Disclosure and Management

In many instances, COIs are not categorically prohibited but rather required to be disclosed, so that the organization can consider whether to permit the COI, and, if so, under what terms and conditions. This section of the blog (and the sub-categories below) will explore a variety of issues related to these aspects of COI compliance.

Thanksgiving edition: conflicts of interest and cholesterol

For millions of individuals (including me) Thanksgiving is not only a time for giving thanks but also for thinking about cholesterol.  And  if guidelines recently issued by the American Heart Association and American College of Cardiology are followed, the number of us who use  statins – cholesterol reducing drugs – will increase substantially, as described in this piece from Forbes.   But as described in this piece in Time (and also in the Forbes article) “the chair of the panel responsible for the new advice, which many see as favorable to … statins, had previous ties to a number of drug makers that manufacture those very same medications,” as did six of the other fourteen members of the panel.

I should add that the financial ties were duly disclosed and applicable guidelines (issued by the Institute of Medicine) were complied with, in that the guidelines do not prohibit any such COIs – only COIs by a majority of members of a panel.  Still, one cannot help feel uneasy about this situation for several reasons.

First, with respect to the panel’s report, one should not assume that disclosure cures the COI.  Indeed, as described in earlier posts in this blog, behavioral ethics experiments have shown just the opposite – that disclosure may “license” conflicts-inspired decision making.

Second, it is not clear to what extent the disclosures here are sufficiently processed.  As described in this article in MedPage Today by a faculty member at Harvard Medical School: “[A]midst all the late-breaking clinical trial presentations and ask-the-expert sessions, what I didn’t hear were the speakers’ financial conflicts of interest. Don’t get me wrong — the AHA mandates that all speakers present a disclosure slide at the beginning of every talk, and this rule was reliably followed by all presenters … in the following manner: ‘Here are my disclosures’ — PowerPoint slide flashes on screen with a list of pharmaceutical/device companies. Yet, by the time the speaker finishes speaking those four words, the slide deck has already advanced to the next slide. I, and my fellow audience members, didn’t even have enough time to read the disclosures, let alone process them.”

Finally, and on a broader level, COIs of this sort could have a more pernicious effect beyond directly impacting the patients involved, because of the great extent to which health-care costs are borne by the country as a whole.  As discussed in this recent post:

–          there are certain challenges (such as climate change and public debt) that both pose great risks to society as a whole and will require broad-based sacrifice to successfully address; and

–          COIs can imperil the likelihood that all relevant parties will be willing to make such sacrifices.

Health care costs fit into this category, too, and, like the others, key players in these areas have, in my view, a higher (i.e., “Caesar’s wife”) duty when it comes to addressing COIs ethically.

Conflict of interview review processes

As prior posts have discussed, reviews of disclosed employee conflicts of interest pose a number of challenges. Disclosures may not truly mitigate conflicts.  Indeed, they may actually cause more wrongful COI-based conduct to occur than would be the case absent a disclosure.

Still, very few business organizations opt for a true “zero tolerance” approach to all COIs.  And for those that don’t, COI review processes are necessary for determining when a COI should be permitted to exist and under what conditions.

At a minimum, COI reviews should be conducted by an independent person or body.   Independence for these purposes means more than COI-free in the traditional sense.  It should also encompass the behavioral ethics concept of “motivated blindness,”  i.e., a reviewer should not be someone who may – due to the relationships involved – be inclined to approve a conflict-laden relationship or transaction.

For this reason, companies may wish to have COI reviews conducted by a C&E committee.  One obvious benefit to this approach is that there is “safety in numbers.” Another is that the committee will have or develop expertise (born of experience) in evaluating conflicts, which behavioral ethics research shows can be useful.    Offering less C&E protection – but still more than having COI reviews made by a line supervisor – is tasking a staff function, such as legal or HR,  for this job.

Of course, some companies do permit supervisors to approve COIs.  If this approach is adopted, companies should still seek to have a reasonable degree of rigor in the process by:

– requiring that any approvals be in writing and sought before engaging in a conflict-based transactions;

– providing and publicizing avenues for supervisors to ask questions of the C&E function when performing COI reviews; and

– including the issue of COI reviews in supervisor training – or, if this is impractical, providing written guidance (e.g., FAQs)  regarding such reviews.

Finally, companies should check on the supervisors’  actions in reviewing or approving COIs, such as through audits.

How Well Does Disclosure Really Mitigate Conflicts of Interest? (continued)

Earlier posts have questioned the efficacy of disclosure as a mitigant for COIs for several reasons:

Disclosure can “morally license” the conflicted party to act in a COI-based way.

– Individuals impacted by the COI may not fully understand /be aware of what is being disclosed.

– A “reverse conflicts of interest” could occur, meaning that an individual dealing with the conflicted party could over-compensate for it.

To this list a fourth area of concern should be added: “disclosure can place inappropriate pressure on the audience to heed the advice — for example, in order to avoid insinuating that the [disclosing party’s] advice has been corrupted,” as noted in this interview with Daylian Cain of Yale.

It is important to add that Cain (and the colleagues who collaborated in his research on conflicts) “still think that transparency is a good thing and agree that disclosure will surely be part of the solution. So now [they] are more focused on how to improve disclosure because the word is out that it is no panacea.”

But what does it mean to improve COI disclosure?

In the context of COIs in business organizations (the focus of this Blog), the issue is, I think, less a matter of how to improve disclosures themselves than how to improve the way in which disclosed COIs are addressed, with the possibilities including:

– Educating (through C&E training and other communications) those involved as to the generally under-appreciated dangers of COIs.

– Ensuring that decisions about COI waivers and COI management are made by those who are independent and possess relevant expertise (e.g., a C&E officer) – not line managers.

– Having a sufficiently rigorous COI management process.

Finally, the danger identified by Cain of, in effect, of feeling pressured to heed COI-based advice may seem inconsistent with the “reverse COI” concern of overcompensating for COIs.  But I think they are not inconsistent when viewed in their respective relevant contexts. That is, overcompensation is more likely to occur in the setting of a business organization  – with defined and enforced ethical standards regarding COIs, where one might be more concerned about looking bad to one’s colleagues (or bosses) than to the conflicted party.

More to come in future posts.

Conflicts of Interest in the News: A transaction “tainted by disloyalty”?

An earlier post described a lawsuit brought by shareholders of El Paso Corp. seeking to block an acquisition of that company by Kinder Morgan due to claimed COIs on the part of Goldman Sachs, which advised  El Paso on the transaction, and that company’s CEO.  Last week, the judge – Leo Strine of the Delaware Chancery Court  – refused to issue the requested injunction (a ruling that was expected – given the absence of a competing offer for El Paso), but also had harsh words for Goldman and the CEO, and left open the possibility of a claim for damages against them.

As described in these articles in the NY Times, Bloomberg, and the Wall Street Journal,  (which I draw from since the opinion itself hasn’t, as of this writing, been posted on the Court’s web site):

– The Court found that Goldman was clearly conflicted because at the time it advised El Paso in the negotiations with Kinder Morgan its private equity arm also owned  more than 19 percent of the latter company (and had two appointees on its board).  As noted in the Times piece, the court found that Goldman was not “capable of ignoring its $4 billion investment” in connection with providing this advice: “Goldman was fighting for every dollar, securing a $20 million fee for advising El Paso on the sale…if Goldman was so greedy for $20 million, it surely would be for $4 billion.”

– “While Morgan Stanley was hired as a second adviser to El Paso because of this conflict, [the judge noted that] Goldman also arranged the ‘remarkable feat’ of limiting the scope of Morgan Stanley’s engagement so that it got paid only if El Paso was sold but not if El Paso decided to engage in an alternative”  transaction.  In other words, the attempt to mitigate the COI was structurally defective (and, in my view, could be seen more as a proof of the COI than meaningful mitigation).  Moreover, as noted in the Bloomberg story, “Goldman Sachs was able to ‘exert influence’ on the sale to Kinder Morgan because the investment bank continued to advise on the [alternative transaction]. Goldman Sachs’s conflict was ‘real and potent, not merely potential,’ the judge wrote.”

– El Paso’s CEO – who had told Kinder Morgan, but not his own board, that he hoped to buy El Paso’s pipeline business from Kinder Morgan once the transaction was consummated – “inexplicably caved in to Kinder Morgan” in agreeing to the price of the transaction.  As described in the Times, the CEO “was supposed to be getting the maximum price for El Paso out of Kinder Morgan. Instead, [the judge] observed that [he] appeared more interested in currying Kinder Morgan’s favor in order to make this subsequent purchase.”

Although, as noted above, the judge denied the request for an injunction, the shareholders can still seek monetary damages if they can prove the transaction was “tainted by disloyalty,” which parts of the judge’s opinion certainly seem to suggest occurred.  And, the Times piece concludes that in light of two other recent cases involving claimed COIs by Goldman: “[I]t is hard to see why Goldman Sachs was willing to risk its reputation again for a $20 million fee.  While it will continue to dispute these facts and its liability exposure is limited [due to an indemnity], Goldman is most likely the biggest loser because of its continuing self-inflicted … reputational wounds. This is another black eye.”  Finally, the bank’s COI-related troubles are still not completely behind it: in addition to the continuation of the El Paso case, Goldman Sachs faces a lawsuit filed two weeks ago based on claimed COIs in another (completely unrelated) transaction.

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 the News: 011412 Edition

 

The two big COI news stories of the week were:

–  Economists Adopt New Disclosure Rules for Authors of Published Research.  The reforms follow “heavy scrutiny of economists’ conflicts of interest before the financial crash of 2008.”  This is a good (and certainly overdue) step (and sadly underscores how it often takes a scandal for COI-related reforms to be implemented).  Of course, disclosure by itself does not necessarily mitigate COIs.

Ties of FDA experts to pharma companies revealed. The “FDA asked outside experts in December to discuss the safety of birth control that contains the compound drospirenone, including Bayer’s Yaz and Yasmin. The panel decided by a four-vote margin that the benefit of pregnancy prevention from these pills outweighed their risk of dangerous blood clots. But according to court and public documents, three of the FDA’s 26 advisers had research or financial ties to Bayer. A fourth adviser had a connection to a manufacturer of generic copies of Yaz, Barr Laboratories, now part of Teva Pharmaceuticals. All four of these advisers voted that the drugs’ benefits outweighed risks, meaning the pills could stay on the market…” Beyond the impact on the decision at issue, one can imagine the harm that COIs of this sort have on public trust of the FDA.

Other news of the week concerns COIs and…

Government contractors.  This is an analysis from the Corporate Compliance Insights website of an important decision from the General Accounting Office concerning government contractors hiring former government officials, underscoring, among to other things, the need to do meaningful conflicts checks in hiring.

Journalists: “Next week, thousands of tech journalists will descend on Las Vegas to get a sneak peek at coming tech gadgets at the International Consumer Electronics Show.  Many will also probably come away with grab bags of goodies…The question, of course, is whether journalists can properly serve their readers when the industry is handing them bottles of top-shelf booze and pricey toys.”

Supreme Court Justices.  A tricky issue,  indeed: who decides COI issues for the court of last resort?

Regulators: “A former Securities and Exchange Commission official has agreed to pay a $50,000 fine for going through the revolving door and working for alleged Ponzi scheme mastermind Robert Allen Stanford after purportedly taking part in SEC decisions to not investigate Stanford, the Justice Department said Friday.” (Bad facts – but also an unusual case.)

And, thanks to Broc Romanek of the invaluable – particularly for securities and corporate lawyers – theCorporateCounsel.net for featuring our post on COIs in serving on other companies’ boards.  Apparently this was the occasion for much discussion there – and so we will return to the topic before not too long.

Coming up next week: more on COI risk assessment, moral hazard and a video coming attraction for a series on cognitive bias and “behavioral compliance and ethics.”

 

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. 

 

 

Weekend News Round-Up: How Conflicts of Interest Can Hurt

Probably the two most prominent COI stories recently in the news concern insider trading by members of Congress and  David Stern’s running both the NBA and one of its teams.

But the most instructive piece about COIs that I’ve seen in the past few days concerns a woman with MS learning from a state data base of pharma company payments to doctors that her physician had received more than $300,000 in such payments, with “the makers of the two drugs he had recommended to her listed as major contributors.”  She notes: “As a patient experiencing a neurological disease that has no known cause and no known cure, I expected my neurologist to be direct and honest with me. I expected honesty in interpreting my MRIs; in giving me a prognosis; in explaining his rationale behind treatment recommendations and in providing verifiable, scientific information about them; in educating me about MS; and in telling me about any conflicts of interest with drug companies. Actually, I expected that my neurologist would have no financial conflicts of interest whatsoever.”

The story powerfully illustrates the general point that COIs  can be devastating  to important  relationships of trust – and, as you can imagine, the woman found it impossible to continue receiving treatment from this doctor.

The story also shows that disclosure can be helpful, but note this conclusion. “At the end of [my conversation with my new doctor,] I asked if many patients inquire about possible conflicts of interest. He shook his head ‘no.’ I was the only one.”

 

“Reverse Conflicts of Interest”

Consider the following (disguised) case, from some years ago….

A company enters into a complex business arrangement where one of its managers has a relationship with the other entity.  The relationship is fully disclosed and approved pursuant to company policy on COI waivers.  After time, the arrangement runs into business difficulties.  Although the company has lived up to its contractual obligations, the other entity seems to feel that the company should have done more to make the arrangement work.  Based partly on that, some employees of the company question whether that entity had been promised more than was disclosed by the manager, causing the employees to take various defensive measures which put further strain on the arrangement. Ultimately, the arrangement collapses.

As a general matter, if properly disclosed and approved, some COIs can be waived (although some should not be permitted under any circumstances).  Such approvals can be either a true “green light” or subject to being managed on an ongoing basis, i.e., a “yellow light.”

Like many C&E-related determinations, this type of decision tends to be made based on a balancing of costs versus benefits (hopefully, with a reasonably high burden of showing that the latter outweigh the former).

The case above illustrates what I believe is a factor that should generally be considered by companies deciding whether to grant a COI waiver: whether there will be reasonable possibility of overcompensating for the COI in ways that are harmful to the company.  The potential for such “reverse COIs” could turn on many factors – perhaps most significantly, on the extent to which the contemplated relationship must rely on trust.  (That is, the greater the need for trust, the greater the possibility of suspicion – at least as a general matter.)

Historically, reverse COIs may not have been common.  But as sensitivity to COIs has grown dramatically over the past few years (the subject of a coming post), they seem more likely to occur than ever before, and should be on a company’s radar in making COI waiver determinations.