Edited by Jeff Kaplan
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Conflicts
In this section of the blog (and the various sub-categories below) we will examine the many ways in which interests can conflict for COI purposes.
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There is, of course, no one body of law governing all conflict-of-interest issues. But the law regarding fiduciary duty comes closer to doing so than does any other body of law.
In “The Rise of Fiduciary Law,” recently posted on the Harvard Law School Forum on Corporate Governance and Financial Regulation, Professor Tamar Frankel of Boston University School of Law notes: Fiduciary rules appear in family law, surrogate decision-making, laws of agency, employment, pensions, remedies, banking, financial institutions, corporations, charities, not for profit organizations, medical services and international law. Fiduciary concepts guide areas of knowledge: economics, psychology; moral norms; and pluralism. Fiduciary law was recognized in Roman law and the British common law. It was embedded decades ago in religious Jewish, Christian, and Islamic laws. Internationally, fiduciary law appears in European, Chinese, Japanese and Indian laws.
Frankel traces the growth of fiduciary expectations to the increasing need in modern societies to share expertise while minimizing the risks that can arise from such sharing. Power can be used to benefit or harm. The recipients’ inability to check the experts’ power and services quality can result in suspicion and withdrawal from the expert. This result conflicts with society’s interests. After all, the financial, health, legal and education systems, to name a few, are built on offer and exchange of expertise. In response, fiduciary law establishes duty of care ensuring expert services and duty of loyalty prohibiting conflicting interests which undermine trust. Fiduciary law can entice and protect those who need expert services to rely and trust their experts. The lower the ability to check the experts’ expertise and honesty, the higher the fiduciary duty of experts and their punishment for abuse will be.
Looking forward, Frankel notes: The impact of fiduciary law is likely to rise. Fiduciary law issues are expanding. Inequality of knowledge and expertise exist and is likely to continue, depending on the degree to which those who rely on the experts can trust the experts, and the degree to which society benefits from this degree of trusting by expanding and exchanging knowledge and helpful services to its members….Regardless of whether they are enforced by law, by social rules, or by cultural pressures, fiduciary rules are a condition to the long-term well-being of a human society.
(For an earlier post on the many harms that can come from a COI-based lack of trust click here.)
For legislators, enforcement personnel and business leaders the lesson of this analysis is clear: fiduciary standards should be strongly defined and enforced. But what is the take-away for the fiduciaries themselves?
Frankel notes, in this regard: Fiduciary law should be based on one guiding test by a party that offers trusted fiduciary expert: “Would I, the trusted person, like to be treated the way I treat those who trust me?”
I understand and partly agree with this proposal, but also worry – based on behavioral ethics research showing that people often underestimate the impact on them of others’ wrongdoing – that it might not produce the desired result enough of the time. So, my friendly amendment is to put this suggested question into a third-party framework: Would the proposed action if taken by people generally tend to reduce trust generally in the context at issue? (E.g., would non-disclosure of a payment by a pharmaceutical manufacturer to a doctor tend to reduce the trust of patients in their doctors generally.)
Just to be clear, I am not advocating a rewrite of the Golden Rule. I am just suggesting that it can be easier to recognize vulnerabilities in others – i.e., people generally – than in ourselves, and this might be relevant to designing a guiding principle for fiduciaries.
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Movie mogul Samuel Goldwyn famously said “I’ll take fifty percent efficiency to get one hundred percent loyalty.” But too much loyalty may be bad for reasons that go beyond inefficiency, as indicated by President Trump’s call for then FRI director Comey to be loyal to him.
In Ethics for Adversaries, Arthur Isak Applbaum describes how many of the adversary systems with which we live – law, politics, and others – seem to license wrongdoing that would not be countenanced if done in other settings. As he notes, “[A]dversaries act for by acting against,” and this leads to a purported “division of moral labor” – with the expectation that some sort of equilibrium will arise therefrom. But, he says, acts that ordinarily would be morally forbidden – such as deception – should not be considered permissible merely because they are performed in a political or professional role.
The phenomena of loyalty can be thought of somewhat in the same way as adversarial norms in that, although the source of much good, it too can interfere with fairness and honesty in thought and deed.
In a piece in a recent issue of Forbes. Rob Asgar makes the following important points about loyalty:
– The “loyalty bind,” as some psychologists call it, keeps the members of an organization from being able to see tumors metastasizing in their midst. It’s what leads to scandals and cover-ups in churches, city halls, companies and ideological movements.
-The challenge is to move organizations away from the notion of loyalty to persons and toward the notion of loyalty toward first principles. These principles include transparency, integrity, accountability and a constant readiness to reform in whatever way necessary—no matter whose personal interests may be affected. This isn’t easy, because humans are tribal—we evolved to be in the society of other humans and to instinctively sacrifice our own safety in order to defend them against outside threats. The notion of defending shared principles came later, and it still hasn’t taken root fully.
– It’s something of a management cliché to suggest that good leaders inspire loyalty. But the reality is that it’s often the bad ones who focus on that. Good leaders inspire principled behavior, not loyalty or obedience.
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“The past is never dead. It is not even past…” wrote William Faulkner. Should something similar be said of conflicts of interest?
While this blog has addressed future COIs it has never previously done so with past ones. The latter was suggested to me by a recent posting in MedPage Today by Milton Packer MD, which posed the question: “Does a financial conflict of interest ever expire?” Doctor Packer – writing about COIs in the medical research realm – noted: “All organizations that worry about conflicts of interest have a ‘sunset’ provision. It is the identification of [a] date before which the influence of a prior relationship is deemed to be irrelevant. You can argue about whether it should be 1, 3, 5 or 20 years. But at some point in time, the influence of that relationship becomes negligible.”
However, formal sunset provisions of this sort do not necessarily exist in all COI management regimes. For instance, it would be rare to find one in a corporate code of conduct, although presumably organizations without such provisions would take the time factor into account in applying more general COI standards in their respective codes. The same might be the case regarding various professional services and other ethical standards.
So, what criteria should those handling conflicts of interest – either in drafting or applying COI policies – consider in determining whether a given COI is really “past”?
First, one should assess whether the COI at issue is based purely on the economics of the relationship or if “substance” comes into play. As a general matter, the logic of having an expiration date for a COI of the former sort seems sound, since the impact of receiving such a benefit would indeed tend to diminish over time. By contrast, where the COI is more qualitative – meaning based more on the substance of such work– then its influence is less likely to be negligible, particularly if the prior work is related to the contemplated opportunity.
Second, size matters. The larger the financial benefit in question, the further back one may need to go to reach a point where its influence is negligible.
Third, appearance matters. As a general matter, some types of COIs will seem more worrisome than others – particularly when they are difficult to evaluate by key constituencies.
Fourth, one should consider in these deliberations – as Doctor Packer’s post does – the implications of a given sunset provision vis a vis recruiting the most able individuals for the task at hand. I.e., the maximum ethical approach does not always yield the best results. While this consideration is of perhaps of most obvious relevance in designing or applying medical research COI regimes, it can come up in other contexts too.
Fifth, I’ve lumped a lot of things together in this short post, but want to emphasize that whether a COI should be deemed to be in the past may be a narrower test than what needs to be disclosed in the first instance. This distinction may be necessary to ensure that the party with the putatively past COI is in fact applying the applicable expiration date appropriately.
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According to an article published yesterday in Newsweek: “A majority of American voters believe that Russia investigation special counsel Robert Mueller and former FBI Director James Comey are friends, despite the fact the two men have never visited each other’s homes or spent much time together outside of work.” As noted in the piece by one individual who knows Comey well: the two are essentially no more than “cordial former colleagues…” Yet “[n]ew polling by Harvard’s Center for American Political Studies shows that 54 percent of Americans think their relationship amounts to a conflict of interest.”
Should this kind of relationship – meaning a professional or work-related friendship – be deemed a conflict of interest of the sort that would require Mueller’s removal from his position as Special Counsel? One way to analyze a possible COI standard in any given context is to ask if we would be willing to apply the same standard in other contexts, i.e., here, to ask if work-related friendships should generally be viewed as giving rise to COIs beyond the Special Counsel setting.
At least for me, that thought experiment leads to a pretty strong No. Among other things, I see a world in which supervisors and subordinates are discouraged from being friendly with each other, i.e., where workplace friendships are disqualifiers in terms of reporting relationships. In this imagined world, vendors would hesitate to act in a friendly way with their customers, as doing so could lead to a loss of business. I can also envision a host of undesirable consequences of viewing work-related friendships as COIs in other contexts – including scientific research, journalism and even corporate compliance. In short, this imagined world is colder and less productive than the actual one we inhabit.
Of course, not all friendships should be beyond the reach of COI scrutiny. The philosopher Mencius once said, “Friends are the siblings God never gave us,” and for friendships of that sort of depth and nature COI treatment is entirely appropriate. But the great majority of office friendships are not truly family like – and do not create conflicting loyalties of any significance.
More broadly, the issue of where to draw the line is already addressed in many codes of conduct, which do not deem all friendships as COI creating but only “close personal” ones. From what I know, that standard has worked well in organizations generally, and I see no reason to doubt that it would do so in the case at hand.
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A few days ago Newsweek ran a piece on the Trump family’s “endless conflicts of interest,” describing in detail several dozen actual, apparent and potential conflicts, and related ethical infirmities. Another such list is maintained and periodically updated by The Atlantic. The sheer volume of these cases is so overwhelming that it may be worthwhile to step back and consider what the harm from COIs is as a general matter.
Over the years, one of the themes of this blog has been that the harm caused by COIs is often significantly underappreciated. Some of these posts are collected here.
Broadly speaking, COIs often give rise to two categories of harm: they encourage people to make undesirable decisions and discourage them from making desirable ones, as described in this post. Neither type of harm is generally easy to spot but, of the two, the first – being incented to make bad decisions – is presumably more identifiable as a general matter than is the second – being discouraged from making good ones, as actions are typically more noticeable than inactions.
But an interesting and important case of the latter has been on display the past few days as Hui Chen – a highly regarded member of the compliance and ethics (“C&E”) community – has publicly explained her decision to leave her position as compliance counsel for the Justice Department’s Fraud Section. As described in The Washington Post : As a contractor for the Justice Department, Hui Chen would ask probing questions about companies’ inner workings to help determine whether they should be prosecuted for wrongdoing. But working in the Trump administration, Chen began to feel like a hypocrite. How could she ask companies about their conflicts of interest when the president was being sued over his? “How do I sit across the table from companies and ask about their policies on conflict of interest, when everybody had woken up and read the same news?” Chen said in an interview. “I didn’t want to be a part of the administration whose job it is to question others about these precise things.”
While this may seem like “inside baseball” to those outside of the C&E community, Hui Chen’s departure from Justice represents a loss for all who can be protected by strong C&E programs, meaning millions of shareholders, consumers, employees, taxpayers and others – in short, pretty much everyone.
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Paying hush money is big business, and hardly a day goes by without some press account of a company or powerful individual buying the silence of those with knowledge of wrongdoing. Sometimes this involves settling individual claims with confidentiality provisions – such as today’s story in the NY Times about the various settlements Fox News has paid to silence individuals who claimed they were sexually harassed by that organization’s Bill O’Reilly. But of perhaps of greater interest to C&E personnel (or at least to me) are what could be considered structural inhibitions on whistleblowing.
Andrew Call, Simi Kedia and Shivaram Rajgopal recently published research they conducted on the relationship between companies issuing stock grants to their employees and employees at such organizations reporting fraud. As described on HBR.org, the possible connection between receiving stock options and deciding to blow the whistle is twofold. First, “the value of stock options is directly tied to the value of the firm’s stock, and … whistleblowing allegations result in an immediate decline in the firm’s stock price, [so] employees stand to lose financially when they blow the whistle. In addition, employee stock options typically have vesting terms that require employees to wait a few years before they can exercise their options, which may act as a disincentive to blowing the whistle before they’re able to exercise their options.”
Their research approach and findings were as follows:
“Using a Stanford Law School database, we identified a sample of 663 firms that were alleged to have engaged in financial misreporting and were subject to class action shareholder litigation in U.S. federal court from 1996–2011. We examined the number of stock options granted to rank-and-file employees during the period of alleged misreporting, and we found that these firms granted more stock options during the misreporting period than did a benchmark sample of 663 similar firms that were not being investigated for financial misreporting. Option grants by these misreporting firms varied over time. Specifically, misreporting firms granted 14% more stock options to rank-and-file employees when they were allegedly misreporting their financials, but the number of options they granted decreased by 32% after they appeared to stop misreporting. These findings suggest that these firms granted additional stock options strategically during periods of alleged misreporting. We also found that these efforts are effective. Misreporting firms that granted more stock options to rank-and-file employees were less likely to be exposed by a whistleblower. Approximately 10% of the firms in our sample were subject to a whistleblowing allegation. Firms that avoided a whistleblower granted 78% more stock options than these firms did not.”
These are certainly interesting findings, although one wonders if the results would be similar with a study of exclusively post Dodd-Frank cases, given how that 2010 law has greatly enhanced the incentives for whistleblowing in public companies. I also have a hard time picturing a meeting of senior executives and human resources personnel agreeing to a strategy of using stock options to buy employee silence. It is essential to keep in mind that whistleblower retaliation charge can be applied to people who are potential whistleblowers. I’m not saying this never happens but doubt it happens a lot – given the personal risks that participating in such a scheme would create for those involved. However, I can definitely see how this would happen in the poorly lit realm of what is understood but not spoken.
Regardless of how this incentive manifests itself, I think C&E professionals should be aware of it in assessing and responding to the challenge of encouraging employees to internally report wrongdoing in their organizations. For some companies the key will be in increasing disincentives for not reporting, such as imposing serious economic penalties for senior managers on whose watch the wrongdoing occurred regardless of fault by such individuals. For other companies, softer incentives might be what is needed – such as the appeal to a “larger loyalty” described in this previous post on behavioral ethics and whistleblowing. For still others, having a “point of risk” communication strategy around the granting of the option – also a behavioral ethics inspired approach – might be what is called for.
Finally, the study also raises a different issue: should C&E personnel receive stock options? I know of no research on this issue, but this post – which explores the related area of incentive compensation for “governance monitors” (general counsel and internal auditors) – may be of interest to readers facing this issue in their organizations.
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“It could probably be shown by facts and figures that there is no distinctly native American criminal class except Congress,” Mark Twain famously wrote. Providing some of those facts and figures, Aaron D. Hill, Jason W. Ridge and Amy Ingram – in an article published yesterday in the Harvard Business Review – describe a growing conflict-of-interest problem in the US Congress, an important topic that these days is largely overshadowed by the COIs involving the President.
The authors set the stage by showing that there is now widespread ownership of stock by members of Congress: “the average S&P 500 firm in [their] sample has about seven members of Congress holding its stock. Some companies have closer to 100 members holding stock, and many firms have 50 or more in a given year.” They next show that “firms where a greater percentage of lawmakers invest have significantly higher performance in the subsequent year — with each percentage of congressional membership owning stock worth about a 1% improvement in” return on assets. “This suggests that politicians may be privy to nonpublic information about future regulatory or legislative actions that may prove helpful to these companies. It’s also possible that members of Congress use their influence to benefit the firms in which they invest. This finding dovetails with prior research that shows members of the House and Senate generate abnormally higher returns on their investments.”
Hmmm. Perhaps just a coincidence. (As Twain once noted in a different context: “What a delightful thing a coincidence is.”) But wait, there is more.
The authors also show that “firms are taking note of congressional investments in a couple of ways … paying close attention to public disclosure laws that require members of Congress to report their stock holdings annually… [and] also hiring private companies that specialize in a unique business: identifying who owns firms’ stock (among other political intelligence activities). Firms can use information about which members of Congress own their stock to minimize the intensity of their lobbying activity,… [b]ecause owning stock aligns the interests of the firms with those of their stock-holding lawmakers …companies that have congressional stockholders no longer need to spend as much money on lobbying to influence opinion.” One example of this: a “nearly three-quarter increase in members of Congress who held Apple stock from 2007 (22 people) to 2008 (38) was followed by a nearly 50% reduction in lobbying intensity the following year (2009).”
This is one of the most interesting use of facts and figures to show COIs that I’ve seen in a long time. Indeed, I think that, as a general matter, more needs to be done to understand not only the incentives that COIs can create but also the disincentives, as discussed in this recent post.
And, there is more still to what Hill, Ridge and Ingram have to say about Congressional COIs – both their consequences and also mitigation approaches. But for that you’ll need to read the original article, which I hope you’ll do.
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In the fourth volume of his biography of Lyndon Johnson Robert Caro describes how, once in office, the President put his extensive personal business interests into a blind trust… but also took steps to manage those interests on the sly, including having “a private line installed in the White House so he and the trustee could talk without their conversations being taped or made part of the official record.” What would a President Trump do from a conflict of interest perspective with his business interests – which are more varied and valuable than Johnson’s were?
At the outset, it should be noted that federal COI laws do not apply to Presidents, as described in this recent Wall Street Journal article. But, for ethical and presumably political reasons Presidents have sought to address actual, apparent and potential COIs through the use of blind trusts (or, in the case of Johnson, what might be called the appearance of a blind trust).
However, this approach doesn’t necessarily work for all types of property interests. As noted last month in an NPR story: “A blind trust works for liquid assets: stocks, bonds, other financial instruments. Trump has plenty of those, but his biggest assets are all about the Trump brand. The golf courses, high-rises and so forth can’t be easily unloaded. Dropping the Trump name would very likely reduce their value. Bowdoin College government professor Andrew Rudalevige said, ‘To put your identity into a blind trust is a little bit difficult.’ And as Washington ethics lawyer Ken Gross said, ‘You can’t get amnesia when you put it into a trust, and forget you own it.’”
What is Trump’s view of an acceptable blind trust to address these issues? According to the LA Times, he “has said repeatedly that he would have his children manage his enterprises if he became president,…” However, “experts doubt that would be enough distance to remove suspicion. The Office of Government Ethics, which oversees conduct for the executive branch, specifically states that a blind trustee cannot be a relative, and more generally warns about government officials’ actions that could benefit the financial interests of family members. Indeed, given that FCPA cases have been brought where the corrupt attempt to influence official conduct was hiring a government employee’s family member this does not seem like a cure at all. (The late Mayor Daley – when caught giving government business to a son – famously said, “If I can’t help my sons, then [my critics] can kiss my ass. I make no apologies to anyone.” Could anyone rule out a President Trump saying something similar?)
What might the actual COIs be in a Trump presidency? One interesting possibility was identified in an article in Mother Jones last month: “the presumptive GOP nominee …has a tremendous load of debt that includes five loans each over $50 million… Two of those megaloans are held by Deutsche Bank, which is based in Germany but has US subsidiaries. And this prompts a question that no other major American presidential candidate has had to face: What are the implications of the chief executive of the US government being in hock for $100 million (or more) to a foreign entity that has tried to evade laws aimed at curtailing risky financial shenanigans, that was recently caught manipulating markets around the world, and that attempts to influence the US government?” An interesting question indeed.
Would a President Trump be influenced by this potential COI? In light of some of the statements he made during the time he was “self funding” his campaign, it is clear that he believes financial ties can influence how politicians act. Moreover, given the behavioral ethics phenomenon of “loss aversion,” COIs arising from being in debt could be seen as potentially more impactful than are those involved with receiving contributions (although this is concededly a somewhat speculative observation).
This is just one potential COI. Others, according to the LA Times story, include “if a future Trump administration, for example, declared a parcel next to a Trump golf course as public land, causing the value of his golf property to triple; or if a President Trump had dealings with a leader of a foreign country where businessman Trump operates a casino.” And, from a story in The Real Deal: “The Trump Organization …has a 60-year lease with the federal government at a former Washington D.C. post office, where it developed and now operates the Trump International Hotel. If the hotel failed to make its lease payments or violated its lease in another way, would a federal agency be tasked with going after it and crossing the commander in chief?”
Additionally, while the federal COI statute does not, as mentioned above, apply to Presidents, other laws might be relevant to COI-type behaviors. As noted in The Real Deal: “If Trump does actually make it to the White House, one thing he’d need to examine is a little-known Constitutional provision called the Emoluments Clause. The clause — which dates back to 1787 and was meant to bar U.S. government officials and retired military personnel from accepting royal titles in foreign countries — has in recent years been interpreted far more broadly to ban accepting any kind of gift from a foreign entity. And the definition of ‘gift’ has also broadened in scope….For Trump, the provision could get him in hot water if, say, a foreign government offered a tax break to one of his overseas sites in a way that was perceived to be a gift or an act of favoritism. The GOP frontrunner owns golf courses in Ireland and Scotland (in addition to Florida, New Jersey and elsewhere), and while it’s not clear if the overseas holdings receive any tax breaks, many of his courses benefit from them stateside.”
Finally, note that I am not suggesting that this is good fodder for a political attack by the Democrats. Hillary has too many problems of her own COI-wise. Rather, I write because it certainly is interesting – and as challenging from a COI management perspective as any set for circumstances of which I’m aware.
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Perhaps the most interesting recent conflict of interest story in the US concerns the unfortunate impromptu meeting between Bill Clinton and Attorney General Loretta Lynch last week on the tarmac of an airport in Phoenix, when he – learning that she was nearby – boarded her plane to chat. Lynch has denied that there was any discussion between them of the Justice Department investigation of Hillary Clinton’s email use and both women have expressed regret from an appearance perspective that the meeting occurred at all.
As with most other postings in this blog arising from cases in the news, I’m less interested in faulting the individuals involved than in considering whether there is a broader lesson that C&E professionals can draw from these events. In particular, my interest is in what might be learned from Lynch’s involvement since, by all accounts of which I’m aware, she is highly ethical. (The same cannot be said about Bill Clinton.)
For me, the most useful learning here comes from the circumstances of the case – which, according to everything I’ve read about it, really did involve a chance encounter, at least from Lynch’s perspective. Of course, the particular circumstances are highly unusual, but viewed broadly, this sort of situation – meaning one where an individual must make an on-the-spot ethical decision with little time for reflection – is not at all uncommon. Among other settings, it can come up when an employee must decide whether to approve a questionable payment that is described by her boss as urgent, is given sensitive information by a competitor on an unsolicited basis or is asked by senior sales personnel to confirm to a prospective customer things that aren’t true.
When these or other ethical tests present themselves with little or no warning, the best protection for the individual being tested could be having strong ethical instincts. Simply recalling what company policies are may not be enough to do the trick.
However, such instincts cannot be summoned on command. Rather, they must evolve and be sustained over time. And for this companies (and other organizations, including governmental agencies) generally need strong – and culture-based – C&E programs. Indeed, one of the core goals of a culture-based C&E program should be having ethics operate on an instinct-like level.
Of course, one could argue that some forms of wrongdoing trigger instinctive revulsion in most people, without the need for C&E assistance. In the three examples described above, the one about lying to a prospective customer is most likely to do this, since honesty has been a core human value for millennia. The picture is somewhat less clear with the antitrust example – as accepted standards of conduct there are of much more recent vintage than are honesty-based expectations. Corruption – which was both prohibited and widely accepted for many centuries – probably lies somewhere between these two. But, for all of these and other forms of wrongdoing a strong ethical culture should increase the odds of any employee making the right decision when faced with an unexpected, high-stakes choice.
And what about the type of wrongdoing at issue in the Clinton-Lynch meeting which (assuming they did not in fact talk about the email investigation) should be seen as creating the appearance, if not the substance, of a COI? While COIs themselves have been seen as wrong since the time of the Bible (man cannot serve two masters), appearances of such are less likely to have reached the point where they trigger instinct-like negative responses. Thus, having strong ethical cultures may be necessary to reduce risks of this sort too.
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