When a COI has been disclosed and waived, often it must still be managed – meaning allowed to exist only subject to specified terms and conditions. This section of the blog will explore various issues relating to COI management.

If Trump becomes President

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.


What’s new in managing conflicts of interest

Most organizational or other types of ethical standards (e.g., professional ones) do not have a zero tolerance approach to COIs.  That is as it should be: many COIs can be managed without too much difficulty – and the benefits of a zero tolerance regime in these instances would likely be outweighed by the costs.  But sometimes managing a conflict of interest does pose considerable challenges, as illustrated by two recent stories from very different contexts.

First, as reported in the Wall Street Journal this past week: “At Hillary Clinton’s confirmation hearing for secretary of state, she promised she would take ‘extraordinary steps…to avoid even the appearance of a conflict of interest.’ Later, more than two dozen companies and groups and one foreign government paid former President Bill Clinton a total of more than $8 million to give speeches around the time they also had matters before Mrs. Clinton’s State Department, … Fifteen of them also donated a total of between $5 million and $15 million to the Bill, Hillary and Chelsea Clinton Foundation, the family’s charity, according to foundation disclosures. In several instances, State Department actions benefited those that paid Mr. Clinton…”

The Journal does caution that it is aware of no evidence of a quid pro quo involving the speech fees or donations. But still, and as described more fully in the piece, the appearance of COIs seems strong.

The story further describes how “[t]he Clintons struck an agreement with the Obama administration to allow State Department ethics officers to check for conflicts between speech sponsors and Mrs. Clinton’s government work….” Such reviews were conducted by career civil servants at State – not political appointees, and did result in a few speech requests being rejected, including potential appearances sponsored by North Korea, China and the Republic of Congo.

But while better than nothing, this hardly seems enough, as it is unrealistic to ask an employee of any organization to make a decision that could cost the head of the organization vast sums of money (through her marriage). While they may rise to the occasion when presented with truly egregious cases (e.g., taking money from the North Korean government),  preventing actual or apparent COIs requires a more effective compliance regime than this.  At least in the private sector, a COI-related decision about a CEO and her spouse would almost certainly involve the board of directors – as they are not subordinate to the CEO the way that an ethics officer is. Perhaps there is a lesson that the public sector can learn from the private one.

On the other hand, while clout is necessary for monitoring COIs effectively, it is generally not sufficient – and boards of directors don’t always do a good job in this area either.  A recent case from Delaware Supreme Court –  In re Rural/Metro Corp. Stockholders Litigation, as summarized in this post by an attorney from Orrick, Herrington & Sutcliffe on the Harvard Law School Forum on Corporate Governance and Financial Regulation  – underscores this.

The case involved conflicts of interest on the part of a financial advisor to a company (and not a CEO), the  specifics of which are less important (at least to me) than is the following italicized (by me) portion of that summary:  “While a board will not be liable any time it fails to discover conflicts of interest on the part of its financial advisors, the Court’s decision reaffirms that a board has an affirmative duty to take sufficient steps to uncover any conflicts of its advisors, including by requesting ongoing disclosure of material information that might impact the board’s decision-making process.” This is a technical compliance point, but an important one.

Indeed, requiring ongoing disclosure of COI-related information should be seen as a necessary component of any monitoring regime (not just those involving financial advisors).  But I would bet that many organizations – public and private – fall short in this regard. The holding should prompt C&E personnel to review monitoring related provisions of COI policies/procedures to see if the ongoing disclosure piece is adequate.

These are two very different stories – and two different lessons, one having to do with the “will” of COI mitigation and the other the “way.”  But together they help remind those involved in any aspect of monitoring COIs of the need to develop approaches that are truly up to the often difficult task at hand.

(For further reading on COI  disclosure and management see the posts collected here.)

Does disclosure really mitigate conflicts of interest?

The first posting in this series  on behavioral ethics provided an overview of that emerging and important area of knowledge and what it might mean for the C&E field.    In this post we examine what behavioral ethics teaches about COI-related compliance.

Conflict-of-interest compliance regimes are, for the most part, based on disclosure requirements.  That is, while some types of conflicting interests are prohibited in  all circumstances, a more common approach is to require appropriate disclosure of the interests in question (and, in some instances, approval from specified parties before the COI condition is permitted to continue).

But how effective is this way of addressing conflicts?  In “Disclosing Conflicts of Interest – Does Experience and Reputation Matter?, Christopher W. Koch and Carsten Schmidt (replicating the results of an earlier study – “The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest,”  by Daylian  M. Cain, George Loewenstein and Don A. Moore)  found that in some circumstances  disclosure could be a cause of, rather than cure for, unethical behavior: “information providers whose conflicts are not disclosed will feel morally bound to report accurately to information users, because they would consider it unfair to lie to someone who is unaware of the misalignment of incentives.  Disclosing conflicts of interest would have the effect of removing the moral bound and providing a moral license to misreport.”

The particulars of the experiments undertaken for these studies (Koch and Schmidt used an audit-related setting) are, in my view, less important for C&E professionals than is the larger message, which is that disclosure should not be considered a panacea for COIs.  We have already seen in the Blog how disclosure can be ineffective (when patients don’t use information from publicly accessible data bases of  pharma company payments to health care providers) or even lead to “reverse conflicts of interest.” The findings reported in these two papers suggest that even when disclosed and approved COIs may need to be actively managed (to the extent that can be done in a given set of circumstances).

Part of that process should be educating both the individuals with the COIs and those managing the COIs on the nature of the challenge facing them.  As described by Cain,  ,  people often fail to “understand how big a problem conflicts of interest” are and he further notes that COIs can affect the judgment of even well-meaning individuals, i.e., someone “need not be intentionally corrupt to have difficulty in objectively navigating a conflict of interest.” 

Finally, one unsurprising but still important aspect of this research is showing that disclosure is likely to be more effective as the level of relevant experience/expertise of the party to whom the disclosure grows.  This, in turn, suggests that COI approvals generally should not be made by line management alone, but should involve a C&E officer, who is likely to be a more sophisticated estimator of the impact of a COI in an organization.

Coming up: what  behavioral ethics teaches us about C&E risk assessment and training.


Conflicts of interest in serving on another company’s board of directors

Some codes of conduct and C&E policies and certifications identify outside board service as a potential COI.   What should an  analysis of COIs of this sort  entail?  This is a topic about which relatively little has apparently been published.  Below are links to some helpful resources on it combined with a few hopefully helpful thoughts of my own.

First, in this post on the Business Ethics Blog, Chris MacDonald notes that serving on a board typically involves significant compensation (and hence should be considered an interest for COI purposes); an individual’s board member duties could conflict with her employee duties if the entities in question did business with each other; and given the sheer time commitment expected of board service, there could be a significant time-management conflict in situations of this sort.  This is a good foundation for analyzing COIs in these types of situations, to which one might add that even where the two entities don’t do business with each other a conflict could arise if they both do business with a given third party, i.e., employee of Company A joins the board of Company B, which is seeking to do business with Company C, a supplier to Company A.  (This would not necessarily be a COI – but, depending on a variety of circumstances, might be one.)

Second, another valuable post on this topic comes from Meghan Daniels of SAI Global – who offers various questions companies might ask when considering whether to allow an employee to join the board of another entity based on: a) the employee’s role at the company; b) the time commitment involved in the contemplated board service; c) the status of the external company; and d) the relationship between the two entities.

Third, here is a useful code provision on board service from a publicly available code of conduct:

Entergy recognizes that there may be limited cases where it is in the Company’s best interest for you to hold a position on the board of directors of a for-profit entity not affiliated with Entergy. However, the position must not place you or the Company in a potential conflict of interests situation, must meet all regulatory and legal requirements, and must be appropriately disclosed to all relevant parties. There are certain laws and regulations that can impact this service and you must discuss the situation with your supervisor and receive appropriate approvals prior to taking action.

Two points about this language: a) the need to make disclosure to “all relevant parties” is important, as disclosing to the company alone might not be enough; b) the policy appropriately focuses on the company’s interest in deciding the issue at hand.  Note, too, that the laws and regulations referenced here may be largely specific to the industry that this company is in, and being familiar with any relevant laws applicable to one’s own organization can be critically important for addressing issues of this sort.

Fourth, worth considering  (although perhaps of less immediately obvious relevance to our topic) is a judicial  decision in a case called Raley  v. Superior Court.  In Raley, the Court ordered the disqualification of a lawyer’s firm  from participation in a litigation against a corporation that was owned by a  trust, the trustee of which was a bank on whose board the lawyer sat, based, in part, upon the fact that the lawyer’s fiduciary duties to the bank and trust  “require him to make every reasonable effort to maximize” the assets of the  trust, which could lead to his acting contrary to the firm’s client in the litigation.

As relevant to the issue addressed in this posting, this language underscores  just how strong the ethical and legal duty that arises from board service is – which, in turn could support a strict approach  to determining COIs when an employee of one entity seeks to serve on the board  of another.  The case is indeed a reminder that serving on a board is serious business,  and before agreeing to such service an individual – and, if relevant, her  employer – should think through all that that entails from an ethical and legal  perspective.

Fifth, in some situations a company might decide to permit an employee to join another company’s board subject to management of any COIs flowing therefrom.  If going this route, all concerned need to consider the implicatons vis a vis the confidentiality of the latter’s information.

Finally, I  should stress that there are a host of possible advantages to an organization in  having one of its employees serving on the board of another entity (as reflected in the language from the Entergy code).  Here is a good piece identifying some of those   and my post should not be read as suggesting any presumption against  permitting such service – it is offered only to help identify what some of the  relevant COI issues might be.

Conflicts of Interest in the News: 123011 Edition

This is not all the COI news that’s fit to print, but hopefully some items of interest that you might not otherwise see – with notes on why I think they’re noteworthy.

COIs and Government

NY State “Attorney  General Eric Schneiderman has asked the state’s 932 towns to show his office their ethics codes in an effort to bolster self-policing by local government.” As explained in the article, “one practical aim is providing the attorney general’s office with referral information for calls from New Yorkers with concerns, which have recently included questions about officials with connections to wind power and hydrofracking interests.”

This seems like an important initiative, given the COI risks that can occur on local levels of government – risks exacerbated by often weak controls.   Because, over the years, the NY AG’s office has been a leader in addressing many COI issues, I imagine that other states’ enforcement officials will be watching this effort as it unfolds.  The story may also be of particular interest to private sector organizations that deal with local governments.

A story about conflicts that occur when individuals have more than one government role   This not your typical public sector COI, which involves a conflict between a public duty and a private interest.  (But it is not altogether unique, either: NY’s legendary “Power Broker” Robert Moses  once held twelve public posts  at  the same time.)  More generally, the  story shows that an interest for COI purposes  can itself be a duty – something we’ll return to next week when we look at COIs arising from  outside board service.

COIs in Business

For Wall  Street Deal Makers, Sometimes It Pays to Be Bad (may require registration).  This is about COIs in the buy-out area –  which  can indeed be a COI minefield.  The story is  interesting for, among other reasons, showing the difficulties  that shareholders  can face in seeking redress for COIs in corporate governance settings.  (Also, this is the first time in my more than thirty  years as a lawyer that I’ve heard a court use the word “icky.” )

Drug company  money on rise for 2 Minn. clinics Among other things, the piece a) has an  interesting discussion of conflict of interest management plans, which can be  crucial for this one – very significant – type of COI; b) reveals a split in  approaches between the two institutions at issue (the Mayo Clinic and the University  of Minnesota) on whether to have a de minimis threshold for COI reviews. (Both COI management and de minimis COIs are topics we’ll explore in 2012.)

COIs and Criminal Law

Prosecutor’s  Literary Contract Creates Conflict of Interest. Even though he cancelled the contract  and returned the advance, the court held, “this is a bell that cannot be  unrung.”  Note that cases concerning COIs  in the legal profession are rarely useful for analyzing those in business  organizations, but this one may be an exception for at least some cases where a  party tries fecklessly to “undo” a COI.