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.
Over the past few years, the COI Blog has devoted a fair bit of attention to considering what “behavioral ethics” can mean for corporate compliance programs. An index of these writings can be found here. Conspicuously absent from this compilation was anything on the important behavioral concept of “framing.”
But blogs abhor a vacuum, and fortunately this gap has now been filled courtesy of an excellent article by Scott Killingsworth (of the Bryan Cave law firm) in the latest issue of Ethisphere magazine. As he notes:
Psychologists have much to say about the phenomenon of “framing”—the process by which we decide “What kind of situation is this? What rules and expectations apply?” How we frame a situation affects our thinking and our behavior. We know, for example, that merely framing an issue as a “business matter” can invoke narrow rules of decision that shove non-business considerations, including ethical concerns, out of the picture. Tragic examples of this “strictly business” framing include Ford’s cost/benefit-driven decision to pay damages rather than recall explosion-prone Pintos, and the ill-fated launch of space shuttle Challenger after engineers’ safety objections were overruled with a simple “We have to make a management decision.” We are surprisingly susceptible to external cues about how a situation should be framed. For example, researchers have found that simply renaming “The Community Game” as “The Wall Street Game” cuts cooperation in half: the business frame suggests not only what is expected of us, but what tactics we should expect from our opponent.
There’s much more to this article, but I won’t quote or summarize anything else as I encourage you to read the original. However, I do want to add two thoughts about what framing means from a C&E program perspective.
The first is pretty obvious: framing – and other key behavioral ethics concepts – should be part of C&E training. In particular, companies should consider including a high-level review of behavioral ethics concepts (with examples) for general employee training and a more detailed version for senior managers and “controls” personnel.
The second is less obvious: these dangers underscore the importance of having a C&E officer whose “reach” makes it likely that she’ll be at the table when framing risks first surface. Moreover, that may be an additional reason to have a CECO who also wears the General Counsel hat (as discussed in this recent post), since by definition these risks don’t appear to be ethics-based; i.e., the GC in most companies is more likely to be part of what is ostensibly a general business discussion than is a non-GC CECO.
At his trial for Libor rigging, evidence was introduced last week that former trader Tom Hayes had told the Serious Frauds Office that “many of the people responsible for submitting panel banks’ Libor rates also traded products linked to the rate, creating an inherent conflict of interest” and that “’[n]ot even Mother Teresa wouldn’t manipulate Libor if she was trading it,…’”
While obviously somewhat self-serving, this colorful bit of analysis still helps to underscore the overarching behavioral ethics point that to reduce the risk of ethical transgression often one cannot always count on the characters of those involved. Rather, the situation will play the decisive role.
Inherent COIs are an instance of that. Granted, they are just one of many such types, but they may also be more common than most others, and hence worth further study.
And beyond an area of interest to behavioral ethicist scholars, seeing some COIs as being inherent (or near to inherent) can be useful to others, too, such as:
– C&E professionals, who should consider the category of inherent COIs in their risk assessments.
– Senior managers and directors, who should – as part of their C&E program oversight – make sure that nothing their company is doing or contemplating doing falls into (or anywhere near) this category of risk.
– Enforcement personnel, who often can find good fishing in the inherent COI waters.
– Individual business people, who – in making career decisions – should steer clear of jobs that could involve inherent conflicts of interest.
On this last point, Mr. Hayes would surely agree.
And on the point about the role of enforcement personnel, in my view the “fishing” shouldn’t be limited to those individuals who succumbed to the pull of the inherent COIs, but should also include the senior managers and directors who allowed the COIs to exist in their respective organizations. (For further reading on how a behavioral understanding of ethics and compliance should inform our approach to liability see this earlier post.)
(Thanks to Scott Killingsworth of the Bryan Cave law firm for letting me know about this story.)
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.”
Mark Twain famously said “A lie can travel half way around the world while the truth is putting on its shoes,” and one might think something similar about risk and C&E. Perhaps it has always been this way and maybe it always will be, at least to some extent. But forward looking companies should look for ways to narrow or possibly eliminate the gap between the immediacy of the problem and that of the solution.
In a sense, this is much of the point of the “cultural” approach to compliance and ethics, and it can also be seen as part of the promise – albeit still largely theoretical – of “behavioral” C&E. Both seek to have C&E operate, in effect, as an instinct. (For more on behavioral ethics visit the Ethical Systems web site.) But, at least in part, the idea goes back much earlier – to Aristotle’s focus on ethics and habit.
There are various avenues for pursuing this goal but, as a general matter, a valuable though often underutilized approach lies in the realm of incentives. Incentives tend, I believe, to reach employees more deeply than policies and procedures do – and thus can help create instinct-like ethical behavior.
Companies indeed do seem to be more interested than ever in exploring ways to use incentives to promote strong C&E. For instance, one company I know now uses the results of internal controls testing in setting compensation for its senior executives. This kind of measure might not sound particularly exciting, but it could – at least over time – help make compliance operate as something of a reflex, in that it presumably contributes to managers being focused on risk on a day-to-day basis (and not just on the far less frequent occasions of responding to cases of possible violations). More generally, this and other incentive measures could be part of a larger C&E strategy of moving from a necessary but somewhat limited “culture of honesty” to also include a broader and deeper “culture of care,” as described in this earlier post.
Moreover, C&E incentives need not be solely of the negative type, nor need they be tangible. Appealing to the better angels of our nature through praising pro-social behavior could, to my mind, be a powerful force for helping ethics move at the speed of risk, particularly with the somewhat idealistic generation of younger employees.
But, in some cases traditional economic incentives are indeed called for. That is why – as discussed in these earlier posts – the notion of “moral hazard” should play a greater part than it currently does in many C&E programs.
Finally, note that incentives are just one type of tool in the C&E “tool box.” And, whether it be through a cultural/behavioral approach or something else, the risk-reduction discussion should include consideration of all available tools – which is what a C&E risk assessment offers …or, at least, should. (For more on risk assessment generally, please download this complementary e-book, available at CCI.)
Imagine a company where all the senior managers took compliance and ethics as seriously as they do traditional aspects of business (R&D, production, sales & marketing). In this company, not only would senior managers do whatever was reasonably necessary to prevent and detect violations in their own business unit or function, they would use their knowledge of and clout within the entity as a whole for making sure their peers were equally committed to promoting law abiding and ethical conduct. While thought experiments are more art than science, I find it hard to imagine any other single C&E-related factor being as powerful a force for good in organizations as this would likely be.
Leona Helmsley is reported to have said that “only the little people pay taxes” and sometimes it feels like C&E programs are only for the little people – given how often it is the “big people” who engage in the types of unlawful and unethical practices that cause the greatest harm in businesses. Indeed, the “C Suite” seems to be the “final frontier” when it comes to effective ethics and compliance programs. In an article in yesterday’s NY Times, Gretchen Morgenson identifies two recent (and somewhat similar) proposals that offer a path to addressing this area of great weakness in many companies.
One is a proposal to Citigroup shareholders that would “require that top executives at the company contribute a substantial portion of their compensation each year to a pool of money that would be available to pay penalties if legal violations were uncovered at the bank. To ensure that the money would be available for a long enough period — investigations into wrongdoing take years to develop — the proposal would require that the executives keep their pay in the pool for 10 years.”
The other is an article by Greg Zipes in the Michigan State Journal of Business and Securities Law which “calls for the creation of a contract to be signed by a company’s top executives that could be enforced after a significant corporate governance failure. Executives would agree to pay back 25 percent of their gross compensation for the three years before the beginning of improprieties. The agreement would be in effect whether or not the executives knew about the misdeeds inside their companies.” Its requirements would be triggered if, among other things “a company pleaded guilty to a crime [or]…if an executive signed a financial document filed with the S.E.C. that subsequently proved false and required an earnings restatement of at least $5 million.”
Both of these proposals make sense to me. While a company should, of course, use traditional forms of compliance (e.g., training, auditing, monitoring) to address C-Suite risks, the best mitigant of all may be other “big people” – if they are properly motivated to prevent and detect wrongdoing by their peers.
For further reading:
– “Redrawing corporate fault lines using behavioral ethics”
– “Behavioral ethics and C-Suite behavior” (discussion of paper by Scott Killingsworth)
– “Behavioral Ethics and Management Accountability for Compliance and Ethics Failures”
– “Where is the accountability?” (a dialogue with Steve Priest in ECOA Connects).
While in the more than three years of its existence the COI Blog has been devoted primarily to examining conflicts of interest it has also run a number (close to fifty) of posts on what behavioral ethics might mean for corporate compliance and ethics programs. Below is an updated version of a topical index to these latter posts. Note, however, that to keep this list to a reasonable length I’ve put each post under only one topic, but many in fact relate to multiple topics (particularly the risk assessment ones).
– Business ethics research for your whole company (with Jon Haidt)
– Overview of the need for behavioral ethics and compliance
BEHAVIORAL ETHICS AND COMPLIANCE PROGRAM COMPONENTS
– “Inner controls”
– Is the Road to Risk Paved with Good Intentions?
– Slippery slopes
– Senior managers
– Long-term relationships
– How does your compliance and ethics program deal with “conformity bias”?
– Money and morals: Can behavioral ethics help “Mister Green” behave himself?
– Risk assessment and “morality science”
Communications and training
– Publishing annual C&E reports
– Behavioral ethics and just-in-time communications
– Values, culture and effective compliance communications
– Behavioral ethics teaching and training
– Moral intuitionism and ethics training
– Behavioral Ethics and Management Accountability for Compliance and Ethics Failures
– Redrawing corporate fault lines using behavioral ethics
– The “inner voice” telling us that someone may be watching
– Include me out: whistle-blowing 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
– Is Wall Street a bad ethical neighborhood?
– Too close to the line: a convergence of culture, law and behavioral ethics
Values-based approach to C&E
– Values, structural compliance, behavioral ethics …and Dilbert
Appropriate responses to violations
– Exemplary ethical recoveries
BEHAVIORAL ETHICS AND SUBSTANTIVE AREAS OF COMPLIANCE RISK
Conflicts of interest/corruption
– Does disclosure really mitigate conflicts of interest?
– Disclosure and COIs (Part Two)
– Other people’s COI standards
– Gifts, entertainment and “soft-core” corruption
– The science of disclosure gets more interesting – and useful for C&E programs
– Gamblers, strippers, loss aversion and conflicts of interest
– COIs and “magical thinking”
– Insider trading, 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
– New proof that good ethics is good business
– An ethical duty of open-mindedness?
– How many ways can behavioral ethics improve compliance?
– Meet “Homo Duplex” – a new ethics super-hero?
– Behavioral ethics and reality-based law
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.
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.
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.
* 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.
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.