Edited by Jeff Kaplan
Not every interest matters for COI purposes. In this section of the blog we will identify situations and principles illuminating this aspect of the COI field, with sub-categories devloted to various of the most common types of interests considered for COI purposes.
Many years ago, I lived next door to a young police officer and his family who, while presumably paid a modest salary, drove a pretty expensive car. He was able to do this, I learned, because his department seized autos (and other property) of various suspected offenders and then let its officers drive the vehicles for their personal use. Although he seemed in every respect like an honorable young man, the impact that this practice could have – and also appear to have – on law enforcement decisions left me feeling uneasy.
The latest issue of The Economist has a sweeping indictment of the US system of business law enforcement. There are many components to this assault, including that: large fines are, in effect, extorted from companies, but the guilty individuals often go free (which, in my view, is quite true); settlements of these cases often obscure facts that should be made known to the public (with which I also agree); US laws are so numerous and complicated that companies face a grave risk of prosecution for conduct that they never could have suspected was wrongful (with which I agree only slightly); and part of the cost of this system is that “[e]normous amounts of time and money are now being put into compliance programmes that may placate judges, prosecutors, regulators and monitors but undermine innovation and customer services” (which I also think is an overstatement, but also is true enough for companies to be careful not to go overboard in their compliance programs). But the critique that interested me the most concerned the view that the prospect of recovering large fines influences law enforcement decisions, i.e., a corporate variation on the story in the first paragraph of this post.
This part of The Economist article relied in part on a paper in the January 2014 Harvard Law Review – “For-Profit Public Enforcement,” by Margaret H. Lemos (Professor, Duke University School of Law) and Max Minzner, (Professor, University of New Mexico School of Law), in which the authors seek to show “that public enforcers often seek large monetary awards for self-interested reasons divorced from the public interest in deterrence. The incentives are strongest when enforcement agencies are permitted to retain all or some of the proceeds of enforcement – an institutional arrangement that is common at the state level and beginning to crop up in federal law. Yet even when public enforcers must turn over their winnings to the general treasury, they may have reputational incentives to focus their efforts on measurable units like dollars earned. Financially motivated public enforcers are likely to…undertake more enforcement actions [and] focus on maximizing financial recoveries rather than securing injunctive relief,… Those effects will often be undesirable, particularly in circumstances where the risk of over-enforcement is high.”
I don’t know if it is quite right to call this a conflict of interest, but it does seem close to a moral hazard, in that those with power to reduce risks (prosecutors) may have interests that are not well aligned with those who bear the consequences of their actions (the public). Moreover, and independent of this concern, prosecutors sacrificing tomorrow’s interests (as the benefits of deterrence take place entirely in the future ) for a quick buck today – the very trade-off for for which guilty companies are often castigated - itself can be harmful because, as Justice Brandeis famously said: “Our government is the potent, the omnipresent teacher. For good or for ill, it teaches the whole people by its example.”
(For more on moral hazard see the posts collected here. And here is a post on implications for risk assessment of the government’s seeking large financial recoveries from corporate defendants.)
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.
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.
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.”
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 .
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.
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.
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.
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).
-Overview of the need for behavioral ethics and compliance
BEHAVIORAL ETHICS AND COMPLIANCE PROGRAM COMPONENTS
- “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?
Communications and training
- Behavioral ethics and just-in-time communications
- Values, culture and effective compliance communications
- Behavioral ethics teaching and training
- Moral intuitionism and ethics training
- Behavioral Ethics and Management Accountability for Compliance and Ethics Failures
- Redrawing corporate fault lines using behavioral ethics
- Include me out: whistleblowing and a “larger loyalty”
- 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
- Too close to the line: a convergence of culture, law and behavioral ethics
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
- Insider trading, behavioral ethics and effective “inner controls”
- Insider trading, private corruption and behavioral ethics
- Using behavioral ethics to reduce legal ethics risks
OTHER POSTS ABOUT BEHAVIORAL ETHICS AND COMPLIANCE
- An ethical duty of open-mindedness?
- How many ways can behavioral ethics improve compliance?
- Meet “Homo Duplex” – a new ethics super-hero?
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.”
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.
Years ago, two young lawyers at a firm sat in the office of a senior partner who was on the phone conducting a reference check for a potential hire, waiting for the call to end so they could begin the meeting they had planned with him. They listened silently as the partner went down the list of the questions that one asks in these calls – Is the candidate hard working? Is he smart? Does he have the potential to attract business? – but when he inquired whether the candidate was honest, one of the young attorneys turned to the other and cynically asked in a whisper: “What’s the right answer?”
Today, when business ethics has become part of the corporate mainstream, it is more difficult (though not impossible) to imagine a conversation like this happening. Indeed, organizations of all kinds routinely proclaim that ethics matters in the context of hiring – and the related settings of deciding promotions and compensation. But what does that actually mean?
In an excellent post last week in Slaw, which was responding to an article summarizing various studies that showed that “legal employers rank ‘integrity, honesty and trustworthiness’ as a crucial quality in a prospective lawyer hire,…” Professor Alice Woolley of the University of Calgary Law School wrote: “While I can’t help but be pleased to see this apparent consensus on the importance of ethics and professionalism to legal practice, I think the conversation as framed has the potential to lead us astray… by [among other things] assuming that it is ethical actors who create ethical behavior…” In fact, she argued: ”the kind of person I am will affect my behaviour in a far less significant way than will the circumstances in which I find myself, ” and she notes further that “there is far greater consistency of behaviour by different people within a single situation than there is from the same person across different situations.”
I completely agree with Professor Woolley’s behaviorist analysis and, as described in a series of earlier posts, have suggested that behavioral ethics supports the need for strong corporate compliance programs. That is, such programs a) are predicated on the assumption that most individuals are in fact vulnerable to pressures/temptations to engage in wrongdoing – i.e., what Woolley calls situations; and b) can play a crucial role in minimizing the risk causing potential of such situations. Moreover, it is also the case that many of the ways in which compliance programs attempt do this – e.g., propounding standards and procedures, training on these and auditing/ monitoring to ensure they are followed - are not directed at hiring the ethically fit and barring others from one’s organization.
However, focusing on ethics in hiring and other personnel decisions – particularly when reinforced by other compliance program efforts – does have a role to play in mitigating ethics risk, in that these measures can help individuals:
- make the right decisions when faced with a risky situation; or
- better yet, take steps to prevent such situations from occurring in the first instance.
Here are some thoughts (including “practice pointers”) on how to do this.
With respect to hiring, business organizations generally conduct some due diligence on candidates but – while generally necessary – these sorts of efforts serve limited purposes. By contrast, too few companies ask ethics-related questions in employment interviews – e.g., “Describe an ethical challenge you’ve faced and how you dealt with it?” The point of asking this (or similar) questions is less about identifying individuals of strong ethical character – something which, as noted above, behavioral ethics teaches us doesn’t matter much in determining how people respond to actual ethical challenges. Rather, its principal benefit is in conveying that ethics matters in tangible ways (which hiring decisions clearly are) to a company – which can positively impact not only the job candidate but the interviewer as well. A practice pointer: it can be helpful to reinforce in compliance training for managers the importance of ethics-related job interviewing – as this helps convey the larger message that managers are responsible for the conduct of those who report to them.
Note that this sort of inquiry is most important for more senior-level positions. In particular, in hiring (or approving the hires of) candidates for senior posts, boards of directors should ask what was the “ethics component” of the process – a question which can reinforce their company’s expectations for the new hire, the other senior executives… and the board itself. Moreover, this topic should be included in board ethics training.
Turning from hiring to promotion/compensation/recognition, the most common tool for making ethics count in these types of personnel-related matters is the performance evaluation. In my experience, this is an area of struggle (and under-performance) for a great many companies. A practice pointer: the key to success here can be tailoring ethics-related criteria in performance evaluations to different positions/functions, rather than painting with a broad brush.
Some companies do give direct financial awards for exemplary ethical behavior – amounts which are often, but not always, nominal. Practices of this sort have been around for a long time – indeed, Bear Stearns had an internal compliance “bounty” system as far back as the 1990’s, at least for certain types of violations – and they have been the subject of much controversy, with many people taking the position that it is flat-out wrong to pay employees to do what is right. I don’t have such a completely negative view on it, but do think that appealing to the “pro-social” side of human nature may be more effective than giving cash for ethics. A practice pointer: as part of the management training mentioned earlier, managers should be shown how to identify acts of truly exemplary ethical behavior and compliment the employees involved (including when to let other employees know about this).
Finally, most companies have means to weed out genuine bad actors in the promotion process, but too few have a mechanism to identify those who are merely weak when it comes to ethics, e.g., supervisors who convey the message that required ethics training is a “necessary evil.” A practice pointer: companies should have a requirement for promotions to ranks above a certain (typically high) level that the decision makers must receive the input of the compliance & ethics officer. Not only can this be a helpful tool for ensuring that promotions reflect company values, but the very act of putting the C&E officer in this position of power can - like some of the other strategies described in this post – help shape in a positive way the sorts of situations to which Woolley refers.
(Thanks to the recently launched Behavioral Legal Ethics Blog for alerting me to Woolley’s post.)
In “Behavioral Ethics: Can It Help Lawyers (and Others) Be Their Best Selves?” – a preliminary draft of a paper which has been accepted for publication by the Notre Dame Journal of Law, Ethics & Public Policy - Robert A. Prentice of the University of Texas at Austin’s McCombs School of Business reviews various findings of behavioral ethics research and presents ideas for how individuals and businesses can help address the challenges posed by these findings, including:
- the use of communications strategies to counter “ethical fading”;
- the importance of punishing even minor instances of bad behavior to mitigate the danger of “incrementalism”;
- rigorous enforcement of conflict of interest polices and “setting reasonable rather than extravagant incentive structures for their employees” – both to limit the harm cause by the “self serving bias”;
- monitoring the use of euphemisms by employees to address the often pernicious impact of rationalizations;
- a number of measures to mitigate the powerful contextual factors that can serve as a breeding ground for unethical conduct – e.g., treating employees well, given that behavioral ethics studies have shown that “[e]mployees are more likely to act unethically if they are exhausted, time-crunched, or feel they have been mistreated”; and
- use of a company’s “organizational reward and control systems [to] boost moral ownership…[and] create feelings of [moral] efficacy.”
For those considering how to apply behavioral ethics to strengthen compliance programs, Prentice’s piece is a very good place to start. I also recommend Scott Killingsworth’s paper on C-suite behavior and note that over the years the COI Blog has discussed various ways of using compliance program mechanisms – such as risk assessment – as a device for delivering behavioral ethics thinking into business organizations.
But separate from the issue of how behavioral ethics can be deployed in companies is the threshold question of how to get companies to move in this direction, i.e. persuading them of the “why to” as opposed to the “how to.” In this connection note that:
- while some of the experiments in this field are fairly recent, the core learning of behavioral ethics – that context, as opposed to character, plays a greatly underestimated role in dictating how ethically we act – is more than forty years old; but
- notwithstanding this, it appears (from a wide range of sources) that relatively few companies consider behavioral ethics as much more than a subject of curiosity - or what one colleague recently referred to as “parlor games.” Another colleague recently wrote to me that people in the C&E field “just do not accept behavioral science as real” – although he added the hopeful word “yet” at the end of his e-mail. And from a review of the agenda of the many C&E conferences that have been held over the past few years behavioral ethics seems much more like an extracurricular activity than it does part of the “core curriculum” of the field.
In a way this is not a surprise. Those managing compliance and ethics programs often struggle just to accomplish the basic goals of their jobs on a daily basis – e.g., trying to get all the sales people to take the code of conduct training or completing the due diligence of a new distributor on a rush basis – and simply may not have the bandwidth to grapple with the implications for their programs of a new view of human nature. In addition, compliance managers are rarely challenged by senior management to be innovative to the degree that traditional business functions (e.g., R&D, sales and marketing) are.
This is where the board of directors can play a key role. Although they cannot be expected to immerse themselves in all the research on this subject, they can and should ask management a simple question: What are we doing about behavioral ethics in our company?
Based on my experience, the right question from a board member can often make things happen – and happen quickly – in a company’s C&E program. An inquiry from the board can be the catalyst for strategic thinking in a field dominated by tactical considerations. And, in this case, if enough boards ask this question, it could be what is necessary for behavioral ethics to begin to live up to its full promise in improving behavior by businesses.
(For more on the importance of boards asking C&E questions, see this piece from the FCPA Blog.)