Bias

Two very different types of bias topics will be examined in the blog: A) Under what situations involving business organizations should bias be treated like a traditional COI. B) How often-unrecognized biases can inhibit ethical decision making, which is one of the principal teachings from behavioral ethics (i.e., “cognitive biases.”)

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.)

9 years ago
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Is compliance still just “putting on its shoes”?

Mark Twain famously said “A lie can travel half way around the world while the truth is putting on its shoes,” and one might think something similar about risk and C&E. Perhaps it has always been this way and maybe it always will be, at least to some extent. But forward looking companies should look for ways to narrow or possibly eliminate the gap between the immediacy of the problem and that of the solution.

In a sense, this is much of the point of the “cultural” approach to compliance and ethics, and it can also be seen as part of the promise – albeit still largely theoretical – of “behavioral” C&E. Both seek to have C&E operate, in effect, as an instinct. (For more on behavioral ethics visit the Ethical Systems web site.) But, at least in part, the idea goes back much earlier – to Aristotle’s focus on ethics and habit.

There are various avenues for pursuing this goal but, as a general matter, a valuable though often underutilized approach lies in the realm of incentives. Incentives tend, I believe, to reach employees more deeply than policies and procedures do – and thus can help create instinct-like ethical behavior.

Companies indeed do seem to be more interested than ever in exploring ways to use incentives to promote strong C&E. For instance, one company I know now uses the results of internal controls testing in setting compensation for its senior executives. This kind of measure might not sound particularly exciting, but it could – at least over time – help make compliance operate as something of a reflex, in that it presumably contributes to managers being focused on risk on a day-to-day basis (and not just on the far less frequent occasions of responding to cases of possible violations). More generally, this and other incentive measures could be part of a larger C&E strategy of moving from a necessary but somewhat limited “culture of honesty” to also include a broader and deeper “culture of care,” as described in this earlier post.

Moreover, C&E incentives need not be solely of the negative type, nor need they be tangible. Appealing to the better angels of our nature through praising pro-social behavior could, to my mind, be a powerful force for helping ethics move at the speed of risk, particularly with the somewhat idealistic generation of younger employees.

But, in some cases traditional economic incentives are indeed called for. That is why – as discussed in these earlier posts – the notion of “moral hazard” should play a greater part than it currently does in many C&E programs.

Finally, note that incentives are just one type of tool in the C&E “tool box.” And, whether it be through a cultural/behavioral approach or something else, the risk-reduction discussion should include consideration of all available tools – which is what a C&E risk assessment offers …or, at least, should. (For more on risk assessment generally, please download this complementary e-book, available at CCI.)

9 years ago
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A behavioral ethics and compliance index

While in the more than three years of its existence the COI Blog has been devoted primarily to examining conflicts of interest it has also run a number (close to fifty) of posts on what behavioral ethics might mean for corporate compliance and ethics programs. Below is an updated version of a topical index to these latter posts. Note, however, that to keep this list to a reasonable length I’ve put each post under only one topic, but many in fact relate to multiple topics (particularly the risk assessment ones).

INTRODUCTION

– Business ethics research for your whole company (with Jon Haidt)

– Overview of the need for behavioral ethics and compliance

BEHAVIORAL ETHICS AND COMPLIANCE PROGRAM COMPONENTS

Risk assessment

– “Inner controls”

– Is the Road to Risk Paved with Good Intentions?

– Slippery slopes

– Senior managers

– Long-term relationships

– How does your compliance and ethics program deal with “conformity bias”?

– Money and morals: Can behavioral ethics help “Mister Green” behave himself?

– Risk assessment and “morality science”

Communications and training

– Publishing annual C&E reports

– Behavioral ethics and just-in-time communications

– Values, culture and effective compliance communications

– Behavioral ethics teaching and training

– Moral intuitionism and ethics training

Accountability

– Behavioral Ethics and Management Accountability for Compliance and Ethics Failures

– Redrawing corporate fault lines using behavioral ethics

– The “inner voice” telling us that someone may be watching

Whistle-blowing

– Include me out: whistle-blowing and a “larger loyalty”

Incentives/personnel measures

– Hiring, promotions and other personnel measures for ethical organizations

Board oversight of compliance

– Behavioral ethics and C-Suite behavior

– Behavioral ethics and compliance: what the board of directors should ask

Corporate culture

– Is Wall Street a bad ethical neighborhood?

– Too close to the line: a convergence of culture, law and behavioral ethics

Values-based approach to C&E

– Values, structural compliance, behavioral ethics …and Dilbert

Appropriate responses to violations

– Exemplary ethical recoveries

BEHAVIORAL ETHICS AND SUBSTANTIVE AREAS OF COMPLIANCE RISK

Conflicts of interest/corruption

– Does disclosure really mitigate conflicts of interest?

– Disclosure and COIs (Part Two)

– Other people’s COI standards

– Gifts, entertainment and “soft-core” corruption

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

– Gamblers, strippers, loss aversion and conflicts of interest

– COIs and “magical thinking”

Insider trading

– Insider trading, behavioral ethics and effective “inner controls”

– Insider trading, private corruption and behavioral ethics

Legal ethics

– Using behavioral ethics to reduce legal ethics risks

OTHER POSTS ABOUT BEHAVIORAL ETHICS AND COMPLIANCE

– New proof that good ethics is good business

– An ethical duty of open-mindedness?

– How many ways can behavioral ethics improve compliance?

– Meet “Homo Duplex” – a new ethics super-hero?

– Behavioral ethics and reality-based law

9 years ago
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Behavioral ethics and reality-based law

Historically, one of the ways law has advanced is by becoming more “reality based” in general and accepting of social science information and ideas in particular. This is a legacy of the great Louis Brandeis.

In the latest issue of Compliance & Ethics Professional (on the second page of the PDF) I ask whether behavioral ethics can play a role of this kind – by providing the social science basis for more C&E friendly law. Another way to ask this: Is behavioral ethics and compliance ready for a “Brandeis moment”?

I hope you find it interesting.

9 years ago
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Operational transparency and internal selling of C&E programs

While all companies try to “sell” their C&E programs, often such efforts are not particularly robust. And that’s too bad, because the need for effective C&E program selling measures is considerable. This is due in part to the behavioral ethics/psychology-related phenomenon that we tend to overestimate how ethical we are, which leads us to underestimate how much we need the kind of help that C&E programs can provide. Also relevant here is the moral hazard/economics-related phenomenon that leads to a misalignment of risk vis a vis rewards in many companies when it comes to C&E, meaning that the internal “market” for C&E services in many companies is not an efficient one. On top of both of these challenges is, at least in some companies, a growing sense of “compliance fatigue.” With all these forces aligned against them, what should C&E professionals do to sell their programs in an effective manner?

A few years ago, in a paper published in Management Science – “The Labor Illusion: How Operational Transparency Increases Perceived Value” – Ryan W. Buell and Michael I. Norton, both of the Harvard Business School, reviewed the results of experiments involving the near-ubiquitous experience of consumers reacting to wait times on web sites. They found that “when websites engage in operational transparency by signaling that they are exerting effort, people can actually prefer websites with longer waits to those that return instantaneous results—even when those results are identical.” While the context is obviously not at all specific to C&E work, the general learning about individuals valuing services more positively when they understand the amount of effort involved in providing those services seems broadly applicable, and worth considering for possible lessons to those seeking to “sell” C&E programs.

Operational transparency can, of course, play a role in C&E programs in various ways – most obviously through the day–to-day work of compliance officers in training on and otherwise communicating about a company’s standards of business conduct, work which is presumably well understood in a company. Beyond this, employees generally have some understanding that a C&E officer receives and responds to reports of suspected wrongdoing. But there is, of course, much more to a C&E program than these two functions, the depth and breadth of which is often unknown to (or under-appreciated by) its “customers” – meaning the employees.

For some companies, what is needed to make a strong and positive impression on the work force is an annual C&E report. Such reports typically summarize major efforts and accomplishments of a company’s C&E department in a given year, and thereby hopefully have the kind of impact that will make employees truly value what goes into the program. To my mind, the opportunity to publish reports of this kind should be seen as “low hanging fruit” in more than a few companies – and I hope that C&E officers who don’t currently engage in this practice will revisit the issue at some point soon.

There are, however, two caveats to this suggestion. First, in publicizing the work of a C&E department, one must be careful not to do anything that might indicate that the promise of confidentiality in responding to helpline calls and undertaking other sensitive inquiries could be compromised. Second, as the authors of the paper state: “Whereas operational transparency involves firms being clearer in demonstrating the effort they exert on behalf of their customers—an ethically unproblematic strategy—inducing the illusion of labor moves closer to an ethical boundary,…” to which I would add that this should indeed be seen as over the line for any C&E professional. More broadly, while C&E officers often should make greater efforts to sell themselves and what they do, they must be mindful of restraints that are particularly relevant to (with apologies to The Godfather) “the business [they have] chosen.”

For further reading see this post on annual C&E reports in Corporate Compliance Insights.

9 years ago
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Conflicts of interest, compliance programs and “magical thinking”

An article earlier this week in the New York Times takes on the issue of “Doctors’ Magical Thinking about Conflicts of Interest.” The piece was prompted by a just-published study which examined “the voting behavior and financial interests of almost 1,400 F.D.A. advisory committee members who took part in decisions for the Center for Drug and Evaluation Research from 1997 to 2011” and found a powerful correlation between a committee member having a financial interest (e.g., a consulting relationship or ownership interest ) in a drug company whose product was up for review and the member’s voting in favor of the company – at least in circumstances where the member did not also have interests in the company’s competitors.

Of course, this is hardly a surprise, and the Times piece also recounts the findings of earlier studies showing strong correlations between financial connections (e.g., receiving gifts, entertainment or travel from a pharma company) and professional decision making (e.g., prescribing that company’s drug). Nonetheless, some physicians “believe that they should be responsible for regulating themselves.”

However, such self regulation can’t work, the article notes, because “our thinking about conflicts of interest isn’t always rational. A study of radiation oncologists found that only 5 percent thought that they might be affected by gifts. But a third of them thought that other radiation oncologists would be affected. Another study asked medical residents similar questions. More than 60 percent of them said that gifts could not influence their behavior; only 16 percent believed that other residents could remain uninfluenced. This ‘magical thinking’ that somehow we, ourselves, are immune to what we are sure will influence others is why conflict of interest regulations exist in the first place. We simply cannot be accurate judges of what’s affecting us.”

While the findings of these and similar studies are, of course, most relevant to conflicts involving doctors and life science companies, there is a broader learning here which, I think, is vitally important to C&E programs generally. That is, they help to show that “we are not as ethical as we think” – a condition hardly limited to the field of medicine or to conflicts of interest, as has been discussed in various prior postings on this blog.

One of the overarching implications of this body of knowledge is that we humans need structures – for business organizations this means C&E programs, but more broadly these have been called “ethical systems” – to help save us from falling victim to our seemingly innate sense of ethical over-confidence. So, to make that case, C&E professionals should – in training or otherwise communicating with employees (particularly managers) and directors – address the issue of “magical thinking” head-on.

Moreover, using the example of COIs to prove the larger point here may be an effective strategy, because employees are more likely to have experience with ethical challenges in this area than with other major risks, such as corruption, competition law or fraud – which indeed may be so scary as to be largely unimaginable to many employees. I.e., these and other “hard-core” C&E risk areas might be subject to an even greater amount of magical thinking than is done regarding COIs. So, at least in some companies, discussing COIs might offer the most accessible “gateway” to addressing the larger topic of ethical over-confidence.

9 years ago
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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.”

9 years ago
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Friendship – and the ties that blind (directors to conflicts of interest)

King Herod the Great had something of a problem: he had backed the losing side in the contest between Marc Antony and Octavian to rule Rome, and now fully expected to lose his life for it. But, as described in Jerusalem: the Biography, by Simon Sebag Montefiore, when they met he cleverly asked Octavian “not to consider whose friend he had been but ‘what sort of friend I am.’” Octavian was evidently persuaded by this, for not only was Herod’s life spared but the size of his kingdom was increased.

Loyalty is, of course, fundamental to friendship. But, while potentially more physically dangerous in the Roman Empire than it is today, friendship in our world can be ethically treacherous.

In “Will Disclosure of Friendship Ties between Directors and CEOs Yield Perverse Effects?” (to be published in the July 2014 issue of the Accounting Review), Jacob M. Rose, Anna M. Rose, Carolyn Strand Norman and Cheri R. Mazza describe how they conducted thought experiments involving both actual corporate directors and MBA students to determine whether “directors who have friendship ties with the CEO [are more likely that are directors without such friendships] to manage earnings to benefit the CEO in the short term while potentially sacrificing the welfare of the company in the long term” and also whether “public disclosure of friendship ties mitigate or exacerbate such behavior, and will disclosure of friendship ties influence investors’ perceptions of director decisions.”

Sadly but not surprisingly, their research found “that friendship ties caused directors to be more willing to approve reductions to research and development (R&D) expenses that cause earnings to rise enough to meet the CEO’s minimum bonus target more often than when the directors and CEO were not friends.” Seemingly more of a surprise, they also found that “disclosing friendship ties resulted in even greater reductions in R&D expenses and higher CEO bonuses than not disclosing friendship ties.”

But this latter finding is not so surprising – given other behavioral research showing that disclosure can “morally license” individuals to act inappropriately when faced with a conflict of interest ( as discussed in this and other prior posts.) As described in a recent piece in the NY Times by Gretchen Morgenson, one of the study’s authors explained: “When you disclose things, it may make you feel you’ve met your obligations…They’re not all that worried about doing something to help out the C.E.O. because everyone has had a fair warning.”

Morgenson added: “There are two messages in this study. One is for regulators: Simply disclosing a conflict or friendship does not eliminate its potential to create problems. The other,” again quoting one of the study’s authors (but echoing Herod) “is for investors: ‘Shareholders should take a more active role in finding out what kinds of relationships their boards and C.E.O.s have…and recognize the potential traps created by them’.”

For more on conflicts of interest and directors see the posts collected here .

9 years ago
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Values, structural compliance, behavioral ethics and…Dilbert

Back in the mid-1990’s, the incomparable business ethicist Dilbert asked his boss: “Can you explain how the company’s new ‘Statement of Core Values’ will change my behavior? I was planning to poison the town’s water supply. But wait! It’s against our core values!”

The debate over the value of values is nearly as old as the C&E field itself. Harvard Business School professor Lynn Sharp Paine argued twenty years ago that commitment to company values and values-supporting systems could do more to promote responsible conduct than could what she described as a legal compliance model. But sounding a note of caution then was Win Swenson, the principal draftsperson of the Federal Sentencing Guidelines for Organizations, who wrote in a compliance treatise that while “[t]he legal vs. integrity-based dichotomy helps us think about different approaches companies can take….there is a danger in seeing the actual choice companies confront as a stark ‘either/or’ one,” and with each approach by itself having significant limitations.

The debate continues to this day, and was most recently joined by two other Harvard Business School professors (Francesca Gino and Max Bazerman) and a graduate student (Ting Zhang) in a paper that posits a somewhat similar – but certainly not identical – dichotomy between “(1) values-oriented approaches that broadly appeal to individuals’ preferences to be more moral, and (2) structure-oriented approaches that redesign specific incentives, tasks, and decisions to reduce temptations to cheat in the environment.”

With respect to values-oriented approaches, the authors describe a wealth of recent research findings from the field of behavioral ethics that, among many things, demonstrates the strong potential to impact behavior in desirable ways of “reminding individuals of their personal moral self-concept.” However, the authors note that values-based approaches can have limitations and undesired consequences too: “[f]or instance, organizations that promote ethical mission statements while failing to adjust unrealistic goals that routinely place employees in ethical dilemmas.”

The authors also describe research showing that “structuring the incentives, task, or set of choices to reduce or even eliminate the temptation to act unethically,” can likewise affect behavior in various desirable ways. But here, as well, the news is mixed – as behavioral ethics studies also suggest, among other things, that “using incentives to highlight the negative side to unethical behavior could lead to even more wrongdoing as doing so may prevent individuals from perceiving their decisions as ethically-relevant.”

Thus, and “[g]iven the strengths and weaknesses of values- and structure-oriented approaches on their own, [the authors argue] …incorporating both approaches can compensate for each approach’s unique set of limitations and dampen the risk of adverse effects.” Their paper describes strategies for doing this – including checking for incompatibilities in implementing either approach; aligning the timing of values-related reminders with that of potentially risky decisions; “evaluating decisions jointly rather than separately”; “encourag[ing] mental and social contemplation”; and “designing a structure-oriented intervention [that] includes implementing changes in the environment to induce self-awareness and highlight the link between behaviors and the moral self.”

I should emphasize that while some of the recommendations can be applied in the context of C&E programs that is not the case with all of them. However, this isn’t intended as a criticism of the paper, which does not purport to be addressed to C&E officers but, rather, mainly to other organizational scholars. Moreover, because this is one of the few behavioral ethics papers published to date where the focus is on finding ways to prevent – as opposed merely to identify the causes of – wrongdoing, it should be welcomed by C&E practitioners. (As discussed in an earlier blog post, for various reasons behavioral ethicists and C&E practitioners should work more closely together, and this paper is an important step in that direction.)

Another comment from a C&E practitioner’s perspective is that while the two approaches identified in the paper are indeed distinct as a conceptual matter, the perception “on the ground” may be somewhat more of a blend. That is, regularly seeing one’s company take meaningful steps to promote ethicality and law abidance – through incentives, process controls, discipline for violations and other structure-oriented approaches – may itself serve as a potent reminder to employees of their own moral preferences, and possibly a more effective one than traditional communications. Indeed, from my more than twenty years of interviewing employees of client organizations about the perceived ethicality of their respective companies I have been impressed with how much values-oriented individuals appreciate strong compliance/structural approaches. Like Dilbert (as well as Zhang and her colleagues), they seem to know the difference between preaching and practicing.

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Some related readings:

– Another best-of-both-worlds approach to values and compliance –specifically on how compliance can bring “body” to ethics and ethics can bring “soul” to compliance.

– Scott Killingsworth’s paper, ‘C’ is for Crucible: Behavioral Ethics, Culture, and the Board’s Role in C-Suite Compliance.

– An index of posts of what behavioral ethics could mean for C&E programs.

– An exchange with Steve Priest on C&E “checking,”which includes a discussion of embedding C&E into everyday business operations – an emerging form of structural compliance which could, I believe, play a powerful role in reminding employees of their moral preferences on a timely basis.

9 years ago
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Behavioral ethics and compliance: an index

The COI Blog was launched two and a-half years ago today – and since then has been devoted primarily to examining conflicts of interest. But it has also run a number of posts on what behavioral ethics might mean for corporate compliance programs and, because of the ever increasing interest in this area, I thought that having a topical index to these latter posts could be useful – particularly for those new to either behavioral ethics or corporate compliance, with the topics in question being principally compliance tools and risk areas. Note, however, that to keep this list to a reasonable length I’ve put each post under only one topic, but many in fact relate to multiple topics (particularly the risk assessment ones).