Interests

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.

The most interesting conflict of interest case of the (still young) year

The most prominent COI story in the past few days comes to us from Mexico where, as described in The Economist, that country’s president Enrique Peña Nieto “announced that he, his wife and his finance minister will become the first subjects of a conflict-of-interest investigation” that was “triggered by revelations that [they] bought houses on credit from affiliates of a building firm that has benefited from government contracts.” But for me the most intriguing story of the week (and indeed the year, at least so far) comes from the ethical wonderland that I call my home – New Jersey.

As reported initially by the Bergen Record:   “Federal prosecutors have [launched a probe] into a flight route initiated by United [Airlines] while [David] Samson was chairman of the [Port Authority, which] operates [Newark Liberty Airport]. The route provided non-stop service between Newark and Columbia Metropolitan Airport in South Carolina — about 50 miles from a home where Samson often spent weekends with his wife. United halted the non-stop route on April 1 of last year, just three days after Samson resigned under a cloud. Samson referred to the twice-a-week route — with a flight leaving Newark on Thursday evenings and another returning on Monday mornings — as ‘the chairman’s flight,’ one source said. Federal aviation records show that during the 19 months United offered the non-stop service, the 50-seat planes that flew the route were, on average, only about half full. United… was in regular negotiations with the Port Authority and the Christie administration during Samson’s tenure over issues that included expansion of the airline’s service to Atlantic City and the extension of the PATH train to Newark…” A story from NJ.Com added that the  flight’s booking rate of 50% was significantly lower than “the rate of 85 percent or higher common among carriers” and also that the Chair of the NJ assembly’s transportation committee said the benefit to United of running this unprofitable route “could be PATH. It could be how much they pay for landing planes. It could be for how flights are dispatched at the airport. It could be a multitude of things. And it could be none of them.”

Assuming for the sake of discussion that it is indeed at least one of those or other financial benefits, the case should be interesting to COI aficionados  for several reasons.

First, the main law enforcement challenges to investigating the matter will likely be (as it is many COI/corruption cases) proving wrongful intent.  Presumably, Samson knew enough not to document what was seemingly happening here (although his comments about the “chairman’s flight” may suggest otherwise),  but what about United?  Given how cost conscious airlines have been in recent years, one imagines that someone at the company would have needed to document why they were running half full planes.  Moreover, for various reasons this seems like the sort of arrangement that would have been known at a reasonably high level in the company (although finding documentation of that may be a taller order).

Second, it will also be interesting to see what role, if any, United’s compliance program played in these events. In light of how many people at the airline could well have had some suspicion about these flights, it would be pretty damning if none of them called the C&E helpline. On the other hand, if the issue was raised internally and buried, that would be even worse.

Third, it may be noteworthy that while the Company’s code of conduct does have a section called “When the government is the customer,” the bribery discussion there is limited to international transactions.   Perhaps like a lot of US companies, United’s compliance team failed to grasp the risks of homegrown corruption generally (and the Jersey variety in particular).  Other companies may wish to revisit their own codes to see if they could be subject to the same criticism.

Two final notes.  First, the facts of this case are just beginning to emerge and the speculations in my post should not be read to suggest that  Samson or United are necessarily guilty of corruption. Seriously.  Second, for an earlier story about a possible COI involving Samson (and his connections to the ethically challenged Christie administration) see this post  and the article linked to therein.

Referral fees and conflicts of interest

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.

 

Just friends? Chris Christie and Jerry Jones

A long time ago – before Enron, World Com and Sarbanes-Oxley – business ethics issues in general and conflicts of interest compliance requirements in particular had little prominence in the work lives of the average employee.  But now – through codes of conduct, policies, training, certifications, hotline calls, investigations and discipline – that has changed.

Of course, not all ethics issues are of equal interest to all employees.  But COIs tend to be high on the list, because of their inherently personal nature.  In the post-Enron era, employees who used to be allowed to receive hospitality from suppliers often now are barred from doing so.  And to a large degree they accept that as being good for their companies and therefore ultimately good for themselves – so long as the rules apply to everyone equally.   Indeed,  when one of their colleagues breaks those rules the hotline can ring off the hook – often motivated not by jealousy but a sense of fairness that is truly innate to the human species. (For more on the evolutionary foundation of fairness as a moral value see this chapter from Jon Haidt’s The Righteous Mind.)

Over the past week, the story of NJ governor and presidential aspirant  Chris Christie  and family being flown to a Cowboys game in Dallas by the team’s owner Jerry Jones and being entertained in Jones’ sky box has been oft told in the press and echoed by football fans throughout the country too.  The COI issue is that a company in which Jones was a significant investor received a lucrative contract with the Port Authority, an entity over which, as governor of New Jersey, Christie has powerful influence (and also an entity which has been plagued by patronage).  Here is an article from In These Times  with more details about the story.

Christie’s defense is that he and Jones were  personal friends. While it is true that the relevant NJ ethics code does permit gifts from personal friends, this cannot mean what the governor claims as that would essentially permit any government employee to receive a gift from any vendor by declaring his or her friendship with that vendor. Not only would such a loophole gut the ethics law, it would encourage vendors and government employees to become real friends  - thereby making the COI worse and further discouraging ethical vendors from competing for the government’s business. (For the details of the purported Christie-Jones friendship see this story  - in which the governor says the friendship started only a few months after Jones’ company got the Port Authority contract, which underscores that this is not the kind of relationship for which the gift exception was designed.)

As a former federal prosecutor who brought many corruption cases, the governor almost certainly knows that this interpretation of the ethics law is untenable.* But as a politician with his eyes on the White House he seems to have made the choice that his “jury” – potential voters – won’t care.

Years ago, another brash politician – the first Mayor Daley of Chicago – was caught in a conflict of interest involving a family member getting government business, and responded:  “If I can’t help my sons, then [my critics] can kiss my ass. I make no apologies to anyone.”  Given the broad tolerance for COIs at the time,  it is not surprising that this didn’t seem to hurt him (at least from what I recall about the incident).

But in the post-Enron era that way of thinking may no longer make sense.  As noted above, many American workers are reminded constantly about the importance of an ethical approach to COIs – and know that if they tried to do something like what was done here they would probably be fired.  And the obvious unfairness of a double standard like this could end up hurting Governor Christie in ways that the late Mayor Daley could not have imagined – but which the governor should have foreseen.

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* The Justice Department’s example of when the personal relationship exemption to gift rules applies:  Jenny is employed as a researcher by the Veteran’s Administration. Her cousin and close friend, Zach, works for a pharmaceutical company that does business with the VA. Jenny’s 40th birthday is approaching and Zach and his wife have invited Jenny and her husband out to dinner to celebrate the occasion. May Jenny accept? Yes.Gifts are permitted where the circumstances make it clear that the gift is motivated by a family relationship or personal friendship rather than the position of the employee.

Some other reading of possible interest:

A story from several years ago about a Justice Department Inspector General Report finding travel expense abuses by Christie when he was a US Attorney.

An earlier post on attendance at sporting events and COIs.

 

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.

Risk assessments for office romances

Perhaps the most celebrated story ever about a love affair is Anna Karenina  and the story doesn’t end well – as the distraught heroine throws herself under a train.  Office romances typically don’t end that way, but they are not without risks – particularly those involving senior leaders.

This is indeed an oft-told tale. Here is an earlier post on “frisky executives” discussing one such case from 2012.  Others around that time involved the CEOs of Lockheed Martin and Best Buy. And the latest in this line concerns the CEO of Johnson Controls.

As described in this article of a few weeks ago in the Milwaukee Business Journal, that CEO “failed to inform the corporation’s audit committee about the potential conflict of interest in his extra-marital affair with a consultant hired by the company.”  The net result: a reduction “of his annual incentive performance plan payout to $3.92 million, down nearly $1 million.”

A few thoughts on this case, perhaps of use to any CEO conducting a pre-office affair risk assessment.

First, while the economic hit is high it seems justified for a high ranking official – anything less could be seen as a slap on the wrist. Indeed, one of the cases discussed in the “frisky executives” post also involved a million dollar penalty. So, don’t expect economic leniency.

Second, consider the risk to the other party. In the case of the Johnson Controls executive, she was a consultant in a firm that lost an apparently long standing client in the scandal. No surprise there either.

Finally, while disclosure is necessary it may not be sufficient to prevent harm.  That is because even if an actual COI can be avoided the appearance of a COI might be inescapable – as the natural suspicion among others in the workplace could be that with the relationship comes workplace favoritism. For more on how some  apparent COIs simply can’t be mitigated by disclosure see this post.

(Thanks to COI Blog reader Don Bauer for letting me know about this story.  And, happy new year to all.)

 

Business ethics research of interest to your whole company

In this article from the most recent issue of Ethisphere magazine Jon Haidt of NYU and I take readers on a tour of the Ethical Systems web site. ”EthSys” offers  cutting edge social science research that should be of  interest not only to C&E professionals but also  to board members and executives; to those working in finance, law, HR, audit and procurement; and to many others in the workplace as well.

The ideas and information on EthSys can be helpful in developing C&E training, drafting ethics sections of employee newsletters and in other types of  company communications.  This knowledge can enrich the ethics-related dialogue in workplaces by turning what sometimes seems like a dry and static subject into a compelling and dynamic one.  It can help leaders lead ethically – and show that the same sort of social science findings and insights that increasingly are seen as key to running a profitable business are also essential to running an ethical one. It can also be useful in designing risk assessments; creating various types of policies and procedures; and crafting recognition strategies to promote ethical behavior.

And, that’s only part of what EthSys can do for your company.

So, take the tour yourself.

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.

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.

The conflict of interest case of the year

With less than four months to go, the corruption case again the governor of Virginia and his wife seems destined for 2014 COI case of the year honors.  But while much of the press revolved around the Governor’s unsavory – and unsuccessful – trial strategy of throwing his wife/co-defendant “under the bus,” for COI aficionados what is noteworthy about the prosecution lies elsewhere.

First, on the public policy level, it highlights – as much as any case has in recent memory – the need for strong government ethics laws at the state level.    Perhaps states like Virginia (and NJ, where I live, which is infamous for its culture of corruption) will now look for guidance to those states that have been successful on this front, such as ethics front-runner Oregon.  

Second, on a law enforcement level, the case is precedent setting.  As described in this Washington Post article : “[L]egal experts say the case — especially if it survives an appeal — could encourage prosecutors to pursue similar charges against officials who take not-so-obviously significant actions on behalf of their alleged bribers and make it easier for them to win convictions. ‘I think the case clearly pushes the boundary of ‘official act’ out a bit farther, and I think that’s quite potentially important,’ said Patrick O’Donnell, a white-collar criminal defense lawyer at Harris, Wiltshire & Grannis. ‘It’s striking that here, McDonnell was not convicted on any traditional exercise of gubernatorial power. It wasn’t about a budget or a bill or a veto or appointment or a regulation.’ [Rather,] ‘[t]he McDonnells stand convicted of conspiring to lend the prestige of the governor’s office to Richmond businessman Jonnie R. Williams … by arranging meetings for him with state officials, allowing him to throw an event at the Virginia governor’s mansion and gently advocating for state studies of a product that Williams’s company sold.”

Third, and most relevant to C&E professionals, the case appears to be a striking example of the behaviorist learning, “we are not as ethical as we think” – a principle that helps underscores the need for strong C&E programs in organizations of all kinds.  That is,  based on McDonnell’s testimony,  there seemed to me a real possibility that he genuinely believed that he was not corrupted by the gifts and loans from Williams, and there is indeed some indication that the jurors found him sincere, at least generally.  But believing yourself to be unaffected by a conflict of interest doesn’t make it true – given the results of various behavioral ethics studies showing that COIs impact us considerably more than we appreciate.  (Posts relating to some of these studies are collected here.)    Perhaps this makes the McDonnell case – although more about conflicts in government than in business – a teachable moment for C&E practitioners in all settings.

Prosecutors, massive fines and moral hazard

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.)