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.
While in the more than four years of its existence the COI Blog has been devoted primarily to examining conflicts of interest it has also run more than fifty 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 that a) 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); and b) there is some overlap between various of the articles. Also, on June 3 I’ll be speaking at a conference on behavioral ethics at NYU’s business school (see program agenda here) and will do a post summarizing compliance-related aspects of the program shortly thereafter. Finally, in 4Q 2016 I hope to flesh some of these ideas out into a Behavioral Ethics & Compliance Handbook.
– Business ethics research for your whole company (with Jon Haidt)
– Overview of the need for behavioral ethics and compliance
– Behavioral C&E and its limits
– Behavioral compliance: the will and the way
BEHAVIORAL ETHICS AND COMPLIANCE PROGRAM COMPONENTS
– 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
Positioning the C&E office
– What can be done about “framing” risks
– 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”
– Inherent conflicts of interest
– Insider trading, behavioral ethics and effective “inner controls”
– Insider trading, private corruption and behavioral ethics
– Using behavioral ethics to reduce legal ethics risks
OTHER POSTS ABOUT BEHAVIORAL ETHICS AND COMPLIANCE
– 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
An interesting story (at least by the standards of this blog) from this past week concerns whether a referee in England’s Premier League has created a conflict of interest by signing up with an agency to help him get paid for giving speeches and for other off-field affairs. As described in the Daily Mail, the potential conflict arises from the fact that agency also represents several Premier League players.
Apparently, the ref – Mark Clattenburg – violated Professional Game Match Official Rules by not getting prior permission for entering into a relationship of this sort. But is it a COI?
A conventional analysis starts with looking at what the referee/agency relationship actually entails. Presumably (although the article does not say this) the agency owes him a duty to perform certain services and he owes it a duty to pay for these services. That is, he does not have a duty to perform services for it.
Of course, if part of the way he was paying the agency for its services was by promoting the interests of its other clients, including the Premier League players they represent, then that would be a COI. But imputing such a duty to a relationship of this sort seems like a real stretch. After all, the same analysis would apply to the players the agency represents – assuming two or more are from different Premier League teams – which I think would make little sense. Put otherwise, it is hard to imagine either a ref or a player throwing a match to curry favor with an agent who they are already paying. (Or, to look at a structurally similar COI situation: if a law firm or an investment bank represents two clients with adverse interests the firm/bank may have a conflict – but the clients don’t.)
So, from a conventional analysis I don’t see this as the stuff of a conflict. But, there are other considerations when it comes to COIs and referees.
One of these is what might be called a “needs analysis.” That is, certain types of activities require a higher standard when it comes to COIs to protect the efficacy of those activities. Serving as a judge or on a jury are examples of this; for both, a COI analysis includes looking at potential biases – which, generally speaking, one wouldn’t do in the commercial world, where typically “interests” must be tangible to be deemed conflicting. (Another example is serving in a procurement function, which – as described in this recent post – may necessitate a “Caesar’s wife” approach to COIs.)
Referees are, of course, like judges and juries. And so for the good of the game, it may make sense to apply a higher standard for them, although I’m not sure exactly how one would articulate it.
The other consideration is that – unlike judges and juries – referees often must make truly split-second decisions. From a psychological perspective, these harried circumstances may mean some heightened degree of ethical vulnerability – and that in turn may indicate peril in a referee’s having a connection to a player in a game that he is officiating. (For more on the surprisingly potent role of biases that lurk below the surface and undercut our ethical performance see these prior posts on “behavioral ethics.“)
Ethics and compliance have long been seen by some as representing essentially inconsistent approaches to promoting desirable conduct in companies. I have never been persuaded by this oddly Manichean worldview. Rather, and as previously argued in Compliance & Ethics Professional (page 2 of the PDF), I believe that compliance can give ethics “body” and ethics can give compliance “soul.” Or, as the 2004 amendments to the U.S. Sentencing Guidelines for Organizations indicate, companies should have “compliance and ethics” programs.
Moreover, many “middle-aged” programs (discussed more generally in this piece on the CCI web site ) need all the help they can get. For those struggling to maintain a sense of urgency in their programs, the answer to the question “Ethics or compliance?” is a resounding “Both, please.”
Of course, there are some C&E challenges that companies face that largely require “C” but little or no “E.” (A recent posting here suggests that these include dealing with requirements of anti-corruption, export control and competition law.) The converse is true as well.
But some risk areas – such as conflicts of interest – clearly need healthy elements of both. More importantly, so does the overall platform for ensuring that companies do the right thing, such as paying due attention to C&E in incentive structures.
The importance of incentives to C&E was addressed in a piece last weekend in the NY Times by Gretchen Morgenson about a recent proposal by Professors Claire A. Hill and Richard W. Painter of the University of Minnesota Law School “for making financial executives personally liable for a portion of any fines and fraud-based judgments a bank enters into, including legal settlements” regardless of fault. The proposal, she notes, quoting one of the professors, “would help instill a culture… ‘that discourages bad behavior and its underlying ethos, the competitive pursuit of narrow material gain.’”
Clearly the goal here is to go beyond traditional notions of compliance to promote a more truly ethics-driven approach to banking. But by using the mechanisms of “carrots and sticks” to achieve that goal, it is also very much in the heartland of compliance.
While the case for this sort of an approach may be strongest in the financial services industry, its logic is applicable more broadly. For instance, a large company in any industry might adopt a policy that if any of its divisions are prosecuted the leaders of that division will bear some of the costs incurred by the company. However, and in the spirit of the Sentencing Guidelines themselves, I think that an executive who could show that she made a strong effort to promote C&E in her division – going beyond promoting mere rule abidance, to embrace a truly cultural view of ethics – should be spared some of this punishment.
Of course, few, if any, other industries have had the perverse incentives C&E-wise that financial services (generally speaking) have, which is why I would temper the no-fault aspect of the Hill and Painter proposal as applied to other areas of business. But any company in which the managers are not the owners faces the potential for at least some “moral hazard” when it comes to mitigating C&E-related risk, as discussed in the prior posts collected here. That is why companies of all kinds need to consider how they provide incentives for ethics and compliance.
An article last month in a magazine published by the NY Times provided the occasion for a noteworthy COI discussion. The Times had given Laura Arrillaga-Andreessen the assignment of profiling the head of Airbnb for an issue of “T” magazine. However, her husband, Marc Andreessen, is a substantial investor in that company – which was not disclosed in T’s (very favorable) article about Airbnb, as described here.
T’s editor explained the lack of disclosure as follows: “it was my mistake in not asking her if there were any potential conflicts. This was an oversight on my part. I say this not as an excuse, but she is, separately from her husband, a billionaire (making her through marriage a billionaire twice over) and for that reason I think I failed to consider any monetary conflict in her case.”
A writer in Gawker characterized this explanation as saying, in effect, that billionaires are too rich to have conflicts of interest. I think that’s a fair comment.
While the specifics of this case are particularly interesting to Silicon Valley watchers, for C&E professionals the notion of being too rich to be corrupted is sadly an oft-told tale. It comes up most frequently in the gifts/entertainment and other COIs areas when C&E officers are asked to approve a transaction (e.g., entertainment provided by a vendor) for a high-level employee that would be impermissible for others in the organization. The basic thought is that the individual in question already has so much money (or what money can buy) that more won’t affect her judgment.
There is a logic to this, but it is based on the increasingly discredited homo economicus view of human nature. This view would presumably treat the corruptibility of a person in a given situation as fraction with the amount being offered as the numerator, the individual’s total wealth the denominator, and the larger the overall number the greater ethical risk.
By contrast, when viewed through the lens of behavioral science (and human experience), the rich and powerful can be seen as more corruptible than others, as discussed in prior posts such as this one. The most memorable expression of this may be the saying attributed to the late Leona Helmsley that “only the little people pay taxes.” But the reflection of actual COI risk being concentrated near “the top” echoes through our new stories on a nearly daily basis.
Additionally, there are many types of conflicts that cannot be measured in a purely monetary way, such as those involving glory (as described here), friendship (discussed in the second case in this post) or family relationships (discussed here). Even if they are not inherently more susceptible to COIs, from a situational perspective, the high and mighty presumably are faced with more frequent pressures and temptations of this sort than are most other individuals (as briefly touched on in this earlier post).
“Behavioral ethics” information and ideas have, to date, been used far more to identify ethical challenges than to design approaches to address such challenges. In “Behavioral Ethics, Behavioral Compliance” (which can be downloaded for free here ) Professor Donald C. Langevoort of the Georgetown University Law Center takes up this latter task, and provides a number of practical suggestions for compliance-and-ethics (“C&E”) professionals to consider in applying this body of knowledge to their day-to-day work.
Among these are:
– Certifying compliance in advance – rather than after the fact – of the conduct in question.
– Using behavioral insights – particularly concerning loss aversion – to identify monitoring strategies and priorities.
– Avoiding too much monitoring, as that can “crowd out the kind of autonomy that invites ethical thinking.”
– A more behaviorally attuned approach to compliance incentives and interventions.
Perhaps most importantly, Professor Langevoort offers this broader perspective on what exactly is meant by “behavioral compliance”: “To be clear, it is not some new or different brand of compliance design, but rather an added perspective. Just as compliance requires good economics skills, it requires psychological savvy as well, to help predict how incentives and compliance messages will be processed, construed and acted upon in the field… The behavioral approach to compliance offers some concrete interventions to consider, but is mainly about doing conventional things (communication, surveillance, forensics) better.” (I agree with this view and in prior posts – collected here – have offered suggestions of several other ways to use behavioral insights to do conventional C&E things better.)
But more than the sum of such parts, I believe that the real significance of the field lies in the potential that its overarching message – “we are not as ethical as we think” – can help corporate directors and senior managers appreciate the need for C&E programs generally. While know-how is important here, what’s most wanting in many companies is making C&E a top priority. By showing the C&E risk that is seemingly inherent in the human condition, behavioral ethics can help make this case.
An editorial last week in JAMA – the Journal of the Medical Association by Anne R. Cappola, and Garret A. FitzGerald about conflicts of interest in medical research notes that “disclosure policies have focused on financial gain. However, in academia, the prospect of fame may be even more seductive than fortune. Thus, the outcome of a study may influence publication in a high-impact journal, invitations to speak at conferences, promotion, salary, and space. Even though an investigator may publicly eschew any direct financial reward from a sponsor, such fiscal and professional benefits may accrue to them indirectly from the institution, if they attract clinical trials with their attendant indirect costs.”
This is, I think, an important point, and its logic goes beyond the context about which the authors write to COIs of many other kinds. Support for this broader view can be found in a study showing the impact of social, as opposed to purely economic, factors on the conduct of auditing, and a landmark decision in 2003 of the Delaware Chancery Court examining the impact of non-economic factors on possible COIs involving a corporate board. (The study and the case are discussed in this earlier post.)
The JAMA authors’ prescription for addressing this conceptual shortfall is captured in the title of the editorial – “Confluence, Not Conflict of Interest: Name Change Necessary.” I find the notion of a “confluence of interest” intriguing but a bit troubling too – in the way that “enhanced interrogation techniques” is. The phrase also reminds me of a statement by then king-of-the-hill securities analyst Jack Grubman: “What used to be a conflict is now a synergy.” (Three years later Grubman was fined $15 million dollars and barred from the industry for life for what were apparently still considered COIs.)
Many interests really and truly conflict with professional or other duties, as described in this post. Expanding our recognition of what can have that effect seems like a step forward. Soft pedaling what that impact can be does not.
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.)