Edited by Jeff Kaplan
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Industries and Professions
COI issues can vary considerably by industry , and the same can be said with respect to ethics standards for various professions (e.g., law, journalism). In this section of the blog we will seek to explore, among other things, broader lessons for business organizations that might be drawn from industry- and profession-specific COI matters.
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In today’s NY Times, Michael Greenstone, an economics professor at MIT, writes about a study on auditor COIs that he – together with Esther Duflo of M.I.T.; and Rohini Pande and Nicholas Ryan, both of Harvard – recently published. The study was conducted in Gujarat, India, where industrial plants with high pollution risks are required “to hire and pay auditors to check air and water pollution levels three times annually and then submit a yearly report to” a governmental body. In the study, for a randomly selected set of companies, but not for a control group, “auditors were paid a fixed fee from a central pool of money, a subset of the audits was chosen to have its findings re-examined, and auditors received payments for accurate reports, judged by comparisons with the re-examinations. The control group continued under the status quo system in which auditors were chosen and paid by the plants they were auditing.”
The results of this real-world experiment powerfully demonstrate the impact on the ethicality of conduct that financial incentives can have – even on the judgment of individuals who, by virtue of their professional norms, are supposed to be resistant to COIs. That is: “While many of the plants violated the pollution standards, few of the auditors in the control group reported these violations. In the case of particulate matter, an especially harmful air pollutant, auditors reported that only 7 percent of industrial plants violated the pollution standard. In reality, 59 percent of plants exceeded it.” However, “[t]he rules changes [in the experiment] caused the auditors to report more truthfully. In the restructured market, auditors were 80 percent less likely to falsely report a pollution reading as in compliance, and their reported pollution readings were 50 to 70 percent higher than when they were working in the status quo system. This difference was as large even when comparing reports of auditors working simultaneously under the two systems. Finally, and most important, the plants that were required to use the new auditing system significantly reduced their emissions of air and water pollution, relative to the plants operating in the status quo system. Presumably, this was because the plants’ operators understood that the regulators were receiving more accurate information and would follow up on it.”
Three comments on this important study.
First, while most directly relevant to auditors, these results can, I believe, be broadly applicable to COIs generally. That is, if professionals who are trained to rise above COIs fare this poorly, one can only imagine the impact of COIs on the rest of us.
Second, the more important compliance and ethics program efforts become to society, the greater the need for not just C&E auditing but other forms of checking – such as monitoring, as was discussed in a piece in Corporate Compliance Insights. But monitoring (as a general matter) is even less independent than is auditing, so this recent study underscores the considerable challenges for making forms of checking beyond auditing effective.
Third, research to determine “what works” is vitally important for the C&E field to mature and realize its full promise, and real-world studies such as this one can be particularly valuable in that regard. Interestingly, another article in today’s NY Times describes how in the UK there is now an government-run effort (headed by a “Behavioral Insights Team”) to use research to determine what works with respect to various public policies, including some compliance-related ones. I hope that the US and other countries will follow the UK’s lead here.
Finally, here is a prior post on auditor COIs.
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Employees generally owe duties of loyalty to their companies (at least under US law), but for some time whistleblowing has not seen as a breach of such duty. This was the underpinning of an important Supreme Court case thirty years ago – Dirks v SEC – which held that an employee who told a securities analyst about a fraud at the employee’s company had not breached a fiduciary duty to the company (and hence under applicable law the securities analyst could not be prosecuted for insider trading based on this disclosure). But not all duties of loyalty are the same, and lawyers (and other professionals) are typically seen as having a stronger duty in this area than are employees in general. Additionally, the related obligation to protect the confidentiality attorney-client privileged information is stronger than is the general obligation employees have to protect the confidential information of their employers. These differences, in turn, impact the analysis of whistleblowing by lawyers.
The propriety of attorney whistleblowing (in the US) is generally addressed by state bar ethics rules and also (to some extent) by SEC Rule 205 promulgated pursuant to the Sarbanes-Oxley Act. More recently, the prospect of an attorney blowing the whistle to recover a bounty for her efforts has been the subject of concern with the promulgation of Dodd-Frank Act whistleblower bounty provisions, which permit bounties of 10-30% of certain securities-law related recoveries by the SEC, CFTC or DOJ where a whistleblower’s “original information” contributed to the recovery. This latter type of whistleblowing was analyzed in an important (for attorneys, that is) opinion issued last month by the New York County Lawyers Association (“NYCLA”).
The Opinion notes initially that “SEC whistleblower rules exclude from the definition of ‘original information’ most material that lawyers, in-house or retained, are likely to gain in the course of their professional representation of clients, and thus generally preclude attorneys, in most instances, from receiving a bounty for revealing such information. SEC Rule 21F-4(b) acknowledges the importance of the attorney-client privilege, as well as state ethics rules, and presumptively excludes the use of privileged or confidential information from the definition of eligible original information under the whistleblower rule for protection for whistleblowers. Indeed, the SEC warns lawyers that there will be no financial benefit to lawyers who disclose such information in violation of the attorney-client privilege or their ethical requirements.” However, the above-mentioned requirements (concerning privilege and state ethical standards) are determined not by the SEC itself but by various state bar entities, like the NYCLA.
Turning to those state law requirements, the Opinion notes that under NY’s Rules of Professional Conduct (“RCP”) the situations in which a lawyer may disclose a client confidence are even narrower than they are under applicable SEC rules. Moreover, the RPC’s exceptions to confidentiality mandates generally permit disclosure only to the extent necessary to correct/prevent (the defined categories of) wrongful conduct – and seeking a whistleblower bounty would not seem to meet that requirement. Thus, even if permitted by SEC rules, the RPCs could independently prohibit a lawyer from seeking a whistleblower bounty in cases involving representation of a client.
Most significantly for the purpose of this blog, the NYCLA faced the issue: “Is a conflict of interest under RPC 1.7 presented when a corporate lawyer, functioning as a lawyer, seeks to collect a whistleblower bounty?” Their answer was presumptively yes. “A lawyer confronted with potential corporate wrongdoing must evaluate and consider varying requirements under SEC and state ethics rules and then make some difficult decisions: Is the potential violation material? Is the potential violation criminal? Should the lawyer report the wrongdoing up the corporate ladder? Should the lawyer report the wrongdoing to an outside body, and if so, when? These complex and potentially inconsistent considerations call for the exercise of objective, dispassionate professional judgment. A lawyer who blows the whistle prematurely could harm the client and be professionally responsible for the precipitous disclosure of client confidences. A lawyer who fails to report credible evidence of corporate wrongdoing up the ladder, if it amounts to an independent violation of the securities laws, could potentially be prosecuted by securities regulators, subject to professional discipline by the SEC, and subject to reciprocal discipline by state bar counsel. Especially under these delicate circumstances, a financial incentive [of the type offered by the Dodd-Frank bounty provisions] might tend to cloud a lawyer’s professional judgment.”
The NYCLA also noted that the ethical rules discussed in the Opinion “would not affect or apply to lawyers who are not representing, or did not represent clients. For example, a corporate officer or compliance officer who happens to be a lawyer may not necessarily be representing a client in the performance of his duties, depending on the facts of the individual case. To the extent that the lawyer is not representing a client, our opinion would not apply to that conduct simply because the lawyer happens to be a licensed attorney.”
For further reading…
Two points from earlier posts in this blog about attorneys, confidential information and compliance:
– While providing strong protection of the attorney-client privilege is sometimes seen as catering to corporate stonewalling, a more accurate view (to my mind) is that such protection encourages companies to get legal advice and thus promotes C&E – as discussed here.
– The fact that client confidences and relationships should be protected does not mean that lawyers have no right or obligation to report wrongdoing of any kind. See this prior post for a review of lawyer reporting obligations that do not involve client confidences – and how certain behavioral ethics factors can inhibit compliance with such duties.
A recent obituary for a famous whistleblower in the tobacco industry who was a paralegal, and whose disclosures included attorney-client communications.
And, a piece about comparative conflicts of interest analysis.
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Perhaps no types of conflicts of interest cast bigger shadows on the US ethical landscape than do those of doctors prescribing medicines based on the doctors’ economic interests and financial advisors giving investment advice motivated by their own, and not their clients’, economic interests. And now, these two COI giants seem to have joined together to form a new and particularly grotesque COI: doctors advising patients to sign up for medical credit cards where doing so benefits the doctor but causes economic harm to the patient.
As described in a NY Times editorial today: “Patients around the nation are being victimized by medical credit cards that can lead to financial calamity. These cards, issued by specialty finance companies as well as commercial banks, carry exorbitant interest rates after an initial period of zero interest expires — with heavy penalties for late payments. They are often pushed on patients with modest incomes by health care providers who want to make sure that they get paid, even if some of their patients end up with huge credit card bills they can’t afford. [It is] hard to imagine a situation in which a consumer is more susceptible to financial coercion by a provider with a conflict of interest.” As also described in the Times piece: “Numerous civil lawsuits have been brought by state authorities and lawyers for consumers against care providers and financial companies for misleading practices,” but the problem cries out for a national solution.
Meanwhile, efforts to find comprehensive solutions to the perils posed by the two COI titans proceed apace. With respect to medical doctors, the most important recent development on this front is the advent of the Sunshine Act earlier this year. Indeed, this new law may serve as an unprecedented test of Louis Brandeis’ famous saying that “[s]unlight is said to be the best of disinfectants,” and so should be of keen interest not only to C&E practitioners but also scholars in the business ethics field looking for data to analyze.
And a potentially significant step forward regarding conflicted financial advice is this report issued last week by the Financial Industry Regulatory Authority (“FINRA”). As described by FINRA’s Chairman and CEO Richard G. Ketchum: “While many firms have made progress in improving the way they manage conflicts, our review reveals that firms should do more,” and the report provides “examples of how some large broker-dealer firms address conflicts” including “identifying and managing conflicts on an ongoing basis through an enterprise-level approach that is scaled to the size and complexity of a firm’s business and that starts with a ‘tone from the top’ that carries through to the organization’s structures, policies, processes, training and culture; establishing new product review processes that include perspectives independent from the business proposing products, that identify potential conflicts raised by new products, that restrict distribution of products that may pose conflicts that cannot be effectively mitigated and that periodically re-assesses products through post-launch reviews; making independent decisions in the wealth management business about the products they offer without pressure to favor proprietary products or products for which the firm has revenue-sharing agreements; minimizing conflicts in compensation structures between customer and broker or firm interests where possible and including heightened supervision when conflicts remain; for example, around thresholds in a firm’s compensation structure; mitigating conflicts of interest through disclosures and other information that enables customers to understand the factors that may affect a product’s financial outcome—such as the use of scenarios and graphics for a particular product; and including ‘best-interest-of-the-customer’ standards in codes of conduct that apply to brokers’ personalized recommendations to retail customers in order to maintain and increase investor trust.”
The FINRA report is indeed a virtual encyclopedia of COIs involving brokers and sound mitigation measures addressed to such COIs. It is a must read not only for C&E professionals in the financial services industry but for COI aficionados of all kinds, and in future posts I hope to “mine” the report for mitigation ideas that could be useful in other contexts (perhaps even the credit card business).
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Last Friday, Dylan Byers’ Media Blog in Politico announced a new Conflict of Interest Series, noting: “Almost everywhere you look there’s someone in the media who’s ever more connected with the subjects they cover.” The Media Blog has indeed covered a number of potential COIs in this industry, including, most recently, those involving Stephanie Cutter and Newt Gingrich . While the specific topic of media COIs is, of course, noteworthy (and was indeed the subject of a recent post in these pages), more intriguing to me are the questions of why there should be a growing number of actual or perceived conflicts of interest involving journalism and what, if anything, should be done about it.
While it is conceivable that the reason for this possible increase in journalism-related COIs is that there are simply more media organizations than ever before – assuming that the number of cable TV and internet news sources has more than offset the steep decline in the number of newspapers – I think that the cause lies elsewhere: the involvement in journalism of individuals who are not professional journalists (as evidenced by the two examples cited above). Such individuals are not only more likely to have other (and potentially conflicting) interests than are full-time journalists, but they are also more likely to lack the ethical grounding relevant to their work that hopefully comes with being a professional.
This may sound snobby, but I should emphasize that I am not suggesting that professions consist only or even mainly of members of the ethics nobility. Indeed, over the past two years this blog has run numerous posts on ethical failures in various professions – including auditing, financial services , medicine , economics, law (my own profession) and even dentistry. Moreover, it is possible that the phenomenon of “moral compensation” – the behaviorist notion that moral behavior on one occasion can license other immoral behavior – has an adverse impact on ethics by professionals, i.e., the feeling that one is being ethical by following professional standards might make it easier to be unethical with respect to issues not clearly covered by such rules (although I should stress that I have not seen “moral compensation” studies addressed to this specific context).
But being in a profession does align one’s economic interest with professional ethical standards, in that the failure to abide by such standards creates more risks to the individual than it would for outsiders. Indeed, in a fascinating discussion last week led by Steve Priest at the annual conference of the Ethics & Compliance Officer Association it was evident that the emerging profession of C&E itself could benefit from a body of enforced professional standards.
And if there is a positive correlation between professionalism and ethicality (as on some level there must be) the type of shortfall discussed above in connection with media conflicts should also be of a concern in other contexts. An example of this might be the recent case from the UK in which a Big Four accounting firm took the position that its employees engaged in non-audit work needn’t be guided by the profession’s ethical standards – a pernicious view given the confusion that this could cause to those who dealt with the firm and one that justly helped earn the firm a record breaking fine from the Financial Reporting Council.
But it would be impossible to hold back whatever are the tides that seem to be causing an influx of non-professionals into some types of profession-based organizations. For this reason, entities that employ both sorts of workers should protect themselves – and those who rely on their presumptive professionalism – through implementing C&E programs (meaning more than just codes of conduct) that not only help to instill professional values through the entire workforces and but also to exercise resolve in enforcing those standards.
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Last week the Financial Reporting Council (FRC), the body that regulates the accounting profession in the UK, fined Deloitte L.L.P. £14 million pounds – a record setting penalty for that body – and issued the firm a severe reprimand, as well as fining a former director of the firm £250,000 and banning him from accounting work for three years. As described in the NY Times, the case arose from the firm’s work for MG Rover, a failed automaker, and for the “’Phoenix Four,’ four businessmen who took over the automaker in 2000 and ran it into the ground, taking out millions of pounds for themselves in highly dubious transactions before the company failed.” Although Deloitte had been the company’s auditor it was not the audits that were faulted but the corporate finance work run by the former director – particularly its “very prominent role” in some of the questionable transactions.
In the UK, “ethics rules require accountants to consider the ‘public interest’, but Deloitte argued that this duty was inapplicable to corporate finance work.” The FRC rejected this argument, noting that, among other things, the applicable rules make no such distinction. The FRC’s decision on this issue seems correct to me, as one can readily imagine the difficulty clients and others would have in trying to discern whether an employee of an accounting firm was in any given instance being guided by a very high standard of ethicality (as a public interest test entails) or something less. Indeed, the notion of an ethical carve out would tend to diminish the overall trust the public has in accountants, and that would be bad not only for the profession but – given the key role they play in various aspects of business life – the economy generally.
But is it possible to have an overly narrow view of self interest? Eddie Lampert of Sears may have had just that, as described by Jonathan Haidt and David Sloan Wilson in their new column for Forbes – “Darwin at Work.” The article is based in part on a recent profile of Lampert by Mina Kimes in Bloomberg BusinessWeek, which had noted: “’Lampert runs Sears like a hedge fund portfolio, with dozens of autonomous businesses competing for his attention and money. An outspoken advocate of free-market economics and fan of the novelist Ayn Rand, he created the model because he expected the invisible hand of the market to drive better results. If the company’s leaders were told to act selfishly, he argued, they would run their divisions in a rational manner, boosting overall performance.”
Haidt and Wilson write: “The results have been disastrous, in part because Lampert was ideologically committed to the metaphor of the invisible hand and the associated idea that people are purely selfish. Ideology is a lens – it makes some things more visible, others less so. Lampert’s ideology prevented him from seeing that he was destroying the invisible band – the bond that forms around groups that can trust each other and work together toward shared goals. Evolution is a different lens – one that we believe brings unparalleled focus and resolution when examining complex human systems. A brief look through the evolutionary lens would have made it obvious how dysfunctional Lampert’s reorganization was likely to be.”
They further note: “Evolution is all about competition, and the dramatic effects that competition has on the structure and behavior of organisms over time. But here’s the key idea: competition occurs at multiple levels simultaneously, and the winner at any one level generally succeeds by suppressing destructive forms of competition at the level below.” Finally, they suggest that “the next time someone suggests changing the organizational chart, incentives, or culture of your company to ‘align incentives’ or appeal to selfish interests, ask them if they have thought about the full range of motives evolution has bequeathed to our complex species.”
In effect, what Haight and Wilson are doing is identifying a different type of conflict of interest – where an interest – or at least one’s perception of such – conflicts with human nature itself. It is an important area to pursue, and I certainly look forward to reading more of Darwin at Work.
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In various prior posts the COI Blog has explored the potential impact of “behavioral ethics” on how compliance and ethics programs are designed and deployed, and separately has asked whether law firms should have C&E programs to address legal-practice-related risks. So, I was delighted to learn recently of a soon-to-be-published paper which more or less seeks to connect these two topics, and also does much more than that.
In “Behavioral Legal Ethics,” – which will soon appear in the Arizona State Law Journal and a draft of which is available for free download here – Jennifer K. Robbennolt, Professor of Law and Psychology at the University of Illinois and Jean R. Sternlight, Director of the Saltman Center for Conflict Resolution and Michael and Sonja Saltman Professor of Law, William S. Boyd School of Law, University of Nevada Las Vegas offer what is apparently the first comprehensive overview ever published of the many implications of behavioral psychology for legal ethics. They initially describe how – through “ethical blind spots,” slippery slopes, “ethical fading” and other behavioral ethics phenomena – lawyers (as well as others) are affected by “bounded ethicality.” They next review how various professional norms and contexts (such as the principal/agent relationship) can lead to unethical conduct by attorneys, as can the intense economic pressures of legal practice and the relatively high status and power of many members of the profession. Added to this parade of horribles are various factors – such as the “illusion of courage” – that give attorneys (and others) a misleading sense of comfort that they will respond appropriately when faced with the misconduct of others.
Additionally, unlike many other behavioral ethics studies, Robbennolt and Sternlight also offer detailed and – to my mind – compelling possible solutions to the ethics risks they identify. On an individual level, these include attorneys: maintaining an awareness of the impact of psychology on ethical issues they may face, doing more actively to consider ethics in their professional lives and to be more self-critical, planning ahead as to how they would deal with ethical dilemmas, and recognizing and confronting others’ unethical conduct.
Most important from my perspective are the article’s recommendations on an organizational – i.e., C&E program – level. Among other things, the authors propose enhancing the ethical culture of the entities in which lawyers practice (i.e., firms, corporate law departments, government agencies, etc.), such as by discussing and modeling appropriate professional conduct and improving ethics education (with the latter effort including helping lawyers understand behaviorist risks). With respect to the important (and challenging) area of C&E-related incentives, the authors recommend that organizations do more both to protect lawyers from the various stresses – financial and other – that can contribute to ethical failures, and also to reward ethical behavior (i.e., use of positive incentives).
The authors suggest as well that organizations take greater steps to promote attorneys reporting of suspected ethics violations, including by:
– making “clear that ensuring organization-wide ethical compliance is part of attorneys’ job responsibilities and will benefit the organization”;
– providing many channels through which to report suspected violations – including the appointment of an ethics counsel, an ethics committee, or an ethics ombudsperson; and
– “publiciz[ing] instances in which reporting led to positive change, while at the same time being careful to protect confidentiality and not to spark retaliation.”
Finally, they argue that law firms should monitor the ethical conduct of their attorneys (such as using “software to monitor billing patterns…”).
For readers of this blog who share my interest both in behavioral ethics and compliance programs for lawyers, “Behavioral Legal Ethics” is an important article indeed (and I am looking forward to the publication of the final version in the coming months).
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One of the top COI stories of the past week concerned how ESPN’s financial relationship with the NFL may have caused it to withdraw from collaborating on a documentary about the league’s dealing with players’ traumatic head injuries. Earlier in the month another sports news COI issue – whether John Henry’s purchase of the Boston Globe would impact that paper’s coverage of the Red Sox, which Henry also owns – received a fair bit of attention. So did the purchase of the another paper – the Washington Post by Amazon’s Jeff Bezos, which raised somewhat weightier COI concerns than did the Globe purchase. This therefore seems like a good moment to take a look at press conflicts.
As with many areas of business-related conflicts, press conflicts exist on two levels: organizational and individual. Organizational conflicts arise out of the press ownership – e.g., the concern with the Henry and Bezos acquisitions, and other financial relationships at the entity level, e.g., ESPN’s deal to broadcast NFL games, including, most obviously, relationships with advertisers. Of course, the more that newspapers are part of larger business entities, the greater the likelihood of such risks will be. With individual COI’s the interest is usually at the reporter (or perhaps editor or producer) level.
Additionally, in discerning the relevant ethical framework for press COIs it is important to consider the press’s critical role in maintaining our democratic society. That is, given that trust in the press is essential to maintaining that role – like other “market failures” discussed in this recent post – preventing harm to that trust arguably should not be left totally to the push and pull of market forces. This would suggest the need for a strong legal or ethical approach to addressing COIs in the press.
However, any legal response of this sort would be problematic as a form of interference with press freedom. For this reason, the ethical (and compliance) measures to prevent COIs in the press should be especially potent.
This is not an area about which I had much prior knowledge, but I was pleased to learn that the NY Times has what appears to be a good set of standards regarding COIs. For instance, regarding advertising COI, the Times’ standards provide: “Our company and our local units treat advertisers as fairly and openly as they treat our audiences and news sources. The relationship between the company and advertisers rests on the understanding that news and advertising are separate – that those who deal with either one have distinct obligations and interests, and each group respects the other’s professional responsibilities” and goes on to set forth detailed guidance regarding a number of contexts in which the paper’s advertising and news functions might need to deal with each other. With respect to individual COIs, the same source provides guidance on a) journalists paying their own way to and at events they cover, b) receiving of gifts and entertainment; c) steering clear of advice giving roles; d) entering competitions and contests; e) collaborations and testimonials; f) public speaking and the receipt of speakers fees; g) family-based conflicts; h) financial conflicts; i) free-lance work; j) dealing with competitors; and k) social media use.
The Times standards make an interesting read for one who spends a lot of time reviewing C&E policies and procedures. Indeed, it would be rare to find COI policies as detailed as these in the great majority of industries.
Needless to say, the Times is not unique in this respect. The BBC also has what seem to be a very comprehensive and rigorous set of COI standards for its journalists. Of course, just as the map is not the territory, sound ethical policy and procedures are not the same as a full-fledged compliance and ethics program. But they are a good foundation for one.
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For information on the larger world of ethics in journalism (beyond that of COIs) visit the website of the Center for Journalism at the University of Wisconsin’s School of Journalism.
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The conflicts of interest will be enormous when the recently announced merger between Publicis and Omnicom – each a giant ad agency (or collection of agencies) in its own right – is finalized. Both companies, through their respective subsidiaries, represent major players in such industries as automotive, telecommunications, food, beverages, and beer (as described in this article) . Are conflicts of this sort something that business-ethics-minded individuals should find of concern?
Not in my view – because such conflicts can, at least as a general matter, be addressed by market forces. By contrast, truly dangerous conflicts typically involve one of several types of “market failures.”
The first such failure is “information asymmetry,” meaning where market players lack the information needed to make an informed – and hence optimal – decision. In the COI context, this can occur when a conflict isn’t fully disclosed, which, in some cases, can be seen not only as an ethical breach but a legally actionable instance of fraud or corruption. To this classic type of information asymmetry one should add the various findings of behavioral ethicists – some discussed in this earlier post – showing that, for a variety of reasons, even when COIs are disclosed the information doesn’t seem to be processed in an optimal manner. (I’m not sure if this would truly count as an information asymmetry, but it is in that neck of the woods.)
The other most often relevant market failure to COIs concerns externalities, meaning where the cost of a COI is not borne by the individual/entity in a position to address it but by a third party who doesn’t have a seat at the decision making table. COIs in the health care field – the costs of which are passed on in large measure to taxpayers and insurance companies – are a prominent example of the great harm that externalities can cause. Moreover, the phenomenon of “moral hazard” – also addressed in various prior posts – can be seen as causing harm in this way. Of course, some COIs – like public-sector corruption – involve more than one type of market failure.
COIs caused by the mergers of ad agencies certainly don’t raise the issue of externalities, at least not as a general matter. For the sake of completeness, I should note that if the merger creates a monopoly that would be yet another form of market failure – but this seems very unlikely to ever happen, due to (what I assume are) relatively low barriers to entry in the advertising industry.
Finally, while it is possible that the above-mentioned behaviorist findings about the weakness of disclosure does raise the prospect of information asymmetry (or the behaviorist version thereof) in this setting, I think that the strong presence of market forces in the form of competitors pointing out to advertisers the risks of staying with a conflicted agency would largely negate harms of this sort too. Indeed, astute ad agencies looking to recruit new clients could do worse than trying to utilize some of this behaviorist science for their commercial advantage.
For further reading:
– here’s a description of the various forms of market failures;
– here’s a piece about another context – joint venture governance – in which COIs should not be seen as inherently troublesome; and
– here’s something on how market failures should factor into anti-corruption risk assessment.
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In a recent article in the Penn State Law Review, Conflicts of Interest in Medicine, Research and Law: A Comparison, Stacey A. Tovino of the University of Nevada at Las Vegas law school reviews approaches to managing COIs in three different professional settings. The piece begins with an analysis of legal regimes regarding COIs in clinical medicine, and particularly those arising from the involvement of individuals who, whether due to age or otherwise, have impaired decision making capacities; then examines how different state laws address COIs in human subjects research (a context that, “[u]nlike treatment…is fraught with” COIs); and, finally, compares and contrasts the above-mentioned approaches with those used for managing COIs in the context of legal representation.
Tovino “finds that the law imposes more stringent duties relating to the identification and management of conflicts of interest in the context of legal representation compared to the contexts of clinical medicine and human subjects research.” Among other things, the latter standards do not “recognize and explicitly refer to the concept of ‘conflict of interest,’” to the extent the former does. They are also less stringent with respect to disclosure of conflicts than are the relevant legal representation standards, and the same is true regarding aspects of conflicts management. Based on this analysis, Tovino argues that “state laws governing conflicts of interest in clinical medicine and human subject research should consider borrowing approaches to conflicts management that are set forth in state rules of attorney professional conduct.”
I applaud Tovino’s exercise in comparative COI analysis. Indeed, in establishing this blog, one of my goals was to provide a compendium of information about the treatment of COIs in different industries or other business contexts (the beginnings of which are collected here) in the hope that those dealing with conflicts in one setting – whether as regulators, compliance personnel or in other roles – can benefit from the experience of others in doing so.
(Thanks to Bill Sachs of HCCS for letting me know about Tovino’s article.)
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Recently, we ran a post on the possible need for law firms to have compliance programs to prevent/detect bill padding. In today’s post we examine a different area of lawyer misconduct – misuse of the attorney-client privilege, and a different segment of the profession – members of law departments rather than of firms, with an eye toward suggesting a compliance program remedy in the post that will immediately follow this one.
The attorney-client privilege can, of course, be an invaluable tool for supporting a C&E program mission, as the confidentiality it promises helps companies uncover and address wrongdoing – and thereby comply with legal requirements – without fear that their efforts will be used against them. For instance, last week the Wall Street Journal reported that a company that had suffered a security breach hired a law firm to investigate the breach because the law firm “could offer something a forensic firm couldn’t: attorney-client privilege and the secrecy it confers.”
But unlike the case with law firms, when the privilege is asserted by in-house lawyers a question often arises as to whether the matter at issue in fact entailed the lawyer providing legal advice or instead was her merely dealing with an administrative or business matter. For instance, in a case decided last year in a different (i.e., non-C&E) context, a federal district court in Pennsylvania court held that emails on which an in-house counsel was copied were nonetheless not privileged because they principally concerned the latter type of work.
Of course, many aspects of C&E programs – although having their origins in legal mandates – can be seen as principally administrative/business-related. Indeed, this possibility could actually increase as C&E-related expectations become settled.
Moreover, raising the privilege without sufficient basis is itself not without risks beyond the loss of confidentiality for the communications in question. Courts have warned lawyers against misuse of the privilege. For instance, in United States v. Davis, (131 F.R.D. 391, 401 (S.D.N.Y. 1990)) the court cautioned that an in-house attorney’s degree and office should not be used to create a “privileged sanctuary” for corporate records. Indeed, in the high-profile tobacco industry criminal investigation in 1990’s, some company lawyers were investigated by the Justice Department under fraud/obstruction theory for what was seen as a possible bad faith use of the privilege to hide sensitive information. Although no charges were brought, one can imagine a set of circumstances where the outcome could be different.
So, this is not an issue to be taken lightly. Part two of this post will explore how companies can develop a strong approach to privilege – while not going over the above-referenced line – through a compliance program framework.
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