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.

Expert product reviews

In Expert Product Reviews and Conflict of InterestTom Hamami  writes: “Many firms that produce expert product reviews have a vested interest in increased consumption of the products they review. The classic example is the Michelin Guide, which reviews restaurants, originally conceived to stimulate usage of automobiles and therefore also demand for automobile-related goods and services. The result is a conflict of interest; such firms have financial incentive to give better reviews than products merit… [Hamami] compare[d] video game reviews from two sources: one a video game magazine owned by a game retailer and the other a game website that does not sell games. The goal of the research is to evaluate to what extent, if any, the retailer-owned outlet inflates its reviews in order to boost sales. …, [Hamami indeed found] some evidence of increased inflation in periods shortly following the release of a game’s corresponding piece of hardware. Other literature on this industry finds that reviews have the largest effect on the sales of low-quality games, and [indeed he finds] evidence of review inflation for [such] games. These results are consistent with theoretical predictions for a firm that optimizes the trade-off between sales revenue and the reputational costs associated with biasing reviews.” On the other hand, “somewhat surprisingly, [he finds] no evidence of seasonal variation despite the increased demand for video games in the fourth quarter of the year.”

So, a mixed picture – and one that is indeed consistent with the author’s review of relevant literature on COIs of this sort. E.g., one study finds “evidence of a strong positive influence of advertising on media coverage in the fashion journalism industry…” But another finds “minimal differences between the reviews of two wine publications, one of which accepts advertising and one of which does not…”

How much does this matter?

Assuming that the COI is disclosed or is otherwise apparent – as I imagine is so  in the great majority of cases – there is evidently no “information deficiency,” a key factor in evaluating both the likelihood and impact of a COI.  Nor do the COIs reviewed by Hamami seem to be of the sort that the average buyer cannot evaluate on her own (as might be true, for example, of pharmaceutical or complex financial products). Indeed, the very focus on “reputational costs” suggests that consumers do appreciate and take into account the negative impact of a COI on the publisher of product reviews.

But even disclosed and understood COIs generally do have a pernicious effect on our society, as they can contribute to the cynicism that many feel about the press and business world. I don t know how to weigh that against the other factors mentioned above, but it is certainly part of the picture.

 

Lawyers as compliance officers: a behavioral ethics perspective

What role do corporate lawyers play in preventing wrongdoing by executives in their client organizations? And how is this role impacted by behavioral ethics?

In “Behavioral Legal Ethics Lessons for Corporate Counsel,” to be published in the Case Western Reserve Law Review, Paula Schaefer of the University of Tennessee College of Law  first examines “the corporate lawyer’s consciously held conceptions and misconceptions about duty owed to her corporate client when company executives propose a plan that will create substantial liability for the company—when and if it is caught.” As she shows, lawyers often have an unduly limited view of what that duty is.

Schaefer next “turns to behavioral science and highlights some of the key factors that corporate attorneys are unconsciously influenced by as they try to decide how (or if) to address client conduct that may amount to a crime or fraud.” Those factors are:

Attorney self-interest. A key point on this: “Corporate advisors keep their jobs (as inside or outside counsel) when they keep executives happy; they do this by finding ways to implement corporate executives’ plans, and not by saying no.” Of course, on some level this is obvious but, based on the research of Tigran W. Eldred of New England Law School,  she notes that lawyers are often not aware of the extent to which self-interest corrupts the professional conduct of attorneys vis a vis clients.

Obedience Pressure. A key point here: “Obedience research explains the power an authority figure or colleagues have to influence bad advice.” The best-known study in this area is, of course, that conducted by Stanley Milgram, which measured the extent to which participants were willing to inflict shocks on apparent learners in the experiment when instructed to do so by an apparent authority figure and which demonstrated just how powerful obedience pressure could be. As Schaefer notes: “In the case of a corporate attorney addressing planned conduct that may be criminal or fraudulent, the authority figure is likely the corporate executive that the attorney reports to in the professional relationship.” And as she notes this is likely to create more pressure than the instruction of some man in a white coat in Milgram’s experiment.

Conformity Pressure. Here, Schaefer describes experiments by Solomon Asch concerning the extent to which the participants gave knowingly incorrect answers to a question because of the fact that other participants did so. The results showed a high degree of such correlation. As she notes: “Asch’s research should be particularly concerning for lawyers. For Asch’s subjects, the stakes were low—the subjects likely did not know the other participants in the study and had no ongoing relationship with them. Further, the right answer was black and white, and they still felt pressured to choose the wrong answer selected by the majority. For a corporate lawyer addressing possibly fraudulent or criminal conduct, the group (with whom she feels pressure to conform) might be fellow attorneys or other decision makers at the corporation.”

Partisan Bias. Schaefer writes: “The research reveals that partisanship makes it difficult for a lawyer to filter and interpret information objectively. One study found that students who participated in a moot court competition overwhelmingly perceived that their assigned side had the better case. In another study, subjects were asked to play the role of attorney for plaintiff or defendant in determining the settlement value of a case. Even though both sides received identical information, those who were randomly assigned to play the plaintiff predicted an award substantially higher than that predicted by the defendant.”

Schaefer next considers “interventions to combat a corporate attorney’s wrongful obedience and conformity.” All of these seem sound, but I don’t have space to discuss them here.

However, I do want to add that – although not the focus of Schaefer’s paper – the research may also be relevant to the longstanding debate about whether the general counsel or other member of the law department should serve as chief ethics and compliance officer (CECO)  or if the individual in that role should be independent with respect to reporting purposes. At least to me, the research suggests that it may be more difficult for in-house attorneys to rise above the potential conflicts in this role than is generally thought.

Of course, even an independent CECO would be subject to the various biases described in this article. However, they would still – in my view – stand a better chance of ethical success since the notion of independence is truly foundational to their role, i.e., there is presumably not the same confusion about their duty than Schaefer found was the case with in-house attorneys.

Finally, note that I am not saying that this means that the General Counsel can never serve in a CECO role – only that the implications of this research should be considered along with various other factors in determining what approach makes the most sense for a given company.

For further reading:

– The Legal Ethics Blog

– An earlier post from the COI Blog with a different view on lawyers as compliance officers

Trump’s hotel

As noted in the Washington Post last month: President Trump recently released financial disclosure forms which “show that the Trump International Hotel produced $41 million in revenue, which, according to CNN, brings to more than $80 million the total amount he has made from the property during his presidency. The hotel accounted for almost a tenth of his company’s revenue last year. High demand on the part of Republicans, lobbyists and foreign governments helps explain the hotel’s success. T-Mobile executives spent nearly $200,000 there as they sought approval for a merger with Sprint. A variety of foreign countries have held events at Trump International. The Trump Organization says it donates all the profits it makes from foreign governments. But the president, who has refused to divest from his company, undoubtedly still benefits from high, price-driving demand at his landmark property, not to mention the profits domestic lobbyists produce. For those seeking to influence the Trump administration, padding the president’s wallet with conspicuous spending at his hotel must seem like a viable strategy.”

But could a man apparently worth billions be influenced by a mere $200,000? When reading this story I was reminded of a study  from 2016 on the impact on prescription writing of pharma companies buying meals for doctors. One of the results was stunning: “As compared with the receipt of no industry-sponsored meals, we found that receipt of a single industry-sponsored meal, with a mean value of less than $20, was associated with prescription of the promoted brand-name drug at significantly higher rates to Medicare beneficiaries.” (Emphasis added.)

The last (for now) word on this subject goes to this timeless exchange: George Bernard Shaw: Madam, would you sleep with me for a million pounds? Actress: My goodness, Well, I’d certainly think about it. Shaw: Would you sleep with me for a pound? Actress: Certainly not! What kind of woman do you think I am?! Shaw: Madam, we’ve already established that. Now we are haggling about the price.

 

Conflicts of interest for “the little people”

The conclusion of the Mueller investigation does little to resolve the much broader set of concerns regarding President Trump’s conflicts of interest. These are too numerous to be chronicled on this site, but are being tracked on a weekly basis by the Sunlight Foundation, which even offers a searchable data base of Trump COIs. Additionally, a study recently conducted by USA Today showed that by failing to divest his various investments before taking office, Trump has created more than 1400 COIs.

The late Leona Helmsley is reported to have said that “only the little people pay taxes.” Trump’s view of COIs –  that the President can’t have one – while  similar in spirit to Helmsley’s timeless quip, is correct as a strictly legal matter.

As noted by USA Today: “There is no specific law that directly prohibits the president from owning any assets — whether real estate or anything else — that conflict with his official duties.” But the analysis is very different from an ethical perspective.

First, the foreseeable negative impact of a COI by a President is great. This is less a matter of the specific economic harm arising from an individual conflicted transaction as it is one of setting a bad example.

Justice Louis Brandeis famously said: “Our government is the potent, the omnipresent teacher. For good or for ill, it teaches the whole people by its example.” While Brandeis was speaking about violations of law the point seems just as applicable to ethics.

Indeed, I believe that the negative impact of presidential impunity regarding COIs is particularly worrisome in a way that is unique in our history.  In the coming years we will be compelled to make sacrifices to address increasingly urgent needs regarding climate change and public debt. If government’s motives on these and other subjects are subject to question due to COI’s then the (already small) likelihood of sufficient sacrifice being made is diminished. (For more on the link between morality-based sacrifice and the success of human societies see Jonathan Haidt’s The Righteous Mind.)

Second, the likelihood of a president having a COI  is – at least as a general matter —  very high. That is a function of the near-infinite breadth and depth of a president’s power to help or hinder various interests – which, in turn, can reward him for his action/inaction.

Several weeks ago the House of Representatives passed a wide-ranging bill that – among other things – would encourage presidents and vice presidents to divest assets or create of blind trusts, but the Republican leadership has pronounced the legislation “dead on arrival.” Given how many of the other provisions of this bill are controversial, maybe Congress should be focused more narrowly on what is truly an ethics no brainer.

 

Deadly – and small – gifts and entertainment

Virtually every conflict of interest policy contains monetary limits for individual acts of gift giving or entertainment, but not all seek to quantify how many of such acts are permitted to occur in a given time period. This issue was raised in a particularly grim way – as described in this article in MarketWatch – by a recent study which “found that both deaths from opioid overdose and opioid prescriptions rose in areas of the country where physicians received more opioid-related marketing from pharmaceutical companies, such as consulting fees and free meals,…”

Relevant to the specific issue in this post, Magdalena Cerdá, director of the Center on Opioid Epidemiology and Policy at NYU Langone Health and the senior author on the study, stated: “A lot of the discussion around the pharmaceutical industry has been around high value payments, but what seems to matter is really the number of times doctors interact with the pharmaceutical industry,… ‘A physician’s prescribing pattern could be influenced more by multiple inexpensive meals than a single high-value speaking fee,’ she noted.”

She also said: “’We think it’s because the more times physicians interact with someone from the pharmaceutical industry, the easier it is to build a relationship of trust,… ‘We in no way think the prescribing is some kind of nefarious intentional behavior by physicians. The fact that it is the frequent, low-level payments that have the most effect shows that it’s more unintentional ‘…” Of course, unintentional conflicts tend to be more difficult to address than are intentional ones.

More generally, this finding  seems to me to be significant in a broad-based way as it presumably applies to other commercial contexts as well. And, compliance officers in all industries should make sure that their COI policies address not just high-value gifts and entertainment but also high volumes of such.

Our fiduciary future?

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.

 

Loyalty and conflicts of interest

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.

Expiration dates for conflicts of interest?

“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.

 

Comey, Mueller and conflicts of interest: a thought experiment

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.

The harm from conflicts you often can’t see

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.