Intangible interests

This section of the blog will explore what/when intangible interests – e.g., reputation – are cognizable for COI purposes. Among other topics, the possibility of COIs arising from charitable and political contributions will be considered here

Too big for ethical failure?

An article last month in a magazine published by the NY Times provided the occasion for a noteworthy COI discussion.  The Times had given Laura Arrillaga-Andreessen the assignment of profiling the head of Airbnb for an issue of “T” magazine. However, her husband, Marc Andreessen, is a substantial investor in that company – which was not disclosed in T’s (very favorable) article about Airbnb, as described here.

T’s editor explained the lack of disclosure as follows: “it was my mistake in not asking her if there were any potential conflicts. This was an oversight on my part. I say this not as an excuse, but she is, separately from her husband, a billionaire (making her through marriage a billionaire twice over) and for that reason I think I failed to consider any monetary conflict in her case.”

A writer in Gawker characterized this explanation as saying, in effect, that billionaires are too rich to have conflicts of interest.  I think that’s a fair comment.

While the specifics of this case are particularly interesting to Silicon Valley watchers, for C&E professionals the notion of being too rich to be corrupted is sadly an oft-told tale.   It comes up most frequently in the gifts/entertainment and other COIs areas when C&E officers are asked to approve a transaction (e.g., entertainment provided by a vendor) for a high-level employee that would be impermissible for others in the organization. The basic thought is that the individual in question already has so much money (or what money can buy) that more won’t affect her judgment.

There is a logic to this, but it is based on the increasingly discredited homo economicus view of human nature.   This view would presumably treat the corruptibility of a person in a given situation as fraction with the amount being offered as the numerator, the individual’s total wealth the denominator, and the larger the overall number the greater ethical risk.

By contrast, when viewed through the lens of behavioral science (and human experience), the rich and powerful can be seen as more corruptible than others, as discussed in prior posts such as this one.   The most memorable expression of this may be the saying attributed to the late Leona Helmsley that “only the little people pay taxes.”   But the reflection of actual COI risk being concentrated near “the top” echoes through our new stories on a nearly daily basis.

Additionally, there are many types of conflicts that cannot be measured in a purely monetary way, such as those involving  glory (as described here), friendship (discussed in the second case in this post) or family relationships (discussed here). Even if  they are not inherently more susceptible to COIs, from a situational perspective, the high and mighty presumably are faced with more frequent pressures and temptations of this sort than are most other individuals (as briefly touched on in this earlier post).

Glory as a conflict of interest?

An editorial last week in JAMA – the Journal of the Medical Association  by Anne R. Cappola, and Garret A. FitzGerald about conflicts of interest in medical research notes that “disclosure policies have focused on financial gain. However, in academia, the prospect of fame may be even more seductive than fortune. Thus, the outcome of a study may influence publication in a high-impact journal, invitations to speak at conferences, promotion, salary, and space. Even though an investigator may publicly eschew any direct financial reward from a sponsor, such fiscal and professional benefits may accrue to them indirectly from the institution, if they attract clinical trials with their attendant indirect costs.”

This is, I think, an important point, and its logic goes beyond the context about which the authors write to COIs of many other kinds.  Support for this broader view can be found in a study showing the impact of social, as opposed to purely economic, factors on the conduct of auditing, and a landmark decision in 2003 of the Delaware Chancery Court examining the impact of non-economic factors on possible COIs involving a corporate board. (The study and the case are discussed in this earlier post.)

The JAMA authors’ prescription for addressing this conceptual shortfall is captured in the title of the editorial –  “Confluence, Not Conflict of Interest: Name Change Necessary.”  I find the notion of a “confluence of interest” intriguing but a bit troubling too – in the way that “enhanced interrogation techniques” is. The phrase  also reminds me of a statement by then king-of-the-hill securities analyst Jack Grubman:  “What used to be a conflict is now a synergy.”  (Three years later Grubman was fined $15 million dollars and barred from the industry  for life for what were apparently still considered COIs.)

Many interests really and truly conflict with professional or other duties, as described in this post.   Expanding our recognition of what can have that effect seems like a step forward.  Soft pedaling what that impact can be does not.

Conflicts of interest and “the social nature of humans”

Private supply chain auditing continues to serve an increasingly important role in compliance and ethics efforts worldwide.  A recent working paper from the Harvard Business School  – “Monitoring the Monitors: How Social Factors Influence Supply Chain Auditors,” by  Jodi Short, Professor of Law at the University of California Hastings College of the Law; Michael Toffel of the Technology and Operations Management Unit at the Harvard Business School; and Andrea Hugill of the Strategy Unit at the Harvard Business School – examines various factors that impact the efficacy of such audits.  The paper can be downloaded from SSRN and a summary of it can be found on the Harvard Corporate Governance web site.

For this study, the authors conducted a review of “data for thousands of code-of-conduct audits conducted in over 60 countries between 2004 and 2009 by one of the world’s largest social auditing companies, …”  They found that “auditors’ decisions are shaped not only by the financial conflicts of interest that have been the focus of research to date, but also by social factors, including auditors’ experience, professional training, and gender; the gender diversity of their teams; and their repeated interactions with those whom they audit.”  The authors state that this  “finer-grained picture suggests that audit designers should moderate potential bias and increase audit reliability by considering the auditors’ characteristics and relationships that we found significantly influencing their decisions,” and also that these findings “should likewise inform the broader literature on private gatekeepers such as accountants and credit rating agencies.”

Indeed, and beyond the scope of the paper, a focus on social – and not just economic – ties may be key to assessing various  independence issues regarding boards of directors.  In an important decision from 2003 involving a derivative action brought by shareholders of Oracle Corp., then Vice Chancellor Leo Strine noted: “Delaware law should not be based on a reductionist view of human nature that simplifies human motivations on the lines of the least sophisticated notions of the law and economics movement.  Homo sapiens is not merely homo economicus.  We may be thankful that an array of other motivations exist that influence human behavior; not all are any better than greed or avarice, think of envy, to name just one.  But also think of motives like love, friendship, and collegiality, think of those among us who direct their behavior as best they can on a guiding creed or set of moral values,” adding, “[n]or should our law ignore the social nature of humans.”

Finally, thanks to friend of the blog Scott Killingsworth for recently reminding me of the Oracle decision;  here’s an earlier post about the Oracle case, albeit with a different focus; and here is a post briefly discussing (and linking to) a paper by Jon Haidt and colleagues about business ethics implications of a model of human nature called “Homo Duplex,”  a term coined by the sociologist/psychologist/philosopher Emile Durkheim, which posits that we operate on (or shift between) two levels: a lower one – which he deemed “the profane,” in which we largely pursue individual interests; and a higher – more group-focused – level, which he called “the sacred.”

Corporate charitable giving and conflicts of interest

This is, of course, the season of giving.  And so – hopefully in not too Grinchian a way – the Conflict of Interest Blog looks at possible COIs in corporate philanthropy.

One type of such COI concerns outright corruption  (i.e., third-party conflicts) and perhaps the most attention getting story of this sort in the past year is about a commitment by a subsidiary of Wynn Resorts to contribute $135 million to the University of Macau Development Foundation and an FCPA investigation into whether this was done with a corrupt intent to further the company’s business interests there.  The company has denied any wrongdoing and, as best I can tell from public accounts, the matter remains unresolved.

But then there are the more prosaic types of conflicts similar to those regarding corporate political contributions being used to promote an executive’s personal political agenda . For more on those sorts of COIs we turn to a post last year from the Harvard Corporate Governance Blog  by  Matteo Tonell, Director of Corporate Governance for The Conference Board (based on a Director Note published by that organization and authored by Baruch Lev of New York University, Christine Petrovits of George Washington University, and Suresh Radhakrishnan of the University of Texas at Dallas for that organization) which provides a thorough analysis of and some interesting data regarding COIs in the charitable contributions context.

The post notes that “[a]n executive can reap personal benefit from corporate philanthropy in several ways.  Even when a gift is fully funded with company money, the executive often receives some credit. These awards, honors, and accolades provide the executive with a psychic benefit and elevate his status in elite social circles. In addition, an executive can use corporate contributions to advance his personal preferences, for example, by supporting an organization with his ideological agenda or the pet charity of a family member. Finally, an executive can further his career by using charitable contributions to gain favor with board members.”

The post further notes that many directors may not be doing a good job in their oversight of this area: “In a survey of 721 companies, 45 percent of respondents answered ‘personal interests of CEO/board members’ to a question about which considerations had the most weight in determining the focus of the corporate philanthropy program.”  Other interesting data points in the paper are that: a) “Companies give more to charity when their top executives and board members have social network ties to the business elite in their community, such as belonging to the same country club or serving on the same board of a prestigious cultural organization”; b) “The larger the percentage of stock owned by the CEO, the less money the company contributes to charity, suggesting that when officers are owners they are more focused on the bottom line. …” and c) “[C]ompanies with larger boards of directors are more generous givers, all else equal. Larger boards are generally perceived as a source of social interaction for directors and less effective as monitors.”

While all of this is troubling and certainly warrants attention, it does not – to my mind – provide a basis for cutting back on corporate philanthropy, given the world of good that giving by businesses provides to those in need.  Rather, in light of that importance, business leaders should strive to ensure that COIs in this area are identified and mitigated, and  the authors of the paper make a number of useful recommendations for doing this, such as aligning corporate giving with business activities and, more importantly, enhancing compliance mechanisms  around corporate philanthropy (in various ways they describe).   Indeed, overcoming COIs of the type identified in the paper may be necessary to making corporate charitable giving truly sustainable.

I should note that the COI-related critique of corporate charity is associated with Milton Friedman, who more broadly also suggested that businesses should refrain from giving because business people –  who are not experts in charity or public policy – could not be expected to make charitable choices wisely.   There is some logic to this, and similar assertions have been made by others.

But as Oliver Wendell Holmes, Jr.  said, “a page of history” can be “worth a volume of logic,”  and consider for these purposes  the page of history captured in this wonderful quote by Winston Churchill (who is no one’s idea of a softie): “When history passes its final verdict on John D. Rockefeller, it may well be that his endowment of research will be recognized as a milestone in the progress of the race … Science today owes as much to the rich men of generosity and discernment as the art of the Renaissance owes to the patronage of Popes and Princes.”  While it would be hard to match the impact being described here, there are also smaller but still vitally important worlds of good being done on an everyday basis by corporate philanthropy – and, to my mind, those seeking to undo that good bear a heavy burden of proof indeed.

Finally, on a different but somewhat related issue, here is a post about COI policies for non-profits.

Moral Hazard – Part Three: Intangible Interests, Monitoring By Boards

In prior postings, we introduced the concept of “moral hazard” (which, again, is principally based on economics, not ethics) to the Blog and considered how moral hazard risks can be addressed through appropriate attention to incentives, both positive and negative.  In this posting we discuss the less common form of intangible moral hazard based interests.

Consider the example of corporate support for political causes or candidates for public office (hopefully a good example to use in an election year).  In some instances, a senior manager with the power to make decisions  for a company regarding such support may use that power to embrace a candidate or cause even if doing so is against her company’s interests  (e.g., the cause or candidate’s positions may offend a large percentage of the company’s customers).   For the purposes of our example, assume further that the manager does not expect to be tangibly rewarded for providing the company’s support to the candidate, and thus may not have a true “interest” for COI purposes (at least not in the traditional sense).  Nonetheless, because of the manager’s political beliefs, she may cause the company to take risks in supporting the candidate that are unjustifiable from the organization’s perspective.  In other words, this is a case of an intangible moral hazard risk.

Of course, compared to other C&E risks (e.g., corruption, competition law) political support is not an area of great danger to most companies.  Nonetheless, presumably because of this potential for divergence of interests, it is in fact area of relatively significant amount of board oversight and other high-level compliance measures, as described in The Conference Board’s  Handbook on Corporate Political Activity Emerging Corporate Governance Issues.

I should emphasize that most moral hazard risks really are of the tangible variety – and come particularly from the area of compensation.  But as with COIs, organizations need to think broadly about moral hazard to have an effective C&E approach regarding all the ways in which employees might be moved to act inconsisently with  the interests of the organization.

Next up on the Blog: “behavioral ethics and compliance.”

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.