Edited by Jeff Kaplan
|
Other Economic Issues
This section of the blog will address other economic interests and examine whether they do or don’t count for COI purposes.
|
|
In Expert Product Reviews and Conflict of Interest, Tom Hamami writes: “Many firms that produce expert product reviews have a vested interest in increased consumption of the products they review. The classic example is the Michelin Guide, which reviews restaurants, originally conceived to stimulate usage of automobiles and therefore also demand for automobile-related goods and services. The result is a conflict of interest; such firms have financial incentive to give better reviews than products merit… [Hamami] compare[d] video game reviews from two sources: one a video game magazine owned by a game retailer and the other games reviewer at The Island Now. The goal of the research is to evaluate to what extent, if any, the retailer-owned outlet inflates its reviews in order to boost sales. …, [Hamami indeed found] some evidence of increased inflation in periods shortly following the release of a game’s corresponding piece of hardware. Other literature on this industry finds that reviews have the largest effect on the sales of low-quality games, and [indeed he finds] evidence of review inflation for [such] games. These results are consistent with theoretical predictions for a firm that optimizes the trade-off between sales revenue and the reputational costs associated with biasing reviews.” On the other hand, “somewhat surprisingly, [he finds] no evidence of seasonal variation despite the increased demand for video games in the fourth quarter of the year.”
So, a mixed picture – and one that is indeed consistent with the author’s review of relevant literature on COIs of this sort. E.g., one study finds “evidence of a strong positive influence of advertising on media coverage in the fashion journalism industry…” But another finds “minimal differences between the reviews of two wine publications, one of which accepts advertising and one of which does not…”
How much does this matter?
Assuming that the COI is disclosed or is otherwise apparent – as I imagine is so in the great majority of cases – there is evidently no “information deficiency,” a key factor in evaluating both the likelihood and impact of a COI. Nor do the COIs reviewed by Hamami seem to be of the sort that the average buyer cannot evaluate on her own (as might be true, for example, of pharmaceutical or complex financial products). Indeed, the very focus on “reputational costs” suggests that consumers do appreciate and take into account the negative impact of a COI on the publisher of product reviews.
But even disclosed and understood COIs generally do have a pernicious effect on our society, as they can contribute to the cynicism that many feel about the press and business world. I don t know how to weigh that against the other factors mentioned above, but it is certainly part of the picture.
|
|
|
|
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.”
|
|
|
|
The recent indictment of NY State Assembly Speaker Sheldon Silver on corruption charges has – at least for the moment – focused some attention on the age-old practice of “referral fees,” under which a lawyer or other professional receives compensation for referring an individual or entity to some other service provider. In the Silver case, the (now ex-) Speaker received such fees from two different law firms. As described in this piece in the NY Times , one of these firms – “a large personal injury law firm where he has worked for more than a decade” – paid him more than three million dollars based on client referrals from a doctor whose research center had been given $500,000 in state grants orchestrated by Silver. Another part of the prosecution’s case involves his receipt of referral fees from a real estate law firm to which he had steered clients and his performing official action to benefit those clients.
In both of these alleged schemes the principal victims were the taxpayers of NY, whose interests were subordinated to Silver’s personal interest. The element of harm to the two firms’ respective clients was less a part of the picture (although some harm could be presumed with the personal injury referral fees). But in a traditional referral fee situation the harm is principally and often entirely to the client.
Of course, it is not only lawyers who pay/receive referral fees – and who face ethical questions involving these practices. For instance, architects must, as a matter of professional standards, disclose referral fees. As noted in this Advisory Opinion from the American Institute of Architects: “It makes no difference under the disclosure rules whether the architect is certain that the contractor he recommends is the best one for the job or that he would make the same recommendation even if no referral fee were paid. Though the architect may be confident there is no actual conflict of interest, any referral fee is an interest substantial enough to create an appearance of partiality and is a factor about which the client is entitled to know.”
Legal and ethical issues regarding referral fees are disturbingly common in the medical profession. For a discussion of the conflicts of interest inherent in such arrangements see this post from Chris MacDonald’s excellent Business Ethics Blog: “If the person you’re relying on for advice is financially beholden to the person he or she is recommending, you have every reason to doubt that advice.”
Such practices are also common in the financial advisory services realm. See this discussion of relevant ethical standards, and note that – as with doctors – these cases sometimes cross legal, as well as ethical, lines.
Finally, the regulation of referral fees in the legal profession has existed for many years. However, the area is increasingly complicated by the phenomenon of referrals being made by non-attorneys to law firms, as described in this paper by John Dzienkowski of the University of Texas School of Law.
Indeed, in my own practice I have been offered referral fees by vendors selling C&E products and services. I always say No. I’d like to think that my steadfastness is the result of being virtuous, but in reality, it is just a matter of common sense. That is, for clients or prospective clients to have to worry about whether my advice was tainted would be devastating to my business. And no referral fee could ever compensate for that.
|
|
|
|
In a simpler economic time, the tangible rewards to oneself from doing good for others were fairly self-evident. A memorable articulation of this (from a chronicler of Eskimo life who is quoted in Robert Wright’s book Nonzero: the Logic of Human Destiny): “’the best place for [an Eskimo] to store his surplus is in someone’s else’s stomach.’” But as we have progressed from hunter-gatherer societies – where it was clear that sharing food today could lead to life-saving reciprocation tomorrow – to the modern world of complex capital markets more is now required to make the economic case for helping others.
That need, as described in a post earlier this year, arises in part “because of the enduring influence of a free-market critique of business ethics associated with Milton Friedman’s 1970 article ‘The Social Responsibility of Business is to Increase Profits.’ While I do not agree with his view, I understand its appeal: it has the virtue of simplicity – and hence being easy to apply; and, particularly with respect to public companies – where managers act as stewards of other people’s money – it can certainly be seen as fairness based.” Indeed, Friedman’s critique has special relevance to the COI Blog, as it suggests that managers acting in a socially responsible way may in fact constitute a conflict of interest vis a vis their shareholders. Planning to build a business abroad? Let a good company like these professional corporate services in Vietnam help you do it!
However, like many business ethics issues generally and COI issues in particular, resolving this one is less a matter of drawing from philosophy than social science, as Friedman’s view is based largely on an essentially zero-sum notion that a company’s acting ethically tends to disadvantage its shareholders economically. But, what if that premise were factually questionable? Indeed, as also noted in the above-referenced prior post, a then just-published study – looking at promoting integrity values, a different but related aspect of business ethics than corporate social responsibility (“CSR”) – had helped to show that “’high levels of perceived integrity are positively correlated with good outcomes, in terms of higher productivity, profitability, better industrial relations, and higher level of attractiveness to prospective job applicants,’” thereby undermining at least partly the view that good ethics is bad for business. Still, given how complex, contentious and consequential it is, this issue calls out for more research.
So, it is good news that another study – this one focused on CSR itself – has recently been added to the relevant literature in this area: “Socially Responsible Firms,” which is published by the European Corporate Governance Institute (ECGI) and authored by Allen Ferrell of Harvard University and ECGI, Hao Liang of Tilburg University and Luc Renneboog of Tilburg University and ECGI . It is available on SSRN and a summary of it can be found on the Harvard Law School Forum on Corporate Governance and Financial Regulation.
As noted in that summary, the authors’ focus was on the area of agency and particularly the Friedman-inspired critique that “socially responsible firms tend to suffer from agency problems which enable managers to engage in CSR that benefits themselves at the expense of shareholders. Furthermore [the critique posits] managers engaged in time-consuming CSR activities may lose focus on their core managerial responsibilities… Overall, according to the agency view, CSR is generally not in the interests of shareholders.” Using “a rich and partly proprietary CSR dataset with global coverage across a large number of countries and covering thousands of the largest global companies, [the study’s authors] test [both this agency view and its opposite – which argues that CSR in fact is value enhancing for companies] by examining whether traditional corporate finance proxies for firm agency problems, such as capital spending cash flows, dividend payouts and leverage, are associated with increased CSR. [They also test] the relationship between CSR and managerial pay-for-performance.”
As noted in the Harvard blog summary, the findings from this research help support the notion that good ethics – in this particular instance, CSR – is good business: “We do not find empirical evidence that CSR is associated with ex ante agency concerns, such as abundance of cash and a weak connection between managerial pay and corporate performance. Rather, higher CSR performance is closely related to tighter cash—usually a proxy for better-disciplined managerial practice in the traditional corporate finance literature … and higher pay-for-performance sensitivity. In addition, firms in countries with better legal protection on shareholder rights receive higher CSR ratings…. Finally, we find that CSR can counterbalance the negative effects of managerial entrenchment, and lead to higher shareholder value…”
So, definitely more complicated than the adage about filling Eskimo tummies, but the bottom line is that these and other results of their research “suggest that good governance is associated with higher CSR, and that a firm’s CSR practice is consistent with shareholder wealth maximization.” While no one study could ever definitively make the case for strong CSR or other aspects of good business ethics (just as no one study could never disprove such a case), the work of Ferrell and his colleagues should enhance the comfort that managers and boards of directors feel in moving in this direction.
|
|
|
|
In an unforgettable exchange in Michael Lewis’s wonderful book Liar’s Poker a Wall Street executive tosses a ten-dollar bill to a salesman who is heading for the airport and whom he tells to “take out some crash insurance for yourself in my name.” The salesman asks, “Why,” to which the executive replies: “I feel lucky.”
A story in today’s NY Times reported on a growing business in company-owned life insurance – in which a worker’s life is insured with the company as the beneficiary: “Because so-called company-owned life insurance offers employers generous tax breaks, the market is enormous; hundreds of corporations have taken out policies on thousands of employees.” There has been some effort to rein this business in: under “a law enacted in 2006 … [which] sought to curb the practice — companies now are restricted to insuring only the highest-paid 35 percent of employees, who must give their consent.” However, this type of insurance “remains a growing, opaque and legal source of corporate profit” – and something that, understandably, can be unsettling to those whose lives are insured for the benefit of their respective employers. Indeed, it has even earned a colorful sobriquet: “’dead peasant’ insurance, an allusion to Nikolai Gogol’s novel ‘Dead Souls,’ in which a con man buys up dead serfs to use them as collateral in a business deal.”
Certainly if an employee was betting against her employer that would be considered a conflict of interest (at least as a general matter). This is presumably why some companies’ policies prohibit employees’ short selling of company stock, irrespective of insider trading concerns. However, a COI-based line of analysis is a non-starter here because – at least in the US – employment-based fiduciary duties are largely (and starkly) asymmetric: employees owe duties of loyalty to their employers, but not the other way around.
But that’s not the end of the ethical inquiry, as deontology – the school of moral reasoning founded by Immanuel Kant, which provides much of the foundation for modern business ethics – instructs that you should “[a]ct in such a way that you treat humanity, whether in your own person or in the person of another, always at the same time as an end and never simply as a means.” And, while in the rough-and-tumble world of modern capitalism there may be many close calls with respect to application of this principle, dead peasant insurance seems pretty far over the line to me. Indeed, I was going to add that this is a practice that almost calls out for a modern-day Gogol to capture fully its moral ghoulishness – except that it might be hard to improve on Lewis’s non-fiction version.
|
|
|
|
What is the most potent type of conflict of interest? To my mind, those involving family members – as discussed in this earlier post on nepotism – are generally the strongest of all, given how deeply rooted our instincts to help our kin are.
But being in another’s debt would seem to be pretty powerful too – because of the control of one’s life that it can place in the hands of others. Moreover, compared to COIs involving an “upside” (e.g., moonlighting for one of your employer’s vendors) “debt conflicts” seem more likely to corrupt behavior – in part because of the behaviorist phenomenon of “loss aversion,” which holds that seeking to avoid a loss is generally a more potent force in shaping behavior than is achieving a gain. Indeed, you don’t need to peer deep beneath the mind’s surface to grasp the power of debt for, as Dickens’ Mister Micawber observed using plain old arithmetic, the smallest debt can clearly be the source of large-scale ruin. (“Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”) Thus, on various operative levels, a debt-based conflict can be particularly pernicious.
The most interesting recent “debt conflict of interest” case come to us from the U.S. Securities and Exchange which found that “certified public accountant James T. Adams repeatedly accepted tens of thousands of dollars in casino markers while he was the advisory partner on subsidiary Deloitte & Touche’s audit of a casino gaming corporation. A marker” – the SEC pointed out, for those few unfortunate souls who have never seen Guys and Dolls – “is an instrument utilized by a casino customer to receive gaming chips drawn against the customer’s line of credit at the casino. Adams opened a line of credit with a casino run by the gaming corporation client and used the casino markers to draw on that line of credit. Adams concealed his casino markers from Deloitte & Touche and lied to another partner when asked if he had casino markers from audit clients of the firm.” Based on this obviously egregious behavior (which, I should add, involved far greater sums than those discussed by Mister Micawber), Adams – who ironically had also been Deloitte’s Chief Risk Officer – agreed to be “suspended for at least two years from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.” The summary of California regulations is something to be read to learn about the online gambling and the sites to rely on.
This was as clear a debt conflict case as one might hope to find (meaning, of course, hope never to find again). But debt also comes in less obvious shapes too.
Consider this recent story from a trial now being held in the UK, the salient points of which (for this blog at least) are as follows: “A former UBS AG … banker told a London court that paying $7,100 for strippers to entertain consultants advising a German utility on a disputed derivatives deal didn’t create a conflict of interest.” Looked at it as an “upside conflict” – meaning the consultants receiving free entertainment – maybe it is indeed not a powerful a COI (although personally having never been to a strip joint that’s just a guess). But this particular sort of upside has an element of “debt conflict” too: given the embarrassing nature of the expenditure the consultants could well be concerned that their dirty secret would be revealed, i.e., they would likely be indebted to the bank for keeping quiet. Of course, there would be reason enough to hide $7100 worth of even wholesome recreation paid for by a vendor, but it presumably has less potential to embarrass – and thus cause serious reputational loss – than does being entertained by strippers.
Finally, how should information about “debt conflicts” be used in C&E programs? Certainly, debt should be included in the interests section of the code of conduct or COI policies – which it usually, but not always, is. Moreover, if one is providing examples of COIs in training and other form of C&E communications it may be worth mentioning there as well. The point here is not merely to identify debt as one of many sources of potential COI, but to help give examples of COIs that will resonate with employees – which I think debt-related ones often will do, precisely because of the above-described control aspect. And powerful examples of the effects of COIs can help to strengthen compliance in this area generally.
|
|
|
|
I’m not one who sees ethics and compliance as operating in wholly distinct spheres, and have long felt that they closely complement each other. (For more on the general relationship between the two see this piece from the SCCE’s C&E journal.) But, of course, they are not the same thing, and to some extent each has reach that the other doesn’t.
More specifically, for any given organization, the boundaries of compliance are – to a significant extent – defined by risk assessment. Compliance-related risk assessment can and should be done in an expansive and innovative manner (as discussed in this complimentary e-book ) but it is ultimately finite in ways that are less applicable to true ethical standards. And when it comes to CEOs – who have near infinite capacity for engaging in mischief in their companies – the latter form of protection can be particularly important.
To take the example of conflicts of interest, a prior post described how CEO COIs can be different than those faced by the rest of us and a NY Times story last week seems to illustrate that point. It concerns a company (Questcor Pharmaceuticals) which appears to have timed various corporate announcements with an eye toward boosting its stock price in advance of sales by the CEO pursuant to a “10b5-1” plan (which is an automated procedure to sell stock at specified future dates based on prior instructions). I should stress that the case for the CEO’s stock sales being the motivation for the scheduling of the announcements in question is wholly circumstantial. Still, a commentator from Bloomberg who set out to debunk the case ran the numbers and ended up essentially “rebunking” it – i.e., supporting by statistical analysis, at least to some degree, what the Times suspects.
Not being statistically adept, I have nothing to add about the specifics of this case (other than to say I hope the company’s board conducts an independent inquiry of the matter). Rather, I mention the story because I have to believe that this sort of conflict of interest – assuming, for the purposes of discussion here, that the theory of wrongdoing is well founded – is unlikely to show up in most risk assessments, and thus this illustrates the earlier point about the limits of compliance. But from an ethics perspective, no CEO (or board member or “gatekeeper”) could reasonably believe that gaming a 10b5-1 plan in this way was okay, as it would involve using the company’s resources for purely private purposes (clearly an ethical breach – but perhaps less easily shown to be a legal one).
Indeed, it is precisely because a COI like this is so unpredictable – the Times story seemed to suggest that it was indeed something new under the sun – that it is potentially harmful. That is, when an unforeseeable COI emerges it raises the question: If the CEO is capable of doing this, what other mischief is he or she up to?
What this means is that the primary damage to the shareholders is not whatever costs can be directly traced back to timing corporate announcements for the personal benefit of a executive – an exercise that would likely be too speculative to be meaningful; and, even if the costs were measurable, they would likely end up being a small amount. Rather, the harm flows from a general loss of trust by shareholders from learning that a CEO puts their interests second and – because a CEO can influence her company in so many ways – not being able to monitor all the avenues of possible betrayal that might exist.
Understanding that sort of more general harm is one of the important ways an ethical perspective can supplement a more narrow compliance-based one. And it is part of the reason that boards and senior executives need to understand the importance of truly operating pursuant with high ethical – as well as compliance-related – standards.
Finally, for those who’d like to read more related to this topic please see Scott Killingsworth’s excellent paper on C-Suite behavior, discussed and linked to in this earlier post.
|
|
|
|
“It is difficult to get a man to understand something, when his salary depends on his not understanding it” These famous words were uttered by Upton Sinclair long ago but, although his concern was more with politics than the types of conflicts of interest discussed in this blog, its logic is no less applicable to the latter – and no less forceful with the passage of time. If money can’t always buy people’s souls, it still very frequently affects their understanding and actions. And, in at least one way, the situation may be getting worse.
The pageant of COIs indeed seems endless: lawyers, financial advisors, journalists, economists, medical doctors, auditors, compensation consultants. (For more on this see the posts collected in the Industries and Professions tab on the left hand side of the screen.) To this list should now be added – dental researchers. You can click resources to know more about quality dental services.
According to story last month in Medscape Today News, a recent published study showed: “Researchers are more likely to report positive results about dental treatments if they get paid by the [companies’] marketing the treatments… In an analysis of 135 randomized clinical trials from leading dental journals, those in which the authors had a conflict of interest were 2.4 times more likely to have positive results, the study shows.”
The article did note the view of a “former editor-in-chief of the Journal of the American Dental Association and past president of the [International Association for Dental Research ] … that she is confident existing safeguards will keep the dental literature from being distorted.” On the other hand, one of the study’s authors from St. Charles dental clinic– University of Toronto researcher Romina Brignardello-Petersen, DDS – said, “many readers do not know how to assess the evidence critically…To be completely honest, probably it does have a big impact because most people who use the literature are not accustomed to doing critical analysis of it.”
Still, this may be a difficult problem to address. As also noted by Dr. Brignardello-Petersen, “’unfortunately, it would be very hard to conduct clinical research if there was no sponsorship… . Randomized clinical trials are expensive to conduct, and researchers have a bigger opportunity to conduct research if they work with one of the companies,’” a factor which is particularly relevant to dentistry given that government funding for research in that field is “meager.” For the best dental procedures, Natural Teeth Implant Center: dental implants in Jacksonville FL need to be contacted.
Indeed, at a time when government funding for other types of medical research is increasingly in jeopardy, it is scary to contemplate the broader implications of the dental research COI study. But Sinclair wouldn’t be surprised by any of it.
|
|
|
|
Directors’ conflicts of interest are one of the favorite topics of this blog. Among our prior posts on this subject are this one on what to cover when training directors on COIs , this one on corporate charitable giving, this one on board COIs in internal investigations and this one on COIs in connection with service on the board of a joint venture. We’ve also addressed the need for directors to monitor the COIs of senior executives in their companies – and the dire consequences that can arise from a failure to do so.
So, what’s new in the area?
First, this recent story from Bloomberg news reported on possible conflicts involving a prominent university’s board: “13.5 percent of Dartmouth’s $3.5 billion endowment is managed by firms that are related to trustees or investment committee members.” Dartmouth is not alone in this respect, but some schools do ban the practice, based on COI concerns: “Trustees shouldn’t manage university money because of the potential for self-dealing and other abuses, says Mark Williams, a former Federal Reserve bank examiner who teaches risk management at Boston University. ‘Even the appearance of conflicts of interest can create reputational risk and harm the institution,’ Williams says. ‘The perception is almost as bad as the act of conflict. It does damage to that reputation, which has taken many universities centuries to create.’”
On the other side of the coin, the alumni in question have apparently been very generous in their gifts to the school, so it is arguable that on a net basis the practice is worthwhile – although balancing tangible gains against possible intangible losses is hardly an easy calculus to undertake in any meaningful way. The piece also noted: “The potential conflicts can be thrown into high relief when funds lose money. As chairman of Yeshiva University’s investment committee, J. Ezra Merkin funneled the school’s money via his hedge funds to con man Bernard Madoff in return for fees. The $1.1 billion endowment lost $14.5 million when Madoff’s Ponzi scheme blew up in 2008.”
I don’t know what to add to this except the general comment that many non-profit organizations (i.e., not just universities) could use more rigor in their approaches to COIs. Here is a piece that speaks to that.
Second, this recent post, by Klaus J. Hopt, a professor and director (emeritus) at the Max-Planck-Institute for Comparative and International Private Law, in Hamburg, on the Harvard Law School Forum for Corporate Governance makes an interesting comparison between the duty of loyalty owed by directors under US and UK law and the prevailing approach under the continental system: “The duty of loyalty is highly developed in Anglo-American countries, but it has received more hesitant attention in continental European countries.” However, the piece notes: “More recently there are tendencies to more convergence [and] more attention is paid to prevention, remedies and enforcement.”
At the risk of sounding US centric (whereas I’m really just COI-centric), this does sound like a positive development. Moreover, and beyond the scope of Professor Hopt’s paper (which can be downloaded via the Harvard site), it is interesting to consider that under Delaware law (in particular the Stone v Ritter case) a board’s compliance and ethics oversight duties are actually based on the duty of loyalty – and perhaps the convergence will extend in that direction, as well.
|
|
|
|
An analysis published this week in The Guardian found of the “50 most valuable UK public companies, 33 hired pay consultants who also sold services to other parts of the same company during 2011. The list includes businesses that attracted some of the greatest attention during the shareholder spring, in which investors began rebelling against pay awards.” Both the consultants and companies involved denied any conflicts but, as the paper reported: “the High Pay Commission was ‘concerned at the extent to which remuneration consultants are encouraging the ratcheting up of executive pay. In particular we are concerned that remuneration consultants have a direct conflict of interest where they provide executive pay advice and cross-selling for other business.’ [The Commission] added: ‘While the voluntary code for remuneration consultants specifies that they should not cross-sell services, anecdotal evidence and interviewees the High Pay Commission met during this research suggest this practice is widespread.’ ”
But is there truly harm in these sorts of COIs? The research in this paper – Compensation Consultant Independence and CEO Pay – published last year suggests that there is. As described by the authors: “Using a unique data set of compensation consultant service fee in U.S. S& P 500 firms in 2009, we find strong evidence that compensation consultant’s conflicts of interest is associated with higher CEO pay…evidence shows that that CEO receives 7% more salary, 22.9% more bonus and 15.6% more total compensation in firms where compensation consultants provide other services than that of firms where the consultants do not provide other service. In addition, we also document that CEO’s pay-for-performance-sensitivity (PPS) is lower in firms where the consultants have potential conflicts of interest.”
|
|
|
