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.

Is being ethical in business a patriotic duty?

The most recent posting in this blog  briefly discussed how democracy and capitalism both require a widely shared sense of fair play to succeed.  Most of us are generally familiar – through news stories from home and abroad – with how this works in the political realm.  But given the rough-and-tumble origins of capitalism, is it really the case in the world of economics as well?

In a recent paper “Corporate Scandals and Household Stock Market Participation,” Mariassunta Gianetti and Tracy Yue Wang look at the issue of how scandals affect the appetite of households for buying/holding stock – a topic which is clearly relevant to the success of a capitalist economy. They report on research they conducted which found not only “unambiguous evidence that household stock market participation decreases … following corporate scandals in the state where the household resides,” but also that “households decrease their stock holdings in … non-fraudulent” – as well as fraudulent – firms.   Additionally, “[a]ll households [in a state where a fraud was committed,] not only the ones holding the stocks of fraudulent firms, decrease their equity holdings.” These findings certainly help make the case that unethical and illegal business dealings undermine the trust in capital markets that our economy needs to prosper.

As for the ethics-related connection between trust in business and in government, that would, I think, be hard to show by data of the sort reviewed in this paper – or perhaps any other kind of data (although I’m not a social scientist and so this last point is just  a guess).  But where, due to the nature of an issue, finding relevant data is inherently impossible, one can justifiably rely on common sense perceptions, particularly those articulated by thoughtful and experienced individuals on an issue.

One such person is German Chancellor Angela Merkel, who famously said in a speech to business leaders in 2008: “’Every irresponsible colleague in your circles endangers the basis of our liberal society…’”   Well put, and indeed, perhaps by appealing to a notion of patriotism that features ethicality the Chancellor has suggested what a deeper approach to business ethics might look like  – or at least include.  (For further reading on the promise of promoting ethical behavior through appealing to our broader allegiances, see the article by Jon Haidt and his colleagues on “Homo duplex” briefly discussed and linked to here.)

The connection between business ethics and patriotism is not new –  here, for instance, is a recent piece from Rwanda on the issue – though considerably more seems to have been written on the ethics of patriotism than the patriotism of ethics. But, in my view, it is an idea whose time has come, given how unprecedentedly important our trust-related needs now are – some of which are discussed in this earlier post on the “two conflicts of the apocalypse.”

A ray of sunshine at the end of an ethically dreary week

From the COI Blog’s perspective, the past week was dominated by two discouraging developments:

- The Supreme Court’s decision in the McCutcheon case, further eroding – on free speech grounds – the federal campaign finance reform legal edifice.  Particularly unfortunate was the holding that Congress’s ability to attempt to curtail corruption in this area is limited to the exceedingly  (one might almost say comically, if it wasn’t so sad) narrow category of cases of “quid pro quo” bribery.

-The various stories, prompted by the publication of Michael Lewis’ The Flash Boys, suggesting that stock exchanges effectively sell customer order information to high-speed traders, which the traders use to financially disadvantage  the customers.

While these two stories are, of course, different in many ways, given the deep connection between democracy and capitalism – and the fact that each requires a widely shared sense of fair play to succeed – they seem to reflect a dangerous insensitivity at high levels of both government and business  to the ethical dimension of the ties that bind us together as a society.

But the week actually ended with some good news concerning the promising but generally underutilized mechanism of ethics-related  ”clawbacks,” which was reported in a story by Gretchen Morgenson – “The Wallet as Ethics Enforcer” – in today’s NY Times.  She writes that while the “vast majority of [companies] across corporate America, require recovery of bonuses in only a few circumstances, mostly related to accounting… [and not] other types of unethical behavior … some large shareholders have been working to expand these so-called clawback provisions.”  Among other things, she reports: “the New York City comptroller… and his staff have successfully negotiated expanded thresholds for clawbacks at five companies this year:  Allergan, Halliburton, Northrop Grumman, PNC Financial and United Technologies” and that “[t[hese new clawback thresholds also state that executives can be forced to give back pay even if they did not commit the misconduct themselves; they could run afoul of the rules by failing to monitor conduct or risk-taking by subordinates.”

This is a promising development indeed, for just as financial incentives can serve as a powerfully corrupting force in both politics and stock markets so can such incentives – if properly directed – unleash energy and attention in the service of promoting ethical conduct … and building trust.   (For more on the importance of – and great challenges in – aligning incentives with ethical standards, see the posts collected here.)  

Meet “Homo Duplex” – a new ethics super-hero?

In “Behavioral Ethics for Homo Economicus, Homo Heuristicus and Homo Duplex” – which is published in the March 2004 issue of Organizational Behavior and Human Decision Processes   –  Jesse Kluver, Rebecca Frazier and Jonathan Haidt describe three views of human nature and consider the implications of each for the field of business ethics:

-          The traditionally dominant “Homo economicus” model, which sees human nature as based  on “rational self-interested actors within systems of economic or social exchange” and which views incentive alignment as the key motivator for human behavior.

-          A more recently emerged “Homo heuristicus” approach, which posits that heuristics (ingrained mental short cuts) and biases “drive decision making behavior, including ethical decision and behavior.” The authors view this model as more psychologically realistic than the Homo economicus approach and believe it offers a variety of insights that can be useful for shaping “ethical systems” (including, presumably, C&E programs).

-          “Homo duplex,” a term coined by the sociologist/psychologist/philosopher Emile Durkheim, which posits that we operate on (or shift between) two levels: a lower one – which he deemed “the profane,” in which we largely pursue individual interests; and a higher – more group-focused – level, which he called “the sacred.”  The authors see this view as an extension – not as a contradiction – of Homo heuristicus.

This last model has considerable potential, the authors believe, for promoting ethical behavior.  That is because various studies have shown that “some of the neurobiological adaptations humans have developed for moral behavior work explicitly at the group level rather than the individual level,” “above and beyond what might be expected under the Homo economicus or Homo heuristicus models.”   Yet, the authors argue, Homo duplex has received far too little attention to date, and the paper offers  ways in which this model of human behavior could be used to promote ethical conduct in businesses and also suggests avenues for further research.

There is much more to this paper  - concerning, among other things,  lessons for organizations seeking to build what Haidt calls “moral capital,” as well as  the importance of designing “ethical systems” to bring employees of an organization  to the above-described higher state, and I wholeheartedly commend the piece to readers of the COI Blog.  Indeed, I hope to explore some of these possibilities in future posts.

Having said all this, I should note that there may be limits to how far this thinking can take a company in promoting ethical and compliant behavior, given that so many major business crimes emanate from the “C-Suite,” the inhabitants  of which may be both less likely to act ethically as a  general matter (as discussed in this post ) and less inclined to participate in what the authors call “ego-dissolving activities” – i.e., the basis for Homo duplex’s  higher level – than are the rank-and-file.  Indeed, the most famous corporate example involving an attempt to build team spirit is, the authors note, “Wal-Mart, where each day employees participate in the Wal-Mart chant…”  While presumably effective in reducing the rate of petty theft by store employees, based on various press accounts, this doesn’t appear to have done much to deter massive bribery by the company, which on some level seems to have involved some of its senior managers.

In a related vein, while I am a big fan of Homo heuristicus (as reflected in my many earlier posts on “behavioral ethics and compliance”), and (based partly on my deep admiration of Haidt’s landmark book, The Righteous Mind), while I embrace the authors’ agenda of conducting more research into how a Homo duplex view can be used to promote ethical behavior, I think it important to continue to work with the central insight of the much-maligned Homo economicus framework too (and believe that the authors – who note that we do not need to rely solely on an one view of human nature – would agree with this). That is, while the incentive-based approach to promoting ethical behavior is as old as the Code of Hammurabi, at least in the modern corporate crime setting it has been hobbled by moral-hazard-related infirmities – i.e., it has not , in my view, had a real chance to live up to its  own potential to be an ethical super-hero.

For further reading see:

Scott Killingsworth’s excellent paper, on C-Suite behavior, discussed and linked to in this earlier post

My recent “Ethics Exchange” with Steve Priest about “Ethics, Compliance and Human Nature” on ECOA Connects.

 

 

Exemplary ethical recoveries

F. Scott Fitzgerald famously said, “There are no second acts in American lives,” but in the C&E world the second act may count for more than the first – for better or worse.

Instances of the latter – tragic second acts – include various cases where a company engaged in criminal conduct but failed to either fully “come clean” when it was prosecuted or do what was necessary to prevent future violations.  Prominent examples of this sort of failure  go as far back as cases involving the first massive penalties under the Federal Sentencing Guidelines for Organizations – the $340 million fine against Daiwa Bank for banking-related offenses in 1996 and the $500 million against Hoffman-LaRoche for antitrust crimes in 1999 –  and have occurred as recently as last month, when a $425 million criminal fine was imposed on Bridgestone  for antitrust offenses in part because the Company had failed to disclose those offenses at the time of an earlier plea. (The logic of severe punishment for a company that fails a second time is fairly obvious, and, although he doubtless would have been mortified to be quoted in a compliance blog, is perhaps best expressed by these words of  Oscar Wilde: “To lose one parent may be regarded as a misfortune; to lose both looks like carelessness.”)

But while the cases of failure such as these make the headlines, a second act need not be tragic.  For the good news, we turn from law to psychology, and a just-published paper “Better than ever? Employee reactions to ethical failures in organizations, and the ethical recovery paradox” by Marshall Schminke, James Caldwell, Maureen L. Ambrose and Sean R. McMahon.  In it, the authors review the results of a laboratory study and a field study showing “an ethical recovery paradox, in which exemplary organizational efforts to recover internally from ethical failure may enhance employee perceptions of the organization to a more positive level than if no ethical failure had occurred.”

These results are very encouraging even if, while perhaps paradoxical in the way the authors describe, they do not seem totally surprising. After all, a C&E failure can also be seen as presenting a test – and ethical standards at a company that have fared well on a test could seem more meaningful to employees than those that haven’t been tested at all. Of course, the same could be said of nearly any attribute of an organization – but it would be hard to find another area where the gap between what is proclaimed and what is practiced is as wide as, generally speaking, it is in the field of business ethics. So, there is every reason for much weight to be placed on the results of the sort of test that ethical failures offer.

Still, and beyond the important headline finding about the possibilities of ethical recovery, the paper should be useful to the C&E practitioners for a variety of reasons:

-          It has an extensive review of relevant literature, such as research showing that “ethics-based failures may have a more generalized impact [on employee perceptions of an organization] than other types of failures” – in part because of the strong negative emotions often triggered by the former.  This information should be helpful for briefing directors and senior managers on the importance of strong C&E measures generally (i.e., not just in the wake of failures).

-          The authors note that the results “raise a host of possibilities for considering additional implications of ethical repair, those even further downstream from the unethical event.”  I agree that this is an important area to explore.  Indeed, a company I know that has succeeded as well as any in maintaining an exemplary corporate culture has done so in part by staying mindful of a scandal that had occurred literally decades earlier, i.e., very “downstream.”  But, too many companies take the opposite approach – burying, rather than learning from, their failures.

-          The authors identify other implications for practitioners, including the need to have “systems, structures, processes, controls and policies…in place to stage a successful recovery in the event an ethical failure happens.” I agree with this as well, but note that perhaps more helpful than planning for true ethical crises is having systems for making the most of the small-scale ethics failures that occur on a routine basis – such as by publicizing the extent to which the company conducts rigorous investigations of employee reports of suspected C&E transgressions and imposes meaningful discipline for violations.

Indeed in this sense, exemplary ethical recovery should  not be viewed as a once- (or twice) in-a-lifetime event for a company, but an active ingredient of its very culture.

Finally, note that the research did not look closely at the issue of what made an ethical recovery exemplary; rather, it was based broadly on reported degrees of satisfaction by the study’s subjects.  “We know little about the attributes of an effective recovery,” the authors write.  One hopes that other researchers (or perhaps even these ones) will build upon this study to develop knowledge in that key area.

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CEOs’ ethical standards and the limits of compliance

I’m not one who sees ethics and compliance as operating in wholly distinct spheres, and have long felt that they closely complement each other.  (For more on the general relationship between the two  see this piece from the SCCE’s C&E journal.)  But, of course, they are not the same thing, and to some extent each has reach that the other doesn’t.

More specifically, for any given organization, the boundaries of compliance are – to a significant extent – defined by risk assessment.  Compliance-related risk assessment can and should be done in an expansive and innovative manner (as discussed in this complimentary e-book ) but it is ultimately finite in ways that are less applicable to true ethical standards.  And when it comes to CEOs – who have near infinite capacity for engaging in mischief in their companies – the latter form of protection can be particularly important.

To take the example of conflicts of interest, a  prior post described how CEO COIs can be different than those faced by the rest of us and a NY Times story last week seems to illustrate that point.  It concerns a company (Questcor Pharmaceuticals) which appears to have timed  various corporate announcements with an eye toward boosting its stock price in advance of sales by the CEO pursuant to a “10b5-1” plan (which is an automated procedure to sell stock at specified future dates based on prior instructions).  I should stress that the case for the CEO’s stock sales being the motivation for the scheduling of the announcements in question is wholly circumstantial.  Still, a commentator from Bloomberg who set out to debunk the case ran the numbers and ended up essentially “rebunking” it – i.e., supporting by statistical analysis, at least to some degree, what the Times suspects.

Not being statistically adept, I have nothing to add about the specifics of this case (other than to say I hope the company’s board conducts an independent inquiry of the matter).  Rather, I mention the story because I have to believe that this sort of conflict of interest – assuming, for the purposes of discussion here, that the theory of wrongdoing is well founded – is unlikely to show up in most risk assessments, and thus  this illustrates the earlier point about the limits of compliance.  But from an ethics perspective, no CEO  (or board member or “gatekeeper”) could reasonably believe that gaming a 10b5-1 plan in this way was okay, as it would involve using the company’s resources for purely private purposes (clearly an ethical breach – but perhaps less easily shown to be a legal one).

Indeed, it is precisely because a COI like this is so unpredictable – the Times story seemed to suggest that it was indeed something new under the sun – that it is potentially harmful. That is, when an unforeseeable COI emerges it raises the question: If the CEO is capable of doing this, what other mischief is he or she up to?

What this means  is that the  primary damage to the shareholders is not whatever costs can be directly traced back to timing corporate announcements for the personal benefit of a executive –  an exercise that  would likely be too speculative to be meaningful; and, even if the costs were measurable, they would likely end up being a small amount.  Rather, the harm flows from a general loss of trust by shareholders from learning that a CEO puts their interests second and – because a CEO can influence her company in so many ways – not being able to monitor all the avenues of possible betrayal that might exist.

Understanding that sort of more general harm is one of the important ways an ethical perspective can supplement a more narrow compliance-based one. And it is part of the reason that boards and senior executives need to understand the importance of truly operating pursuant with high ethical – as well as compliance-related – standards.

Finally, for those who’d like to read more related to this topic please see Scott Killingsworth’s excellent paper on C-Suite behavior, discussed and linked to in this earlier post

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

To “walk the line” means something very different to  those who prosecute business crime cases than it did  to Johnny Cash. For instance, in a speech given last year,  Steven L. Cohen,  Associate Director for Enforcement at the Securities and Exchange Commission, said:  “Where we find fraud, there are often early warning signs that may have suggested a corporate compliance culture that is not meeting appropriate standards…..  Risk-taking in the area of legal and ethical obligations invariably leads to bad outcomes.  Any company or person prepared to come close to the line when it comes to legal and ethical standards is already on dangerous ground.  Tolerating close-to-the-line behavior sends a terrible message throughout an organization that pushing the envelope is acceptable.” Similarly, and also in a speech last year, New York federal prosecutor Preet Bharaha said:  “A single-minded focus on remaining an inch away from the legal line is just asking for trouble. It’s a dangerous thing to walk the line – and to train others to do it. Walking the line is like a driver constantly trying to game just how close to the legal alcohol limit he can come without getting a DUI. Now, one can do that. But how long do you think before that driver gets pulled over? How long before that driver blows the legal limit? And how long before that driver hurts someone on the highway?”

Keeping employees and agents from getting too close to the line has long been a focus of – and particular challenge for – C&E programs.  Part of the difficulty here comes from the fact that – at least in the U.S.-  the lines separating criminal from lawful conduct are often not clearly drawn.  These lines can also be subject to change without notice.  Additionally, under doctrines of conspiracy and accessorial liability, those who pay a brief visit to the other side of the line – or indeed are pulled over it by a colleague – can be punished as if they were a major offender.  (For more information on this aspect of U.S. law see the Ethical Systems web site.)

Added to this challenge are the various lessons of behavioral ethics research suggesting that individuals may have real – but unappreciated – difficulty identifying and steering clear of law- and ethics-related lines.   Discussions of some of these studies are collected here, and include the following posts:

-          How “conformity bias” adversely impacts our ability to see the wrongfulness of our behavior.

-          The blurring impact that the “distance” of victims of wrongdoing has on our ethical vision.

-          The various ways in which we are vulnerable to ethical “slippery slopes.”

-          The considerable difficulty we often have in recognizing wrongful behavior in others when it is in our interest not to do so.

-          The particular challenges that individuals in positions of power have in identifying their behavior as wrongful.

In sum, business people – particularly those in organizations that lack healthy cultures – often face a wicked one-two punch of a treacherous legal landscape and many unappreciated human ethical frailties that make navigating that landscape difficult indeed.

There is no easy way to deal with this.  But, at a minimum, C&E officers should train employees generally and managers in particular on all that they are up against.

More generally, understanding these risks should be seen in business schools and the business world as supporting the  need for a high degree of ethical awareness.  Only when business people view being ethically alert – rather than just relying on what they may see as their innate goodness – as an indispensable  professional skill will companies live up to the high expectations articulated by Messrs. Cohen and Bharara and doubtless shared by many others in the enforcement community.

Supervising spouses and other family members in the workplace

A story earlier this week in the NY Daily News  reported:  “The doctor picked by [NYC] Mayor de Blasio to run the municipal hospital system was slapped with a conflict-of-interest ruling after his wife went to work for the hospital he was overseeing. The city Conflicts of Interest Board issued its ruling against [the doctor] in 2008, but allowed the arrangement to continue as long as [he] avoided matters involving his wife…”  The particulars of the case are not especially interesting, but it did serve to remind me that in the more than two years of its existence the COI Blog has yet to cover the often important issue of supervising family members at work.

But first a disclosure: my parents met in a workplace (the newsroom of the Minneapolis Tribune, in the 1940′s), where my father (then a night city editor) supervised my mother (then a police reporter) and, but for the personal relationship they formed there, I literally would not exist.  So, I have what could be called an existential bias on this issue.  On the other hand, at least judging by the classic film about journalists about that era – His Girl Friday – maybe workplace relationships weren’t  prominent on the ethical radar in the industry then, so perhaps I’ve over-disclosed (which comes with writing a COI blog, and for which my mother will hopefully forgive me).

But in the contemporary world, conflict-of-interest issues involving supervision of family members in the workplace can be among the most sensitive that a C&E officer ever faces.  Often one (and sometimes both) of the individuals involved is at a high level within the corporate hierarchy, making the issue as inviting to approach as a field of landmines.  Moreover, because of the strong loyalty instincts that people tend to have about their families, allegations about conflicts of this sort often trigger strong defensive reactions – as discussed in this earlier post  (which should be read mainly  for the immortal story about the late Mayor Daley’s saying – with respect to his having the city of Chicago do business with one of his children:  “If I can’t help my sons, then [my critics] can kiss my ass.”)

On the other hand, other employees may feel deeply resentful of those involved – particularly where the relatives in question are seen (rightly or wrongly) as receiving favored treatment and benefiting from job-related opportunities that otherwise might have gone to such other employees.  The others could also feel stifled in how they do their work.  For instance,  many employees might  be  uncomfortable criticizing a favorite business idea that the spouse of a senior executive has – even if they  think it is no good. Unlike most other COIs, those involving family members on the job tend to be very visible  - and grating, possible even on an everyday basis.

Not surprisingly,  many companies’ COI policies address the issue of supervision of family members.  A somewhat typical policy of this sort is the following from Tower Bank: “The potential for conflict of interest clearly exists if your spouse, partner or immediate family member also works at the Company and is in a direct reporting relationship with you. Officers or employees should not directly supervise, report to, or be in a position to influence the hiring, work assignments or evaluations of someone with whom they have a romantic or familial relationship.”

Of course, a direct reporting relationship between spouses is widely seen as being problematic – and that part of the rule should be easy to apply.  But the “being in a position to influence” part of the rule is much broader, and presumably anyone higher up in a reporting chain is in such a position regardless of how many layers there are in between.

Still, the more layers there are, the more checks against abuse exist – even if they are not strong checks (since they rely on subordinates in preventing and detecting conflicts by their workplace supervisors).  One company that relies explicitly on the number of such layers is United Technologies, whose policy asks the question, “[i]s it a Code of Ethics violation for my spouse and myself to work in the same department at our UTC Division?” and provides this answer: “In most instances this would not be a problem as long as neither employee reported to the other. A sufficient number of reporting levels (at least three) between supervisor and family member must exist to preclude conflict of interest issues.” While not a cure-all, this seems like a strong approach to me.

A final point: given the nature of this particular type of conflict the concern is often less actual COIs than apparent ones.  For this reason, effective mitigation must address the issue of what will employees think about a proposed solution to such a COI – including the broader question of whether such a solution will undermine the workforce’s view of management’s commitment to ethics in general.   More on apparent COIs can be found here, but the bottom line is that this is among the most difficult types of COI to mitigate.

Are private companies more ethical than public ones?

To those in the C&E field, the notion that privately held companies could, as a group, be more ethical than publicly held ones seems implausible.  After all, public companies are required by law to be transparent in ways that private ones are not – and are also required to have various compliance measures that are not mandated for the latter.  Moreover, at least based on anecdotal evidence, when companies go from public to private they tend to cut back on their C&E programs.

But that might not be the whole picture.  As mentioned in a post last week, research in a recently published paper  – “The Value of Corporate Culture,” by Luigi Guiso, Paulo Sapienza  and Luigi Zingales   -  found that public firms seem to have a greater difficultly in maintaining cultures of integrity than do private ones.  In that earlier post we focused not on that finding but what could be described as the “headline” story of that piece: that “high levels of perceived integrity are positively correlated with good outcomes, in terms of higher productivity, profitability, better industrial relations, and higher level of attractiveness to prospective job applicants.”   Today, we return to the article to consider what could be the cause(s) of the link between private ownership and ethical cultures – for which the authors offer three possible explanations.

First, they note that there could be greater integrity-related communications challenges facing a public company than a private one: “if a violation of internal norms is discovered in a public corporation, in deciding the punishment, the CEO has to send two signals: an internal one to the managers and employees that also serves as deterrent for future violations and an external one to the market that maintains transparency of internal procedures. The latter poses the risk of being (wrongly) interpreted by the market as the tip of an iceberg rather than an isolated episode, inducing the top manager to dilute the punishment and the internal message. These complications may weaken integrity norms in publicly traded companies vis-à-vis private firms.”

This is indeed an interesting possibility, and something that I’ve not heard before.  But the very fact that I have not heard it mentioned previously – in more than two decades of advising companies on C&E matters, attending C&E conferences  and otherwise keeping track of the field –  makes me somewhat skeptical about it.

Second, the authors note: “Public ownership…changes …the trade-off between the costs and benefits of strict integrity norms…  If… some assets are not considered (or underappreciated in the short term), public ownership creates a distortion in decision making…” They further argue that integrity may in fact be underappreciated in the market, so that “a CEO who allocates company resources to maximize the current stock market value of a company will tend to underinvest in integrity.”

Unlike the first explanation, this one seems virtually self-evident, given the absence of any meaningful indication (at least of which I am aware) that capital markets really give sufficient weight to integrity cultures.  Fortunately, the above-noted “headline” finding of the authors’ research  -  linking ethical cultures with profitability and other desirable business outcomes –  itself has the power to change that, at least if it becomes widely appreciated and further developed by practitioners and researchers.

Finally, they state: “public ownership comes with a separation between ownership and control and the CEOs of a public corporation are not always driven solely by shareholder value maximization, since they do not fully internalize the cost of deviating from value maximization.”   This, too, seems compelling to me.  It has  its roots in Adam Smith’s powerful insight that “[M]anagers of other people’s money [rarely] watch over it with the same anxious vigilance with which . . . [they] watch over their own,”  and is, of course, broadly consistent the notion of “moral hazard,” about which much has previously been written in this blog and elsewhere.  

So, for C&E professionals what is the import of these findings?

For those who work in/with public companies I think the overriding lesson is that the board needs to be involved to a meaningful extent with the C&E program.  That is because directors are generally far better able to resist the pernicious effect of short-terming thinking and “moral hazard” on a company’s integrity culture than is management. Of course, much has already been written about the need for strong board oversight of compliance.  But, having the relevant data from this paper should help some directors who are under-involved with C&E see the business case for stepping up their game.

Private companies, meanwhile,  should not get cocky.  While good news for them in a general sense, the paper doesn’t mean the pressure is off.   Indeed, the overwhelming percentage of companies punished under the Federal Sentencing Guidelines tend to be small    – and therefore (I assume, though can’t be totally sure) are mostly private.  Moreover, as discussed in this recent posting on the D&O Diary  (which was based on the results of the Chubb 2013 Private Company Risk Survey): “‘private companies increasingly are at risk of professional and management liability from a vast range of events, including costly lawsuits, governmental fines, data theft and other criminal activities’.”’

The science of disclosure gets more interesting – and useful for C&E programs

In “Nothing to Declare: Mandatory and Voluntary Disclosure Leads Advisors to Avoid Conflicts of Interest,” published last month in Psychological Science,    Sunita Sah   and George Loewenstein   note that “[p]rior research documents situations in which advisors— subject to unavoidable COIs—feel morally licensed to give more-biased advice when their conflict is disclosed,” as well other  factors suggesting that disclosure is often less of an effective mitigant than might be imagined.  (For more information on some of this research see this post on moral licensing and this one  on the pressure that individuals to whom disclosure is made might feel to accept the conflict.)  However, the authors argue – and support with the results of several experiments  that they conducted –   “[w]hen COIs are avoidable … the situation can change dramatically because the ability to avoid conflicts brings other motives into play.”

One of these motives is that “disclosure becomes a potential vehicle for demonstrating one’s own ethics …to signal to themselves and to others that they are honest and moral …and that they prioritize others’ interests over their own.”  A second motive is that “in many situations advisors benefit financially when advisees follow their advice… [and] disclosing the absence of conflicts increases the likelihood that the advice will be followed,…”

Sah and Loewenstein also note: “Evidence from the field complements [their] findings. The American Medical Student Association’s PharmFree Scorecards program (which grades COI policies at U.S. academic medical centers…) has been successful in encouraging many centers to implement stronger COI policies.  Similarly, mandatory disclosure of marketing costs for prescription drugs in the District of Columbia produced a downward trend in marketing expenditures by pharmaceutical companies, including gifts to physicians, from 2007 to 2010…”

The authors’ findings make sense to me.  Indeed, in one of the above-noted earlier posts I suggested that the research indicating that disclosure could be harmful in the professional advisor context because it creates pressure to accept the COI  may not apply to the same extent “in the setting of a business organization – with defined and enforced ethical standards regarding COIs, where one might be more concerned about looking bad to one’s colleagues (or bosses) than to the conflicted party.”

That is, the first of the two motivations that Sah and Lowenstein identify as relevant to disclosure – the desire to show one’s trustworthiness – is likely to be a powerful force in many business organizations given the often strong enforcement of COI rules that began with the Sarbanes-Oxley Act and which is also supported  by the general importance of “organizational justice” to C&E program efficacy and the specific relevance of COI enforcement to organizational justice.  (The other motivation, however, is much less applicable outside of the professional advisor context, and indeed the notion of mandatory versus avoidable COIs may also be more relevant to the advisor context than for business organizations.)

So, the results of this study seem like good news.  But is it news that C&E professionals – who operate more in the business organization rather than in the professional advisor context – can use to make their companies’ C&E programs stronger?   Or, is it – as one C&E professional I know recently said of much behavioral ethics – the stuff of “parlor games”? (Note: I don’t agree with this critique, but it is worth noting that C&E practitioners, as a group, don’t seem to be doing much with behavioral ethics findings.)

I think that this knowledge can in fact be put to use for C&E purposes.   That is, it suggests that in policies, training and other C&E communications, companies should emphasize how timely and complete COI disclosure may be important to an employee’s being seen as trustworthy within an organization – as well as by other important parties (e.g., customers or suppliers).

More broadly, C&E professionals should find ways to address this motivation in helping employees understand the business case (in terms of their careers)  not just for full COI disclosure  but for ethical excellence  generally. Of course, this approach already exists to varying  modest degrees in some C&E programs, but there is plenty of room for many organizations to do more in this regard.

Moral intuitionism and ethics training

In their recent article in the Journal of ManagementMoral Intuition: Connecting Current Knowledge to Future Organizational Research and Practice -    Gary R. Weaver of the University of Delaware, Scott J. Reynolds of the University of Washington  and Michael E. Brown of the Pennsylvania State University  review “a rapidly growing body of social science research [that] has framed ethical thought and behavior as driven by intuition,” literature which they describe as “incredibly rich, fruitful, and meaningful to a wide range of audiences.” Among the process components of moral intuitionism are non-inferential judgments, meaning that “moral judgment and behavior can take place without prior deliberative reasoning”; “the automaticity of moral action,” meaning that ethical judgments can be essentially instantaneous; dual process thinking, made famous by Daniel Kahneman’s  Thinking Fast and Slow; and “intuitive primacy [meaning that] although sometimes the rational deliberation model accurately characterizes moral behavior, in the large majority of cases moral intuition rules.”  The content of moral intuition – made famous by Jon Haidt’s The Righteous Mind   – is often said to include five areas: “a) care (vs. harm), (b) fairness, or justice (vs. cheating), (c) in-group loyalty (vs. betrayal), (d) authority (vs. subversion), and (e) sanctity, or purity,” and perhaps a sixth — “liberty (vs. oppression).”

As the authors describe: “Although the value of the moral intuition perspective has been demonstrated in multiple fields (e.g., psychology, anthropology, evolutionary psychology, cognitive science, behavioral economics), its application in organizational contexts is limited,” and in this article they explore the significance of this body of   knowledge from four perspectives: “leadership, organizational corruption, ethics training and education, and divestiture socialization,”  looking at process and content for each. In this post, I review parts of what the authors discuss with respect to ethics training (leaving the related area of ethics education to professional educators), and hopefully will return in the not too distant future to their discussion of the import of moral intuition for organizational corruption.

Turning first to the process of ethics training, the authors express considerable skepticism about the value of computer-based training, which, as they note, is the most prevalent form of ethics training in businesses today: “moral intuition often involves a strong emotional component. Can computer exercises engage intuition by creating truly emotional experiences for participants? Can they trigger processes that make cognitive reappraisal of intuitions more likely? Similarly, moral intuitions are theorized to be multidimensional, involving many different types of information beyond just sights and sounds … The limited dimensionality of computer-based training likely is a substantial constraint on this format. Moreover, reappraisal and change of moral intuition often involve interaction within trusting relationships (in this case, trainer and trainee), which impersonal technology might be hard-pressed to simulate. Computer-based training might be incredibly efficient and serves purposes of external legitimation, but whether it engages moral intuition is open to question.”

They note further regarding moral intuitionism and training process: “At a deeper, developmental level, an intuitionist understanding of moral judgments and their origins looks more akin to long-term habit development than to immediate learning of information. In this, the ‘training’ of moral intuitions is closer to considerations of character education than to analytical exercises of reason.” Finally, they suggest: “Education and training might also focus on teaching about the process of moral intuition as well as the factors that influence it, so that students can learn to recognize when intuition or deliberation are likely and/or appropriate in a given context. If moral judgments typically are intuitive, and largely automatic, perhaps one key element of ethics training is developing an ability to exert some degree of cognitive control over intuition, so that trained individuals are better prepared to manage their immediate intuitive reactions to situations.”

Turning from process to content, they note: “Business ethics training and education has not typically treated concepts like authority and loyalty as moral ideals or ends in themselves (vs. pragmatic matters), and considerations of purity are highly uncommon. But some business practices and issues could be framed in those terms.” However, this would be a major and uncertain step for many business organizations, and they further note that research is needed to determine: “are some foundational intuitions, and efforts to link business practice to them, more conducive than others for ethically successful and productive employees, or is success a matter of context, such that some foundational categories are better suited for some industries, markets, or organizational contexts?”

All of the authors’ suggestions do seem to me to be valuable but – having been involved in corporate compliance and ethics training for more than two decades – also incredibly daunting.   However, at a minimum their thoughts should provide the basis for a dialogue – perhaps even a “rich, fruitful and meaningful” one – between researchers and C&E professionals on how to apply the results of recent moral intuitionism studies to the task of making business organizations more ethical.   And, one of my new year’s resolutions is to try to be part of that discussion.