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.

Tending to personal matters on company time

Last week the Institute of Business Ethics published its 2015 Ethics at Work survey of employees in the UK and Western Europe, available for free download here.  One of the findings was that “employees tend to be more lenient towards conducting personal activities during work hours, than other practices.”

For instance, in Western Europe (France, Germany, Italy and Spain), more than 90% of respondents found it unacceptable to pretend to be sick to take the  day off,  charge personal entertainment to their employer or engage in “minor fiddling of travel expenses.” Eighty-five percent thought it was not okay to “use company petrol for personal mileage” and 76% said the same of “favoring family or friends when recruiting or awarding contracts.” However, only 59% had such a view of using the internet for personal use during work hours and only 52% said that it was wrong for employees to make personal calls from work.

Frankly, I’m surprised that the disapproval percentages for the last two questions were as high as they were.  To the extent that respondents could tell (from instruction, context or otherwise) that they were part of an ethics survey perhaps that – based on the notion of “framing” –  played a role in the results. But regardless of this methodological quibble, the authors’ conclusions about employees’ views of personal use of company time and resources are almost surely sound.

In this connection, they note that the fairly widespread acceptability of “using the internet during hours is perhaps indicative of the way in which lines between work and home have increasingly become blurred over the past few years, as the 21st Century business landscape becomes increasingly mobile and flexible and less reliant on employees being physically present in the office.” This makes sense to me, and I think that a successful conflicts of interest/use of company  resources regime is one that accepts these (and other similar) modern realities.

That is, for many employees (particularly those with young children), a total bar on using phone or intranet for personal purposes is simply impractical, and thus cannot be a true ethical issue – as there is effectively no choice involved. The same is obviously not true with respect to fudging expenses or faking sick days.

The alternative, harsher view would be that embodied in a classic episode of the TV series The Office (the US one), concerning (among other things) a “time theft” policy applicable to the company – under which even a four-second yawn is seen as a transgression.  Besides being impractical and unfair, branding reasonable use of company time/facilities as morally wrong could actually lead to other, more worrisome wrongdoing – by making reasonable uses the first step on a “slippery slope,” as described here.

On the other hand, reasonable personal use really should be limited to uses that a) are truly personal, and do not further other business  interests; and b) cannot harm the company by subjecting its tangible or intangible property or other interests to risk. For instance, many years ago a client of mine learned that an employee was using company phones to run an “escort service.”  Although he apparently did so only during his lunch hour, the reputational harm to the company was clear enough to justify firing him.

Finally, and in a somewhat related vein, you might find of interest this prior post on the connections between ethical standards at work and those in our home lives.

More on conflicts of interest and corporate boards

Director COIs are in the news again.

First, the Wall Street Journal reported last week: “Generic-drug maker Mylan NV moved into new headquarters in December 2013 after buying vacant land in an office park near Pittsburgh and erecting a five-story building for about 700 employees. The company hasn’t publicly disclosed that the office park’s main developer is Rodney Piatt, Mylan’s vice chairman, lead independent director and compensation-committee chief. The new headquarters was a big boost for the mixed-use real-estate development, called Southpointe II, where all the land has been sold and some of the last buildings are now rising.”  As the article further describes, Piatt sold his interest in two parcels to a business partner for nominal amounts,   who in turn sold the parcels to Mylan for several million dollars each, but that does not mean that Piatt received no benefit from the dealings: “Mylan’s decision to build the new headquarters may have helped boost the value of Mr. Piatt’s other holdings in [the development]. After local officials in 2011 approved permits and rezoning for a plan that included the headquarters, a firm managed by Mr. Piatt sold a nearby hotel for $14.8 million, property records show. Mylan’s plans helped spur interest from retailers to sign leases, says… the business partner of Mr. Piatt. ‘The more people there are in offices, the more demand there is for lunches’ and other services,… .”

While there is presumably more to this story than what appears in the article, it is hard to argue with the take of corporate governance expert Charles Elson: “’The optics are terrible. Pittsburgh is a big town with no shortage of real estate. Either they could have gone somewhere else, or [Mr. Piatt] could have relinquished the directorship and eliminated the conflict.’”

The second article – which appeared this past weekend in the New York Times –  is no less interesting: “Consider a document recently filed in a 2013 shareholder lawsuit against directors of Dish Network, the television provider based in Englewood, Colo., which contends that the company’s co-opted board cost its investors at least $800 million in one recent episode. The document also provides some seriously good, well, dish on personal and family ties between Charles W. Ergen, the company’s co-founder and chief executive, and two Dish directors the company identifies as independent in its regulatory filings. Lawyers for Dish shareholders found, for example, that the family of Tom A. Ortolf, a director who is head of CMC, a private investment firm, has taken numerous hiking trips with Mr. Ergen’s family. Another fun fact unearthed in the case: Four invitees to a 17-person bachelor party for Mr. Ortolf’s son were Ergen family members. Then there’s the note Mr. Ortolf sent after Mr. Ergen offered two Super Bowl tickets. “I love you man!” the director exulted. George Rogers Brokaw, a managing partner at Trafelet Brokaw & Company in New York, is another independent Dish director with personal ties to Mr. Ergen. Mr. Brokaw’s family hosted members of the Ergen clan at their homes in New York City and the Hamptons, the lawsuit says. Mr. Brokaw also provided advice on a job search to one of Mr. Ergen’s children. Cantey Ergen, Mr. Ergen’s wife and a Dish co-founder who is also a director at the company, is godmother to Mr. Brokaw’s son.” The Times piece further describes: “The close relationships between Mr. Ergen and his directors might not have mattered so much if not for a private investment he made in 2012 [which, the shareholders contend in their suit, represents a usurpation of a “corporate opportunity” belonging to the company] “that could generate personal profits for Mr. Ergen of perhaps $800 million. After shareholders sued, contending that the transaction was a breach of the chief executive’s duty to Dish, a special litigation committee of the company’s board was formed to investigate the deal. As it turned out, Mr. Ortolf and Mr. Brokaw were appointed to two of the committee’s three posts.”

There’s lots to be said about director conflicts  (see prior posts collected here ) but perhaps the overarching point is that a big part of the reason that the position of corporate director exists is to ameliorate the conflict-of-interest-like “agency problem” that comes from executives managing other people’s (i.e., shareholders’) money.  Since directors’ COIs can raise questions about the ability of a board to perform this vital function, they can be especially pernicious.  For this reason, it is part of a director’s job,  I believe, to avoid situations that  give governance experts like Charles Elson just cause to berate them publicly for creating terrible optics, as he did the Mylan directors.  Put otherwise,  directors have to be attentive not only to actual COIs but apparent ones too.

Of course, every member of a public company board would swear that they are familiar with this principle.  But what is less well appreciated is just how difficult mitigating an apparent conflict can be – and particularly so for powerful people with complex business dealings. For more on what is involved in mitigating apparent COIs see this earlier post.  On the other hand, maybe the Mylan board did understand how challenging mitigating the apparent COI facing them would be, and so opted for non-disclosure. Of course, once uncovered, non-disclosure itself contributes to the appearance of wrongdoing.

Turning to the other case of the week, while the Dish directors might feel that the various purely social ties described in the Times piece are not the stuff of conflicts, the conception of COIs under Delaware law does indeed encompass non-financial relationships, as established by an important (but sometimes forgotten) case in 2003 involving the directors of Oracle. As  described in this article about fiduciary duties,  the court there  held that “a director must base his or her decision on the merits of the subject matter rather than ‘extraneous considerations or influences’ and that a director may be ‘compromised if he is beholden to an interested person.’ Most importantly, the court stated that ‘[b]eholden in this sense does not mean just owing in the financial sense, it can also flow out of ‘personal or other relationships’ to the interested party.”

Future conflicts of interest

First, a plug: at the upcoming annual conference of the Ethics and Compliance Officer Association , I’ll be speaking on a panel on “A view from the edge: exploring the future of ethics and compliance.”  It is a topic I addressed at the very first ECOA conference – held in 1992, when the organization had a grand total of 19 members and the entire C&E field was so new.  I hope to see you at this year’s event, which will be held next month in Dallas.

Second, the COI story of the week – is also about the future. It concerns the Clinton Global Initiative (CGI) accepting contributions from foreign governments, notwithstanding the prospect that Hillary Clinton will run for President.  When she was Secretary of State, the organization did not take such donations, but they lifted the ban when she resigned from that post.

Of course, since she isn’t president, technically this isn’t an actual conflict.  Rather, it is a potential COI.

What’s the difference? As discussed in this earlier post: Potential conflicts refer, as a general matter, to situations that do not necessarily constitute or appear to constitute a COI but where there is a reasonable possibility of an actual or apparent COI coming into play.

As with the risk analysis of any COI, with potential COIs one should consider the dimensions of likelihood and impact.

On likelihood, there are actually two questions relevant to this inquiry. First, how likely is the COI-triggering event to happen?  Here, that event – Hillary becoming President – seems reasonably likely to occur. (The analysis might be different if we were dealing with a “Bernie Sanders Global Initiative,” or organization associated with another long-shot seeker of the office.)

Second, if the triggering event does occur, can effective mitigation measures then be implemented? That might be difficult in this instance because, if she did win the Presidency, presumably returning the donations to the foreign governments, though not impossible, would be pretty unpalatable – particularly if the money was already spent on the many critically important causes the CGI supports.

Finally, the potential impact of a COI seems high here as well.  That is, the donations from foreign governments could undermine the trust that the American people have in the President, and perhaps cause suspicion in other countries too.

So I agree that CGI should ban foreign government contributions.  But I also applaud the organization for its effective work on climate change (and in other areas), as the actual conflicting interest we have with future generations on that issue may be the greatest COI of all time.

(Some additional reading:

Two conflicts of the apocalypse.

Is the road to risk paved with good intentions?

COI policies for non-profits.)



Referral fees and conflicts of interest

The recent indictment of NY State Assembly Speaker Sheldon Silver on corruption charges has – at least for  the moment – focused some  attention on the age-old practice of “referral fees,” under which a lawyer or other professional receives compensation for referring an individual or entity to some other service provider.  In the Silver case, the (now ex-) Speaker received such fees from two different law firms.  As described in this piece in the NY Times , one of these firms –  “a  large personal injury law firm where he has worked for more than a decade” – paid him more than three million dollars based on  client referrals from a doctor whose research center had been given $500,000 in state grants orchestrated by Silver.  Another part of the prosecution’s case involves his receipt of referral fees from a real estate law firm to which he had steered clients and his performing official action to benefit those clients.

In both of these alleged schemes the principal victims were the taxpayers of NY, whose interests were subordinated to Silver’s personal interest. The element of harm to the two firms’ respective clients was less a part of the picture (although some harm could be presumed with the personal injury referral fees). But in a traditional referral fee situation the harm is principally and often entirely to the client.

Of course, it is not only lawyers who pay/receive referral fees – and who face ethical questions involving these practices.  For instance, architects must, as a matter of professional standards, disclose referral fees.  As noted in this Advisory Opinion from the American Institute of Architects: “It makes no difference under the disclosure rules whether the architect is certain that the contractor he recommends is the best one for the job or that he would make the same recommendation even if no referral fee were paid. Though the architect may be confident there is no actual conflict of interest, any referral fee is an interest substantial enough to create an appearance of partiality and is a factor about which the client is entitled to know.”

Legal and ethical issues regarding referral fees are disturbingly common in the medical profession.  For a discussion of the conflicts of interest inherent in such arrangements see this post  from Chris MacDonald’s excellent Business Ethics Blog: “If the person you’re relying on for advice is financially beholden to the person he or she is recommending, you have every reason to doubt that advice.”

Such practices are also common in the financial advisory services realm.  See this discussion of  relevant ethical standards,  and note that – as with doctors – these cases sometimes cross legal, as well as ethical, lines.

Finally, the regulation of referral fees in the legal profession has existed for many years. However, the area is increasingly complicated by the phenomenon of referrals being made by non-attorneys to law firms, as described in this paper by John Dzienkowski of the University of Texas School of Law.

Indeed, in my own practice I have been offered referral fees by vendors selling C&E products and services.  I always say No.  I’d like to think that my steadfastness is the result of being virtuous, but in reality, it is just a matter of common sense. That is, for clients or prospective clients to have to worry about whether my advice was tainted would be devastating to my business.  And no referral fee could ever compensate for that.


Risk assessments for office romances

Perhaps the most celebrated story ever about a love affair is Anna Karenina  and the story doesn’t end well – as the distraught heroine throws herself under a train.  Office romances typically don’t end that way, but they are not without risks – particularly those involving senior leaders.

This is indeed an oft-told tale. Here is an earlier post on “frisky executives” discussing one such case from 2012.  Others around that time involved the CEOs of Lockheed Martin and Best Buy. And the latest in this line concerns the CEO of Johnson Controls.

As described in this article of a few weeks ago in the Milwaukee Business Journal, that CEO “failed to inform the corporation’s audit committee about the potential conflict of interest in his extra-marital affair with a consultant hired by the company.”  The net result: a reduction “of his annual incentive performance plan payout to $3.92 million, down nearly $1 million.”

A few thoughts on this case, perhaps of use to any CEO conducting a pre-office affair risk assessment.

First, while the economic hit is high it seems justified for a high ranking official – anything less could be seen as a slap on the wrist. Indeed, one of the cases discussed in the “frisky executives” post also involved a million dollar penalty. So, don’t expect economic leniency.

Second, consider the risk to the other party. In the case of the Johnson Controls executive, she was a consultant in a firm that lost an apparently long standing client in the scandal. No surprise there either.

Finally, while disclosure is necessary it may not be sufficient to prevent harm.  That is because even if an actual COI can be avoided the appearance of a COI might be inescapable – as the natural suspicion among others in the workplace could be that with the relationship comes workplace favoritism. For more on how some  apparent COIs simply can’t be mitigated by disclosure see this post.

(Thanks to COI Blog reader Don Bauer for letting me know about this story.  And, happy new year to all.)


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.



C&E officer reporting relationships: a tale of two recent surveys

More than a decade ago, Iowa senator Charles Grassley famously said of a company’s general counsel also serving as its compliance officer: “It doesn’t take a pig farmer from Iowa to smell the stench of conflict in that arrangement,…” And since then, there has been a lively (albeit not always as colorfully expressed) debate involving C&E practitioners, lawyers and others concerning the issue of to whom should the C&E officer report.

Earlier this month a survey conducted by NYSE Governance Services and the SCCE  captured considerable attention in the C&E field with its finding that 38% of  persons “with overall responsibility for the compliance program” in their companies reported to the CEO, 19% reported to the board of directors and only 18% did so to the general counsel. This led the Wall Street Journal to proclaim: “Legal [is] losing its grip over risk and compliance.”

However, two caveats should be borne in mind here. First, the specific question in question – “To whom does the person with overall responsibility for the compliance program report?” – could be read to include merely informational reporting (i.e., the C&E officer meets periodically with the CEO) as opposed to the more significant administrative kind (i.e., the CEO is the supervisor of the C&E officer). Having heard  many C&E officers speak over the years about their reporting relationships in a way that uses the two types interchangeably I would be surprised if this ambiguity didn’t account for a slice (and perhaps a large one) of the CEO and BOD numbers.  Second, nearly a third of the survey respondents were from the “health care and social assistance fields” – which is much higher than the percentage of such organizations in the economy generally; this is significant because, for regulatory reasons, reporting to the BOD and CEO are more common than in these types of entities than in most others.

A less noticed but no less notable contribution to this debate was the report of a survey published only a few weeks earlier by Mitratech (a provider of  enterprise legal management solutions for legal departments).  While not posing the same question that the NYSE Governance Services one did, this report noted (among other things) that “[t]he legal department owns the enterprise compliance function in 40% of respondents’ organizations and owns a portion of compliance functions in another 24% of organizations” and also that “[t]he role of the legal department in enterprise compliance is increasing as the responsibilities of the Chief Compliance Officer (CCO) and General Counsel become more tightly intertwined.”  These results feel closer to the actual practices I’ve seen in business organizations than do those in the other survey.

Granted, I have never been a pig farmer from Iowa, but I have been around this issue for a long time (my first experience with it dating back to the mid-1990’s when I was asked by a client whether the C&E officer should report to the GC or its Chief Operating Officer). Based on my experience since then, I can say with some confidence that there is no one-size-fits-all approach to the question of to whom the C&E officer should report.

Certainly, in a company where the GC herself is likely to be a source of risk then the case for independent reporting is clear enough. (This is not about the GC being honest as an individual but, rather,  giving advice regarding or otherwise playing a role in company activities that are relatively likely to be scrutinized in an enforcement context.)   Also, in industries where the government has expressed a preference for not including the GC in the C&E officer’s line of administrative reporting, then that is entitled to a fair bit weight. And, where employees are likely to see the GC as an aggressive defender of the company’s interests – which is sometimes the case where the company is the subject of high-profile litigation – then having the C&E officer subordinate to the GC could inhibit employees reporting suspected wrongdoing.

But there are many other situations where not reporting to the GC would effectively make the C&E officer an organizational “orphan,” because the CEO or BOD – who have a  vast array of responsibilities – would in fact do less for her (and the program) than would a GC whose duties and skill set naturally lend themselves to promoting C&E.   Indeed, I recall one case where the C&E officer did in fact report administratively to the audit committee;  it was a well-intended approach, but the committee gave him little day-to-day guidance, which sadly seemed to contribute to his losing his job. More generally, as C&E program requirements increasingly become part of the sinews of US business law (a trend that seems inevitable), then the case for administrative reporting to the GC may actually be enhanced.

Finally, even if a company does opt for this latter approach, care must be taken to protect the C&E officer’s independence – both actual and apparent – through other means.  One of these is having her reporting periodically to the relevant BOD committee in executive session.  Another is to provide that the C&E officer’s duties and compensation cannot be adversely affected without prior approval of such committee.  Finally, a GC to whom a C&E officer reports should take steps to ensure program independence by other members of the law department – such as through training them on their “reporting up” obligations under S-Ox section 307.

(For additional reading on BOD oversight of C&E programs please see this post by my partner Rebecca Walker and me on the Harvard Law School corporate governance blog.)

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.

Conflicts of interest and “the social nature of humans”

Private supply chain auditing continues to serve an increasingly important role in compliance and ethics efforts worldwide.  A recent working paper from the Harvard Business School  – “Monitoring the Monitors: How Social Factors Influence Supply Chain Auditors,” by  Jodi Short, Professor of Law at the University of California Hastings College of the Law; Michael Toffel of the Technology and Operations Management Unit at the Harvard Business School; and Andrea Hugill of the Strategy Unit at the Harvard Business School – examines various factors that impact the efficacy of such audits.  The paper can be downloaded from SSRN and a summary of it can be found on the Harvard Corporate Governance web site.

For this study, the authors conducted a review of “data for thousands of code-of-conduct audits conducted in over 60 countries between 2004 and 2009 by one of the world’s largest social auditing companies, …”  They found that “auditors’ decisions are shaped not only by the financial conflicts of interest that have been the focus of research to date, but also by social factors, including auditors’ experience, professional training, and gender; the gender diversity of their teams; and their repeated interactions with those whom they audit.”  The authors state that this  “finer-grained picture suggests that audit designers should moderate potential bias and increase audit reliability by considering the auditors’ characteristics and relationships that we found significantly influencing their decisions,” and also that these findings “should likewise inform the broader literature on private gatekeepers such as accountants and credit rating agencies.”

Indeed, and beyond the scope of the paper, a focus on social – and not just economic – ties may be key to assessing various  independence issues regarding boards of directors.  In an important decision from 2003 involving a derivative action brought by shareholders of Oracle Corp., then Vice Chancellor Leo Strine noted: “Delaware law should not be based on a reductionist view of human nature that simplifies human motivations on the lines of the least sophisticated notions of the law and economics movement.  Homo sapiens is not merely homo economicus.  We may be thankful that an array of other motivations exist that influence human behavior; not all are any better than greed or avarice, think of envy, to name just one.  But also think of motives like love, friendship, and collegiality, think of those among us who direct their behavior as best they can on a guiding creed or set of moral values,” adding, “[n]or should our law ignore the social nature of humans.”

Finally, thanks to friend of the blog Scott Killingsworth for recently reminding me of the Oracle decision;  here’s an earlier post about the Oracle case, albeit with a different focus; and here is a post briefly discussing (and linking to) a paper by Jon Haidt and colleagues about business ethics implications of a model of human nature called “Homo Duplex,”  a term coined by the sociologist/psychologist/philosopher Emile Durkheim, which posits that we operate on (or shift between) two levels: a lower one – which he deemed “the profane,” in which we largely pursue individual interests; and a higher – more group-focused – level, which he called “the sacred.”

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 .