find COI policies as detailed as these in the great majority of industries.

Needless to say, the Times is not unique in this respect. The BBC also has what seem to be a very comprehensive and rigorous set of COI standards for its journalists.   Of course, just as the map is not the territory, sound ethical policy and procedures are not the same as a full-fledged compliance and ethics program.  But they are a good foundation for one.

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For information on the larger world of ethics in journalism (beyond that of COIs) visit the website of the Center for Journalism at the University of Wisconsin’s School of Journalism.

“History doesn’t repeat itself, but it does rhyme”: more on Facebook

I was reminded of this famous saying of Mark Twain’s when reading the latest news about the now notorious Facebook IPO.

A prior post described allegations that the lead underwriter,  Morgan Stanley, apparently shared information about Facebook’s flagging prospects with some, but not all, customers before the IPO — a claim of COI that will now be tested in the courts.  In the past few days  a different COI issue has surfaced, with reports that  “eight of the top nine U.S. mutual funds with Facebook shares as a percentage of total assets are run by Morgan Stanley’s asset-management arm [which may be suggestive of a COI  because] Morgan Stanley had a crucial role in lining up orders for Facebook as the social-media company prepared to go public. It helped advise Facebook executives to increase the size and price of the IPO, despite warnings the company was making about its profit outlook. The New York securities firm, which declined to comment, took in $200 million in underwriting fees and trading profits, according to regulatory filings and people involved in the deal.”   As noted by one commentator, “the Morgan Stanley funds’ large stakes raise questions about whether the firm’s role as lead underwriter influenced [the funds’ investment] decisions.”

It should be stressed that no one apparently has proven an improper motive in the purchasing decisions in this instance.   But, as was stated more generally by another commentator: “Institutions that underwrite shares and buy them on behalf of individuals represent another of those too-big-to-fail conflicts of interest that no one seems bothered enough by to actually change. Until, of course, they get burned by one of these deals.”

A famous case in COI history where regulators were able to prove that a bank’s investment advisory business was polluted by other commercial considerations involved HP and Deutsche Bank. In 2003 the Securities and Exchange Commission brought charges against the advisory unit of the bank  where its “investment banking division was working for HP on [a] merger, and had intervened in [an asset management] proxy voting process on behalf of HP.” As stated by the SEC: “This created a material conflict of interest for [the advisory business], which had a fiduciary duty to act solely in the best interests of its advisory clients.”

And looking back further still… nearly ten years before this, one of my colleagues at NYU’s business school had penned a case study that eerily prefigured the HP/Deutsche Bank matter, for use in discussing how external forces could impact investment decisions made by fiduciaries.  Perhaps it was a work of pure imagination (I never asked him) but even at the time it seemed to have the ring of truth – and does even more so today.

Conflicts of Interest in the News: Private Equity

This week we’ve been looking at COI issues in different types of business organizations – first non-profits, then joint ventures and now private equity.

While the fight for the Republican nomination for President has occasioned unprecedented (and largely un-illuminating) public scrutiny of the private equity field (i.e., on a net basis, whether it destroys or creates jobs), of greater significance for that industry  are provisions in the Dodd-Frank Act that treat many private equity firms as investment advisors, and thereby impose  various compliance requirements.  And, according to this helpful client alert published by Latham & Watkins,   that new mandate has occasioned scrutiny by the Securities and Exchange Commission  of the following types of possible COIs in the life cycle of private equity funds: “Fund-Raising Stage. Does a firm use consistent and comparable valuation methods and disclose pricing methodologies? Is the valuation methodology documented? Is the firm a party to side letters with certain limited partners, giving them preferential treatment regarding expenses, services provided by related parties or access to co-investments? Are the terms of these side letters fully and fairly disclosed to other limited partners?  Is the firm seeking to raise more funds than it can effectively deploy in an effort to maximize management fees? Investment Stage.  How does the firm allocate investment opportunities between funds? Is co-investing allowed on a deal-by-deal basis, creating a risk that private equity professionals will cherry pick deals with the best prospects for the co-investment vehicle at the expense of the fund? Management Stage . Do investors receive accurate reports regarding fund performance? Does the firm selectively highlight only the most successful portfolio companies while ignoring or underweighting portfolio companies that underperform?  Are fees charged to portfolio companies (transactional, monitoring, consulting, directors) fairly determined, adequately disclosed and consistent with what investors agreed to at the outset of the partnership?  Exit Stage. Has there been an effort on behalf of fund managers not to divest portfolio companies to extend mature funds beyond their normal lives?  How are conflicts handled when portfolio companies are sold by a fund to an affiliated fund?”

This is quite a list – and creating appropriate standards and controls around all of these areas of possible conflict could be quite a task for some firms, although obviously many are not starting from scratch.  (Note:  for beginners, as well as others, an dispensable resource for learning more about private equity compliance programs is Doug Cornelius’ Compliance Building web site. )  Indeed, at least for financial services compliance officers, private equity should be a source of job creation for some time to come.

Conflicts of Interest in Joint Ventures – the Rights of “Consenting Adults”

This is the second post this week on COIs involving specific types of business organizations – the first post was on non-profits.  This coming weekend we’ll look at some of the COI stories that have been in the news of late and next week we will resume our series on ways to assess COI risks.

In an earlier post on the murky legal landscape regarding COIs we noted that the fiduciary duty of loyalty operates as a “default” in certain circumstances – imposing various COI-related obligations in the absence of an agreement to the contrary.  But when, one might ask, would anyone give up a duty to be treated in a less than loyal way?  One example lies in the area of joint ventures.

The governance and operation of JVs can certainly raise conflict of interest concerns. For an employee of  a JV’s co-owner who is either on the JV’s board or is seconded to the JV whose interests to be treated paramount?  Given the inherent tension in situations of this sort, those involved have good reason to clearly articulate applicable duties and expectations.

Indeed, as noted in recent Gibson Dunn publication Recent Trends in Joint Venture Governance : “Partners negotiating joint ventures are spending increasing amounts of time developing codes of conduct and policies regarding conflicts of interest.  These codes and policies are intended to legislate how business dealings between the joint venture company and a venture partner or its affiliates will be conducted and define the rights and responsibilities of the joint venture company and the venture partners regarding corporate opportunities.  They often reflect the nature of the industry in which the particular joint venture will operate.  In technical joint ventures, for example, the focus of conflict of interest policies is often the ownership, use and commercialization of intellectual property rights.”

Additionally JV agreements sometimes directly address – and waive – fiduciary duties.  As the Gibson Dunn publication further notes: “The managing boards of joint venture companies also owe fiduciary duties to the venture partners under applicable law.  But venture partners generally have a direct voice on the board.  In addition, when they enter into the venture, they have the opportunity to negotiate specific contractual rights designed to protect their interests.  In fact, in many circumstances, they will waive their common law or statutory fiduciary protections, relying instead on a set of negotiated contractual protections.”

Bottom line: JV owners are considered “consenting adults” who can not only waive individual COIs but the right to be treated in a loyal way by their directors and employees.

I should emphasize that there is a whole host of compliance risks in JVs beyond COI ones.  And this recent post in Corporate Compliance Insights  –  “Joint Ventures and Compliance Risks: The Under-Discovered Country”  identifies  three categories of measures that companies should take to promote C&E in JV’s in which they invest: screening the contemplated JV partners; structuring the JV agreement to promote compliance; and once the JV is operational, having a C&E officer work on an ongoing basis with key company personnel who serve as JV board members or seconded employees in senior positions to manage compliance.

Also, this week Compliance Week is running a story “JV Compliance Takes Varsity Skills”; it is for subscribers only so I can’t link to it, but mention it as further indication that C&E issues surrounding JVs are a hot topic these days.

Finally, related to the issue of COIs and JVs is this post concerning COIs arising from serving on another company’s board of directors.