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.

Hire the guilt prone

In a recent edition of Knowledge at Wharton, Maurice Schweitzer of that school discusses a paper, “Who is Trustworthy? Predicting Trustworthy Intentions and Behavior,” he co-authored with T. Bradford Bitterly, a postdoctoral research fellow at the University of Michigan’s Ross School of Business, Taya R. Cohen, a professor at Carnegie Mellon University’s Tepper School of Business, and Emma Levine, a professor at the University of Chicago’s Booth School of Business. Schweitzer notes:

We tapped into a personality trait that hasn’t received as much attention as say, the “Big Five” personality traits [extraversion, openness, agreeableness, neuroticism and conscientiousness.] The personality trait we tapped into is something called guilt proneness, or how prone someone is to feeling guilty. Imagine you’re out at a party. You have a glass of red wine, and you spill some red wine onto a white carpet. How would you feel? The people who would feel extremely guilty about that are the people who are prone to feeling guilt. Now what’s interesting is that people who are prone to feeling guilt, they don’t actually experience a lot more guilt because they spend a lot of effort trying to avoid putting themselves in that position. Those are the people who would say, if I’m if I’m going to be drinking wine over a white carpet, I’m having white wine. Those are the people that are thinking ahead to make sure they’re not missing deadlines. They’re not falling short of your expectations. They’re going to take their time and work extra hard to take other precautions. Those are the guilt-prone people. And it turns out that those people are pretty reliable. And when it comes to being trustworthy, those are the people we should be trusting.

This makes sense to me as an intuitive matter. But more than that, we have only to look at the example set by President Trump, who seems to show no guilt about anything – and who is as untrustworthy as any leader can be.

I’m not sure how compliance officers can operationalize this research. But for citizens the implications couldn’t be clearer.

Moot compliance court for corporate directors?

In their paper, “Short-Changing Compliance,”  John Armour (University of Oxford), Jeffrey N. Gordon (Columbia Law School), Geeyoung Min (Columbia Law School), argue: “Corporate compliance programs play a central role in society’s current response. Prosecutors give firms incentives—through discounts to penalties—to implement compliance programs guiding and monitoring employees’ behavior. However, focusing on the incentives of firms overlooks the perspective of managers, who decide how much firms invest in compliance.” They further note: “stock-based pay, ubiquitous for corporate executives, creates systematic incentives to short-change compliance. Compliance is a long-term investment for firms, whereas managers’ time-horizon is truncated at the date they expect to liquidate stock. Moreover, investors find it hard to value compliance programs, because firms routinely disclose little or nothing about their compliance activities.” Also, “stock-compensated managers prefer not to disclose compliance, because it can reveal private information about a firm’s propensity to misconduct: the greater a firm’s misconduct risk, the more valuable to it is an investment in compliance. As a result, both managers and markets are likely myopic about compliance.”

To remedy all of this they “propose more assertive directors’ liability for compliance failures,…” but which would avoid incenting directors to overinvest in compliance.

I agree that the prospect of director liability for compliance failures under existing law is weak, as described in this recent post.. However, I don’t see the political will among shareholders, courts or legislatures to change that.

But should it come to pass, the next issue would be how the standard would be applied. In this regard, the authors propose: “[I]f the firm resolves a compliance enforcement action, criminal or civil, through payment of a fine or accepting some other sanction, an appropriate board committee, perhaps the governance committee, should trigger an ‘accountability proceeding.’ This proceeding could be presided over by a panel of compliance and industry experts, perhaps three, who would conduct an internal investigation that would (i) evaluate the compliance system within the firm as well as the particulars of the compliance failure, (ii) assess the extent of directors’ responsibility, and (iii) determine the appropriate clawback of the accumulated stock of responsible former and current directors.”

Indeed,  one might – as part of board compliance program governance –  deploy a “moot court” accountability proceeding to help directors avoid ever having to face the “real deal.” I suggest this because much of the underlying logic of compliance programs is based on the realization that merely threatening punishment is not enough to prevent wrongdoing. And just as employees need training in various compliance areas for that threat to be meaningful, so directors should be periodically reminded about the risks they face.

As noted above, the heightened standard of board liability for compliance failures proposed by the authors is a long way from coming to pass. But, even under the current, relatively lax standards, the “moot court” idea might be worth trying, as it would undoubtedly cause some directors to focus on compliance more than they currently do.

For an earlier post on compliance incentives and managers click here.

Imagine the real

 

An early post on this blog noted that among the more interesting phenomena of behavioral ethics was the impact that knowing or not knowing a party could have on how one treated that party.

A set of circumstances that is relatively likely to lead to an ethical shortfall is where we do not know who will be impacted by a contemplated act.   As described in this paper by Deborah A. Small and George Loewenstein,  in one study “subjects were more willing to compensate others who lost money when the losers had already been determined than when they were about to be” and in another “people contributed more to a charity when their contributions would benefit a family that had already been selected from a list than when told that the family would be selected from the same list.”   Beyond their direct application to the area of charitable giving, these findings may be relevant to a broader range of ethics issues, and, for instance, could help explain the relative ease with which so many individuals engage in offenses where the victims are not identifiable.  

One example of this is insider trading – a crime which, although widely known to be wrong, seems utterly pervasive (based, among other things, on the extent of trading in securities right before public disclosure of market moving events).  A behavioral ethics perspective suggests that (at least part of) the reason for this “inner controls” failure is that the victims of insider trading are essentially anonymous market participants. 

Another offense of this sort is government contracting fraud (where the victims tend to be everyone),  and indeed Ben Franklin famously described the risks of an ethics shortfall here as well as anyone could: “There is no kind of dishonesty into which otherwise good people more easily and more frequently fall than that of defrauding the government.”   Understanding why “otherwise good people” do bad things is much of what behavioral ethics is about.

But what about COIs? The picture there is mixed, as some COIs do involve identifiable victims – such as the job applicant who does not get hired because the position was filled by the boss’s son. Similarly, an organization might suffer identifiable harm when its procurement process is corrupted by a COI – e.g., paying too much or getting too little.

However, with other sorts of COIs the harm is less apparent. It is the damage to trust in key relationships.

For this reason, organizations might consider including the following question in their COI resolution protocols: “How likely would it be at that the COI would diminish the trust that stakeholders (shareholders, employees, customers, business partners, suppliers or regulators) would have in the Company or otherwise adversely impact the Company’s reputation?”

Of course, this thought experiment works only if you truly try to put yourself in the shoes of one of these parties. Or, to use the memorable words (albeit from  another setting) of philosopher Martin Buber: “Imagine the real.”

Nonmonetary conflicts of interest

In “Using behavioral ethics to curb corruption” – recently published in Behavioral Science & Policy – Yuval Feldman of Bar-Ilan University notes  that “Classic studies on the corrupting power of money focus on politicians influenced by campaign donations and on physicians whose health care decisions are affected by the receipt of drug industry money and perks. In contrast, more recent studies have analyzed situations where a government regulator has no financial ties to a private entity being regulated but does have social ties to the organization or its members, such as sharing a group identity, a professional background, a social class, or an ideological perspective. In that situation, regulators were likely to treat those being regulated more leniently. Thus, even relatively benign seeming tendencies that regulations tend to ignore—such as giving preference to people having a shared social identity—could be as corrupting as the financial ties that are so heavily regulated in most legal regimes.”

Feldman cites two studies that support this view: “In 2014… investigators in the Netherlands showed that regulators in the financial sector who had previously worked in that sector were less inclined to enforce regulations against employees who shared their background. Similarly, in a 2013 look at the regulation of the U.S. financial industry before the 2008 crisis, James Kwak noted that the weak regulation at the time was not strictly a case of regulatory capture, in which regulatory agencies serve the industry they were meant to police without concern for the public good. Some regulators, he argued, intended to protect the public, but cultural similarities with those being regulated, such as having graduated from the same schools, prevented regulators from doing their job effectively. In such instances, people often convince themselves that their responses to nonmonetary influences are legitimate, mistakenly thinking that because such influences usually go unregulated, they are unlikely to be ethically problematic.”

I agree that the danger posed by nonmonetary COIs tend to be underappreciated and have tried to make this point in prior posts. Included are: glory as a conflict of interest,  and friendship and COIs (discussed in the second case in this post).

But perhaps the most interesting case of a nonmonetary COI to appear in this blog  concerned an issue of “director independence in an internal investigation [that] arose several years ago in a case brought by the shareholders of Oracle [against the company’s board]. There, the Delaware Court of Chancery ruled that a board special litigation committee consisting of two Stanford professors could not be considered independent in an internal investigation concerning alleged insider trading by fellow board members, because the target directors had close ties to that university: ‘It is no easy task to decide whether to accuse a fellow director of insider trading,’ the court wrote, and for the company to have compounded ‘that difficulty by requiring [special litigation committee] members to consider accusing a fellow professor and two large benefactors of their university’ of a criminal act was ‘inconsistent with the concept of independence recognized by our law.’”

Feldman closes his discussion of this issue with a call for “[a]dditional controlled research … on  the ways that nonmonetary influences cause corruption and on how they can lead people to engage unwittingly in wrongdoing.” I agree, but also think using the research that is already available, compliance and ethics officers can deploy internal education about nonmonetary COIs into policies, training and other C&E communications and investigation/discipline protocols.

Compliance & ethics officers in the realm of bias

Bias and conflicts of interest are, of course, related to each other;  but they also differ, in that the former can be based purely on thoughts (or feelings or beliefs) whereas the latter generally requires something truly tangible, such as an economic or familial relationship. Prior postings on bias – particularly those underpinning the field of behavioral ethics – can be found here. But, the world of bias is a vast one, and there is much to be explored about it.

A study recently summarized on the Harvard Law School Forum on Corporate Governance and Financial Regulation offers an interesting example of one type of bias among CEOs. The author of the study – Scott E. Yonker, of Cornell University – sought to determine “Do Managers Give Hometown Labor an Edge?”, based on a review of certain employment-related decisions affecting company operations of varying distances from the hometowns of the companies’ respective CEO’s. The answer – somewhat unsurprisingly, at least to me – was Yes: “The results show that following periods of industry distress, units located near CEOs’ hometowns experience fewer employment and pay reductions, and are less likely to be divested relative to other units within the same firm. Units located closer to CEO birthplaces experience 4.1% greater employment growth and 2.4% greater wage growth compared to similar units. Since employment and wages fall by 3.0% at the average firm unit following industry distress, these findings suggest that hometown units are largely spared. Moreover, these differences have seemingly permanent effects, the wage differences last at least three years, while employment differences revert about three years after industry downturns. With regard to divestitures, units that are more distant from CEO birthplaces are about 6% more likely to be divested.”

Is this at all relevant to the work of compliance & ethics professionals? I think the answer to that is Yes, as well. Or more accurately, It should be.

Of course, “hometown” forms of bias are not as pernicious as are those concerning race, gender and other categories of individuals who have historically been the victims of societal oppression. But the true promise of C&E programs extends to addressing all forms of unfairness, both because non-merit-based decision making in the workplace is (from an economic  efficiency perspective) presumptively bad for businesses (i.e., an inefficient use of resources); and because such decisions can lead to demoralization of a workforce (adversely impacting, among other things, the ethical conduct of those so affected).

Ultimately, for a company to have not only a strong compliance program but also an ethics one, the CEO and other leaders would empower the C&E officer to identify and challenge decisions that may be based on bias. (Note that I don’t mean literally  all such decisions, but those that are significant in potential impact and have a meaningful  ethics/fairness dimension.) The leaders would do so because they would understand that being fair is not just a matter of good intentions; rather, it can  also require expertise and effort – both  of which the C&E officer can bring to a challenging set of circumstances.

The C&E movement has  made a lot of progress in the past quarter century, but we are a long way from getting to such a place. Still, as is often said, it is good to have a goal.

Behavioral Ethics and Compliance Index – 2017 Edition

It is that time of year – time to update the Behavioral Ethics and Compliance Index.  As with past editions, I have linked each  post to only one index topic, but most of them are relevant to several topics.

Also, in the coming month, Ethical Systems will be publishing an e-book on behavioral ethics and compliance that I co-authored with their CEO Azish Filabi.  I’ll post an announcement when that happens.

INTRODUCTION 

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

– Overview of the need for behavioral ethics and compliance

Behavioral ethics and compliance: strong and specific medicine

– Behavioral C&E and its limits

Another piece on limits

– Behavioral compliance: the will and the way

Behavioral ethics: back to school edition

BEHAVIORAL ETHICS AND COMPLIANCE PROGRAM COMPONENTS

Risk assessment

–  Being rushed as a risk

–  Too big for ethical failure?

– “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”

 Advanced tone at the top

Communications and training

– “Point of risk” compliance

–  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

Reverse behavioral ethics

The shockingly low price of virtue

Positioning the C&E office

– What can be done about “framing” risks

Accountability

– Behavioral Ethics and Management Accountability for Compliance and Ethics Failures

– Redrawing corporate fault lines using behavioral ethics

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

–  The Wells Fargo case and behavioral ethics

Whistle-blowing

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

Incentives/personnel measures

– Hiring, promotions and other personnel measures for ethical organizations

Board oversight of compliance

– Behavioral ethics and C-Suite behavior

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

Corporate culture

– Is Wall Street a bad ethical neighborhood?

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

–  Ethical culture and ethical instincts

Values-based approach to C&E

 A core value for our behavioral age

– 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”

– Inherent conflicts of interest

Specialty bias

Insider trading

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

– Insider trading, private corruption and behavioral ethics

Legal ethics

– Using behavioral ethics to reduce legal ethics risks

OTHER POSTS ABOUT BEHAVIORAL ETHICS AND COMPLIANCE

– New proof that good ethics is good business

How ethically confident should we be?

– 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

A core value for our behavioral age

Groucho Marx famously said: “Those are my principles, and if you don’t like them… well, I have others.” When it comes to companies committing to follow key principles to guide their behavior – what are often called “core values” – there is clearly no shortage of options. Indeed, this posting on the Threads web site offers 500 ideas for those in the market for values.

One value that I see occasionally (but not frequently) selected for “core” status is humility. Kellogg, for instance, includes humility among several other core values.  Humility is not principally about ethics – Kellogg embraces an integrity value too (as is the case with a large number of companies). But I do see humility as having an important role to play in promoting compliance and ethics in business organizations, in several ways.

First, humility is a logical and arguably inevitable response to the vast body of behavioral ethics research showing “we are not as ethical as we think.”  Thinking and acting with humility is indeed a way of operationalizing behavioral ethics. (For a list of behavioral ethics and compliance posts click here. Also, please see this recent article in the NY Times on behavioral ethics and the notion of “servant leadership.”)

Second, humility is well suited for addressing ethical challenges that are based not on the purposeful failure to be honest but on the less well-appreciated dangers of being careless. (For a post on that click here.) Recognizing the limits of one’s abilities – which is part of being humble –  should help underscore the need for carefulness.

Finally, humility has the potential to resonate deeply in our political, as well as business, culture. By this I mean humility can help form part of a broader mutually supporting relationship between business ethics and what might be called societal ethics of the sort described in other posts.

From a professional viewpoint the benefits to the business side are of most immediate interest to me, but as a citizen (hopefully in the broad sense) I know that the societal dimension is of greater importance. So, let me close by quoting what is one of the best (albeit largely forgotten) expressions of humility’s role in societal ethics, which  can be found in Learned Hand’s “Spirit of Liberty” speech: “The spirit of liberty is the spirit that is not too sure that it is right [and] which seeks to understand the minds of other men and women…”  Delivered in 1944 – when the US and other democracies were engaged in a truly existential battle for survival – these words have never been more compelling than they are today.

Moral hazard: the final compliance frontier?

Moral hazard exists when there is a gap between the interests of those who can create risks and those who bear the consequences of risk taking. Moral hazard is not the same as conflict of interest, but is conflict like. As described in various prior posts,  C&E programs need to take moral hazard into account in identifying and mitigating risk.

This week, the Society of Corporate Compliance & Ethics  published the results of a survey which showed that “despite the importance of compensation in affecting risk compliance [personnel] rarely play[] a role in evaluating incentive programs” at their respective companies.  The report noted: “just 23% report reviewing the plan prior to the plan’s approval. Just 8% do so after it is approved, and 52% report that the compliance team never reviews the plan. The balance did not know whether the incentive plan is reviewed.”

While disappointing, these numbers are not surprising. Indeed, based on what I have seen at many companies, I would have expected that the percentage of those who reviewed an incentive plan prior to its approval to be even lower than the survey results.

But practices in this key area could change, given – as the SCCE survey notes – the recent publication of  the Department of Justice’s compliance program evaluation guidance document which suggests that prosecutors assessing programs ask (among other questions):  How has the company considered the potential negative compliance implications of its incentives and rewards? Of course, the question does not necessarily mean that compliance professionals need to be part of this determination. But surely the consideration would be seen by the government as more serious (and more informed) if they were involved.

As well, involving the compliance staff in this determination can be seen as empowering them. Such involvement – if made known throughout the company, as it should be – enhances Compliance’s “clout,” which has long been viewed by Justice as fundamental to an effective C&E program.

Also,, note that there are many other ways that C&E can be incented – as described in this post from the FCPA Blog. But all companies, in my view, should involve Compliance in reviewing incentive plans.

Finally, I recently suggested that ethical thinking from the business realm can fortify ethics at the societal level. Understanding the pernicious effects of moral hazard in the two  highly consequential areas of climate change and irresponsible fiscal policies may be a way in which such fortification can work. (For a related post on “Two conflicts of the apocalypse” click here.) Indeed, while the notion of moral hazard being a final frontier has one meaning in terms of C&E program practices, it has a more urgent significance when thought of in terms of these risks.

Trump Princelings?

The most recent post on this blog concerned the possibility of President Elect Trump putting his assets in a trust which would be managed by his children to avoid conflicts of interest that could arise from his management and ownership of such assets while in office. Since then an unrelated legal development has occurred which further underscores the challenge facing Trump: the announcement that JP Morgan was settling the “Princeling” case, which involved the bank’s hiring the sons and daughters of important Chinese officials in return for business. The case (which will likely be followed by others of its sort) is a timely reminder that helping one’s children can inspire corruption – and not just in China.

A famous instance of this sort from the 1980s concerned the hiring (by a former Miss America) of a NY judge’s daughter to influence the judge’s decision on a pending case. And then there are the immortal words of the first Mayor Daley who, in speaking to colleagues on the  Cook County Democratic Committee, defended his having directed a million dollars of insurance business to an agency on behalf of his son John by saying: “If I can’t help my sons, then [my critics] can kiss my ass. I make no apologies to anyone.”

Indeed, helping one’s children might  be a more powerful source for wrongdoing than is pure self-centered greed, for the very reason that it seems to spring from a sense of duty. (An old saying goes that if you’re not stealing from your company you’re stealing from your family.)

Note that I’m not suggesting that Trump would use his influence to get jobs for his kids or direct government business to them. But if they are running his far-flung, secretive and complex business empire  he will have plenty of opportunities to use his influence to benefit them.

None of this means that Trump’s children are destined to serve as “princelings.” I should also stress that I have no reason to think they would do anything unethical. Seriously.

Rather, the focus of this post (and indeed this blog generally) is more about structures and circumstances than it is individual personalities. In effect, the princeling analysis is part of risk assessment, even if it is speculative; it is not an accusation.  More specifically, the JP Morgan case reminds us that in designing (or agreeing to)  an approach to address the COIs relating to his assets, Trump needs to  have procedures that will help  avoid not only direct COIs but those involving his sons and daughters as well – and give the public comfort that those procedures are up to the task at hand.

Reverse behavioral ethics

I am a member of LinkedIn and for the past few months have periodically received a message saying: “2 people in your network are using LinkedIn Sales Navigator to be more effective.” Given that I have – as I assume is the case with many members – more than 500 people in my network (most of whom I don’t actually know), this piece of information may be less persuasive than LinkedIn presumably intends it to be. Indeed, the apparent strategy of telling all members about how many in their network are using “Sales Navigator” – regardless of how small that number is – might actually be hurting Linked In.

As described on the Ethical Systems website,  the work of Professor Robert Cialdini has shown that communicating how many people are engaged in undesirable activity can increase that number by suggesting that “everyone is doing it.” I imagine the same dynamic applies to communicating how few people are engaged in desirable conduct, i.e., what LinkedIn is doing.

But this dynamic can also be a force for good, including compliance-related good. As described in this 2012 article from Reuters: “Applying [Cialdini’s] insight, the British tax agency, Her Majesty’s Revenue and Customs (HMRC), has tested different form letters on delinquent taxpayers. In one letter, this sentence – ‘Nine out of 10 people in the UK pay their tax on time’- increased positive response by 1.5 percent. Adding another sentence – ‘You are one of the few who have not paid us yet’ – raised the success rate 3.9 percent. HMRC also found compliance rose 6.8 percent when taxpayers were told they were one of few delinquents in their hometowns.”

Of course, LinkedIn would presumably love to be able to have statistics like these to use in promoting Sales Navigator. But in the absence of such it might be better to say nothing on the subject, and follow the old adage to “always tell the truth but don’t always be telling it.”

For compliance and ethics people, the opportunities to tell the truth in an effective way may be numerous. Among other areas, the good news can concern code of conduct certifications, training completions, conflict of interest disclosures, helpline use and audit results – as some companies have already found.  But the first rule for all in the persuasion business – which includes C&E professionals, as well as marketers –  is to do no harm.