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.

“Tailoring” the duty of loyalty

A prior post provided an overview of “corporate opportunities” – an important and somewhat distinct type of COI. Last week, writing in the Harvard Corporate Governance Blog, Gabriel Rauterberg of Michigan Law School and Eric Talley of Columbia Law School described some fascinating research they conducted regarding companies allowing their respective directors and officers to engage in conduct that would otherwise violate the corporate opportunities doctrine. The full paper is available for download here.

By way of introduction, they note that the duty of loyalty is widely perceived as “’immutable’—impervious to private efforts to dilute, tailor, or eliminate it.” However, the authors state: “That perception is false: Beginning in 2000, Delaware dramatically departed from longstanding tradition, amending its statutes to enable corporations to waive a critical component of loyalty—the corporate opportunity doctrine—which forbids corporate fiduciaries from appropriating new business prospects for themselves without first offering them to the company. From that moment forward, Delaware corporations and managers were free to contract out of a significant portion of the duty of loyalty…”

Rauterberg and Talley studied the experience of public companies that took this route. They found that literally thousands of companies adopted such waivers, showing: “Public companies have an enormous appetite for tailoring the duty of loyalty when freed to do so.” They further note that “there are…several plausible economic rationales for a corporation to embrace a COW [corporate opportunity waiver] for the sake of shareholder value. Indeed, in the years leading up to Delaware’s initial reform, a growing chorus of critics argued that the exacting requirements of the duty of loyalty had begun to impede corporations’ ability to raise capital, build efficient investor bases, and secure optimal management arrangements. This claim was based in part on the recognition that many then-emerging sources of capital, such as private equity, venture capital, or spin-off transactions may subject their financial sponsors to fiduciary duties in profound conflict with either their larger business plans or with fiduciary obligations they owe to other business entities.” The authors found as well that “COW adopters … tend to deliver larger overall market returns to their capital investors by comparison to other public companies….it does not appear that companies that execute waivers are systematically the unscrupulous bottom feeders of the corporate ecosystem.”  Finally, they assessed “whether the adoption of a waiver tends to add or dilute value on the margin, by analyzing market reactions to issuers’ first public disclosure of a COW. [Their] event study analysis reveals that market reactions are generally favorable, resulting in an average positive abnormal stock return of between 1.0 and 1.5 percent in the days immediately surrounding the announcement date…The positive market response does not seem sensitive to whether the waiver also covers officers and/or dominant shareholders…”

All told, Rauterberg and Talley present corporate opportunities waivers as often desirable based on the logic born of an efficient markets perspective.  This largely makes sense to me (although, as noted below, I have do have one area of concern about their analysis). Indeed, in an earlier post I argued that waivers of the duty of loyalty involving board representatives of joint venture partners were not troublesome, given that such partners can be seen as “consenting adults” in deciding whether a full-fledged duty of loyalty was indeed desirable in any given JV . Somewhat similarly, I’ve previously argued that client COIs arising from advertising agency mergers can readily be addressed by market forces.  (However, in other situations – particularly involving financial services professionals giving investment advice to retail clients – cutting back on the duty of loyalty seems less defensible.)

But, I am troubled by the above-noted part of the authors’ findings about officers, given that the legitimate need for a waiver should be less significant for an officer than for an outside director – as the latter is presumably more likely have business roles with other companies involving identifying business opportunities.  Also, I think (though am not sure) that the likelihood of harm flowing from a director’s usurpation of a corporate opportunity is less than that of an officer’s doing so, in that officers tend to be more knowledgeable about a company’s operations than are directors – and so on average would have the greater chance to misuse such knowledge in the pursuit of the corporate opportunity in question.

In effect, this aspect of the study’s findings can be seen as an effort to gauge the compliance and ethics risk assessment implicitly undertaken by shareholders of publicly traded companies when they learn of a COW.  Given how difficult  C&E risk assessments are even for professionals in the field, I wouldn’t view these particular findings as the final word on the downside of corporate opportunity waivers. Put otherwise, some markets are more efficient than others – and the C&E information market seems pretty inefficient to me, at least at this level of granularity.

Finally, a practice pointer for C&E officers. NYSE listing requirements (section 303A.10) strongly encourage (but do not actually require) companies to have corporate opportunities provisions in their codes of conduct, and a great many codes do this. However, if a company has adopted a COW then presumably it should  not to have such a provision, which could make the code seem deceptive.  For more on possible liability for making false claims about a company’s compliance standards  see this post.

Should there be an “Open Payments” Database for Healthcare Executives?

By Bill Sacks

[We are very pleased to have this guest post from Bill Sacks, Vice President, COI Management at HCCS.  He can be reached  at Bill.Sacks@healthstream.com.]

Many individuals personally involved in the healthcare industry are familiar with the “Open Payments” database published each year by the Center for Medicare and Medicaid Services (CMS). This database, sometimes referred to as the Physician “Sunshine” database, was created as a part of the Affordable Care Act in 2010, and requires that pharmaceutical companies and medical device manufacturers report payments made to physicians and teaching hospitals for services such as promotional talks, consulting, research and royalty agreements.

On June 30th this year, CMS released payment data covering the period from January 1, to December 31, 2015. Companies reported more than $7.5 billion in payments from 1,456 companies to 618,000 physicians and 1,110 Teaching Hospitals. Within two weeks, local newspapers around the country were reporting on payments to their local physicians with headlines like these:

“St. Louis area physicians dominate list of Missouri docs receiving industry money” (St. Louis Post Dispatch)

“Iowa doctors get more than $12.6 million in outside payments” (The Gazette)

“Analysis: More than 80 percent of doctors at three Arizona hospitals accept drug-company payments” (The Republic)

and

“South leads the nation in drug and device company payments to doctors” (USA Today)

The database is doing its job: It is bringing attention to payments made to physicians, giving patients the ability to take those payments into account when selecting a physician or a course of treatment, and possibly influencing whether a physician agrees to accept payments and valuable perks in the future.

However, lately I have seen some different types of headlines and stories:

“Hospital CEO in the hot seat over hefty outside board compensation

Medical Center CEO is under scrutiny for receiving $5 million in stock and cash in recent years for being a board member of companies that do business with the hospital.” (San Francisco Business Times)

and

“Conflict of interest: Academic leaders on US healthcare industry boards

Researchers looked at 279 academically affiliated directors on the boards of 442 companies in 2013. These leaders included 17 CEOs and 11 vice presidents or executive officers of health systems and hospitals, as well as 15 university presidents and eight medical school deans or presidents. On average, these leaders earned $193,000 a year and got at least 50,000 shares of stock in exchange for serving on the boards.

In total, they earned $55 million in compensation and owned roughly $60 million in stock options.” (FierceHealthcare)

 These articles reveal, on the basis of disclosures made by the executives themselves, payments from industry in the hundreds of thousands, and even millions of dollars for Board participation, consulting, and other services. These payments are made by the same companies that are required to report payments to physicians with the goal of eliminating, or at least mitigating, potential conflicts of interest. Yet there is no corresponding requirement that companies report payments to healthcare executives, who may, all things considered, have as great or greater influence on how healthcare dollars are spent.

It is highly unlikely that a mandate requiring that payments to healthcare executives be reported publicly would be proposed or acted on in an election year, but perhaps we should put the topic on the table for consideration at some point after the dust settles in November.

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.)

Inherent conflicts of interest and behavioral ethics

At his trial for Libor rigging, evidence was introduced last week that former trader Tom Hayes had told the Serious Frauds Office that “many of the people responsible for submitting panel banks’ Libor rates also traded products linked to the rate, creating an inherent conflict of interest” and that “’[n]ot even Mother Teresa wouldn’t manipulate Libor if she was trading it,…’”

While obviously somewhat self-serving, this colorful bit of analysis still  helps to underscore the overarching behavioral ethics point that to reduce the risk of ethical transgression often one cannot always count on the characters of those involved.  Rather, the situation will play the decisive role.

Inherent COIs are an instance of that. Granted, they are just one of many such types, but they may also be more common than most others, and hence worth further study.

And beyond an area of interest to behavioral ethicist scholars, seeing some COIs as being inherent (or near to inherent) can be useful to others, too, such as:

– C&E professionals, who should consider the category of inherent COIs in their risk assessments.

– Senior managers and directors, who should – as part of their C&E program oversight – make sure that nothing their company is doing or contemplating doing falls into (or anywhere near) this category of risk.

– Enforcement personnel, who often can find good fishing in the inherent COI waters.

– Individual business people, who – in making career decisions – should steer clear of jobs that could involve inherent conflicts of interest.

On this last point, Mr. Hayes would surely agree.

And on the point about the role of enforcement personnel, in my view the “fishing” shouldn’t be limited to those individuals who succumbed to the pull of the inherent COIs, but should also include the senior managers and directors who allowed the COIs to exist in their respective organizations. (For further reading on how a behavioral understanding of ethics and compliance should inform our approach to liability see this earlier post.)

(Thanks to Scott Killingsworth of the Bryan Cave law firm for letting me know about this story.)

The ethics of “backscratching”

The notion of reciprocity plays a foundational role in our ethical order. Most prominently, variations of the Golden Rule are evidently found in all of the world’s major religions.  Ethics-promoting reciprocity can be negative (“an eye for an eye”) or positive (“the best place for [an Eskimo] to store his surplus is in someone’s else’s stomach.) But, there are also the less ethically savory types – commonly referred to as “mutual backscratching,” but having other names too (my favorite being “the ledger system”).

This past weekend, the Wall Street Journal reported  that the “U.K.’s financial regulator on Friday said it is investigating a banking-industry practice known as ‘reciprocity,’ where investment banks bring rivals into deals in exchange for future business. The Financial Conduct Authority, in a paper detailing the scope of a wide-ranging review into possibly anticompetitive investment-banking practices, said it was investigating whether reciprocity ‘might restrict the entry or expansion of firms which are not party to these arrangements.’ The investigation into reciprocity comes after The Wall Street Journal reported in March on the widespread practice in Europe of investment banks doling out lucrative work to competitors, partly based on how much business they will receive in return.”

Not being a competition law expert, I don’t have a sense of what would need to be involved for this practice to rise to the level of a competition law violation, although I have to believe that occasional acts of “garden variety” reciprocity alone wouldn’t be enough to cross that line.  But in many circumstances – particularly involving “other people’s money” – the potential for a conflict of interest arising from reciprocity seems clear enough.

Consider two cases.  In the first, a bank needs legal services and a law firm needs banking services – both needs being purely internal – and each agrees to use the services of the other.  I see no COI there, as there are no interests for which a duty of loyalty are being compromised.

But in the second case, the law firm is recommending banking services to its clients, in return for the bank  recommending the firm to the bank’s clients. In circumstances of this type – of which many exist – there is the potential for a COI.

How much of a COI is presented will depend in part on whether the referring party has a fiduciary duty to the party receiving the referral.  Presumably the law firm would, and I imagine the bank would as well.   However, in other settings it is more doubtful – e.g., a plumbing supplies store referring a general contractor to a customer to reciprocate for the contractor’s referring her customers to it.

My own view is that there is some kind ethical duty here but not to the same extent as there would be for those who are paid to give unvarnished advice.  The ethical analysis might depend on how long the customer has been dealing with the store – and how much trust he has placed in it during the course of those dealings. Another factor might be how harmful a conflicted recommendation could be. (E.g., substitute “safety equipment” for “plumbing supplies” in the store case above, and you might get a different result.) For further reading on what an “informal” fiduciary duty might entail, please see this post.

From a psychological perspective, reciprocity may not feel like a COI because it does not involve the direct receipt of cash or other things of value – just as barter transactions may not feel as much like tax fraud as does not declaring cash income. A behavioral scientist might say that this increases the extent of ethical peril.

Finally, I believe that – whether based on a true fiduciary duty or some lesser obligation – these sorts of COI (like many others)  generally can be addressed by disclosure: that is, they are not inherently evil as some COIs are, as there will sometimes be quite legitimate reasons for the referral. This is especially true where the referring party’s knowledge of the abilities of the referred party comes from their having previously worked together. However, in all situations involving reciprocity COIs the burden is on the referring party to make sure that the disclosure is indeed meaningful.

For reading on a related topic, here  is a recent post on the issue of “referral fees.”

Can ethics be “unbundled” from business?

Imagine the following: You need to hire a lawyer to advise you on a complex and highly confidential corporate acquisition, but the one you’d most like to have is pretty pricey. You explain this to her and she proposes what she calls a “win-win” solution:  if you sign an engagement letter that broadly states that she need not act in your best interests while performing services for you she’ll discount her hourly rate by 25%.

Or, imagine that your doctor has two schedules of fees: a “full price” one for patients who want the doctor to prescribe medicine based purely on what’s in their best interests and a lower-cost “value plan” for those who agree that the doctor can receive money from pharma companies for prescribing their medicines. Like the lawyer, your doctor is offering to “unbundle” his professional ethical obligations from the other aspects of his service – as a way of saving you money.

You seek clarification from both of them – what will this mean for me?  They both have the same response: while we won’t promise to act in your best interest we will act in ways that are “suitable” for you.

Would you be tempted by either offer?

Note that it is doubtful that either arrangement would be considered lawful – certainly the medical one  wouldn’t be, and I doubt the lawyer one would be either (although professional ethics issues arising from providing unbundled legal services are somewhat complicated – as reflected in this piece in the ABA Journal).    But even if they were permissible it is hard to imagine clients and patients saying yes to such options, where the risk of betrayal is so clear-cut and the adverse impact of such could be so great.

Yet a less obvious but not at all hypothetical version of ethics unbundled from business is already standard operating procedure in large parts of the investment world, where some of those who give advice to investors about retirement accounts have been allowed to operate outside of a best-interests-of-the-client framework. The main argument for this state of affairs is that “Consumers Deserve Choices”,  as described in this recent article in Investment News – including the choice of low-cost/non-fiduciary advice.

Of course, not all business relationships warrant the imposition of fiduciary duties. With some, “the morals of the marketplace” – in the immortal words of Judge Benjamin Cardozo – may well be morality enough.  But the business of providing advice about retirement accounts would not seem to be in this category, given how much is at stake for retirees (and, in a sense, for society as a whole), and the massive conflicts of interest problems that have beset the financial services industry for decades.

However, change is in the air. As described by the director of policy research at Morningstar,  last week “the Department of Labor proposed an amendment to the fiduciary definition under ERISA, the Employee Retirement Income Security Act. In short, the proposal would require any individual receiving compensation for providing investment advice to a plan sponsor, plan participant, or IRA owner making a retirement investment decision to adhere to a series of fiduciary duties–that is, to act in the best interests of their clients. The rule is based, in part, on a Council of Economic Advisors analysis showing that when individuals receive what the White House calls ‘conflicted advice,’ they tend to enjoy lower investment returns.”

Note that the even the proposed rule does have some exceptions built into it. For instance, “you can call a broker to execute a trade without triggering fiduciary duties, you just can’t ask for advice,…” as noted in this article in Forbes.   There are other exceptions too.  But overall it is a big step forward.

At this risk of being repetitive, I definitely recognize that there are times when it may indeed make sense to “unbundle” what would otherwise be an ethical duty from a business relationship.  An example from an earlier post is that joint ventures partners may and sometimes do waive fiduciary duties expected of board members on the JV.

However, one would be hard-pressed to look at instances such as this – where the investors in question tend to be powerful and sophisticated – as being relevant to the reality faced by most individuals struggling to grow/maintain their retirement accounts. Like the lawyer and doctor examples at the beginning of the post, if you take ethics out of the equation for investment advice involving retirement, what’s left might well be worthless …or outright damaging.

 

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.)

 

Conflicts of interest disclosures, waivers, recusals … and fig leaves

Much of the most interesting  case law and social science research around conflicts of interest concerns the related topics of disclosure and waivers, some of which is discussed in the prior posts collected here.   Recusals are relevant to this general area, too, in that they represent an alternative to waiver as a response to a disclosed conflict.   Today, we look a bit deeper at two stories covered in earlier posts to see what they tell us about disclosures, waivers and recusals.

The first story concerns disclosure and waiver in the recent Royal Bank of Canada case.  The case is noteworthy because the court declined to find that generalized language in an engagement letter between the bank and its client concerning a possible conflict was sufficient to waive the actual conflict at issue there. (See discussion starting on page 71 of the court’s decision, which is available through the link immediately above.)

Of course, at least in some circumstances, COI waivers by sophisticated parties are acceptable.  But in all cases involving any ambiguity, whether from a legal or ethical perspective, the efficacy of disclosures should be closely scrutinized and common sense applied to the claim of waiver.   By common sense I mean asking: Would a rational party have waived the COI  knowing all the relevant facts? And where the COI at issue seems to have been genuinely harmful to the complaining party – which was evidently the situation in the Royal Bank of Canada case – the proponent of the waiver will often have a tough sell indeed.

The second story concerns an aspect of the investigation (that is part of the broader inquiry concerning Governor Chris Christie)  of the chair of the Port Authority of New York and New Jersey, who was also a partner in a law firm – as  previously discussed briefly here  and more fully in this New York Times story.   Specifically, a Port Authority matter came before the chair in which a client of his firm had a clear interest and, while the chair apparently recused himself from voting on the matter, according to sources in the Times story, he evidently still “made his support for the plan [at issue] known to his fellow commissioners and was involved in planning” relating to the matter.

As described by a historian of the Port Authority, Jameson Doig (an emeritus professor at Princeton), who was interviewed for the Times piece, “the recusal afforded [the chair] an ethical fig leaf. ‘And the fig leaf is not adequate’…”  Note that the historian’s analysis may not be the final word on this – given the official investigations.  But the logic of analyzing recusals (this one and others) through a substance-over-form lens (like that which was applied by the court in the Royal Bank of Canada case) seems compelling to me.

 

The science of disclosure gets more interesting – and useful for C&E programs

In “Nothing to Declare: Mandatory and Voluntary Disclosure Leads Advisors to Avoid Conflicts of Interest,” published last month in Psychological Science,    Sunita Sah   and George Loewenstein   note that “[p]rior research documents situations in which advisors— subject to unavoidable COIs—feel morally licensed to give more-biased advice when their conflict is disclosed,” as well other  factors suggesting that disclosure is often less of an effective mitigant than might be imagined.  (For more information on some of this research see this post on moral licensing and this one  on the pressure that individuals to whom disclosure is made might feel to accept the conflict.)  However, the authors argue – and support with the results of several experiments  that they conducted –   “[w]hen COIs are avoidable … the situation can change dramatically because the ability to avoid conflicts brings other motives into play.”

One of these motives is that “disclosure becomes a potential vehicle for demonstrating one’s own ethics …to signal to themselves and to others that they are honest and moral …and that they prioritize others’ interests over their own.”  A second motive is that “in many situations advisors benefit financially when advisees follow their advice… [and] disclosing the absence of conflicts increases the likelihood that the advice will be followed,…”

Sah and Loewenstein also note: “Evidence from the field complements [their] findings. The American Medical Student Association’s PharmFree Scorecards program (which grades COI policies at U.S. academic medical centers…) has been successful in encouraging many centers to implement stronger COI policies.  Similarly, mandatory disclosure of marketing costs for prescription drugs in the District of Columbia produced a downward trend in marketing expenditures by pharmaceutical companies, including gifts to physicians, from 2007 to 2010…”

The authors’ findings make sense to me.  Indeed, in one of the above-noted earlier posts I suggested that the research indicating that disclosure could be harmful in the professional advisor context because it creates pressure to accept the COI  may not apply to the same extent “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.”

That is, the first of the two motivations that Sah and Lowenstein identify as relevant to disclosure – the desire to show one’s trustworthiness – is likely to be a powerful force in many business organizations given the often strong enforcement of COI rules that began with the Sarbanes-Oxley Act and which is also supported  by the general importance of “organizational justice” to C&E program efficacy and the specific relevance of COI enforcement to organizational justice.  (The other motivation, however, is much less applicable outside of the professional advisor context, and indeed the notion of mandatory versus avoidable COIs may also be more relevant to the advisor context than for business organizations.)

So, the results of this study seem like good news.  But is it news that C&E professionals – who operate more in the business organization rather than in the professional advisor context – can use to make their companies’ C&E programs stronger?   Or, is it – as one C&E professional I know recently said of much behavioral ethics – the stuff of “parlor games”? (Note: I don’t agree with this critique, but it is worth noting that C&E practitioners, as a group, don’t seem to be doing much with behavioral ethics findings.)

I think that this knowledge can in fact be put to use for C&E purposes.   That is, it suggests that in policies, training and other C&E communications, companies should emphasize how timely and complete COI disclosure may be important to an employee’s being seen as trustworthy within an organization – as well as by other important parties (e.g., customers or suppliers).

More broadly, C&E professionals should find ways to address this motivation in helping employees understand the business case (in terms of their careers)  not just for full COI disclosure  but for ethical excellence  generally. Of course, this approach already exists to varying  modest degrees in some C&E programs, but there is plenty of room for many organizations to do more in this regard.