Conflict of Interest Blog

Revised DOJ compliance program standards: what is new

In the most recent posting on the Compliance Program Assessment Blog Rebecca Walker and discuss what is new in the  June 1, 2020  update  to the Department of Justice’s standards for evaluating compliance programs.

We hope you find it useful.

Assessing conflict of interest compliance programs

Here is a just-published article in Corporate Compliance Insights by Rebecca Walker and me on conducting assessments of conflict of interest compliance programs.

We hope you find it useful.

Beyond the attorney-client privilege

In my latest column in Compliance & Ethics Professional I consider the issue of whether program assessments should be conducted under the attorney-client privilege.

I hope you find it useful.

 

Mapping the field of “”behavioral business ethics”

In “Toward a Better Understanding of Behavioral Ethics in the Workplace,”  David De Cremer of the Business School, National University of Singapore, and Celia Moore of the Cambridge Judge Business School, review literature that is part of the growing area that they call “behavioral business ethics.” They use this formulation to “build a bridge between business ethics and behavioral ethics,” and they consider the various implications of “behavioral business ethics” research.

As their article is itself largely a compilation of summaries of various studies I won’t attempt to summarize it, but do note generally that the article considers the significance of this body of knowledge on three levels: intrapersonal, interpersonal and organizational. They “conclude by recommending future research opportunities relevant to behavioral business ethics and discuss its practical implications.”

For instance, they note that on an intrapersonal level, “understanding what drives people to act unethically is essential to the behavioral ethics approach. Behavioral business ethics helps us identify psychological processes that can be harnessed to ensure that employees and managers do not fall prey to basic human frailties that can derail one’s good behavior. One important practical goal of a behavioral business ethics approach is to gather evidence so managers can be trained to act more ethically themselves, and elicit more ethical behavior from their subordinates, as well as to refrain from moral licensing, where people give themselves credit for initial ethical behavior, allowing them to follow it up with unethical behavior ….”

The article is filled with useful and interesting information, and I do think the “behavioral business ethics” formulation works. And this also poses an appropriate occasion to take note of the formulation I have used in this blog and elsewhere – “behavioral ethics and compliance” – and the mapping (in this blog and elsewhere) relevant thereto.

In brief, behavioral ethics and compliance seeks to:

– Use the overarching message of behavioral business ethics that we are not as ethical as we think to persuade boards of directors and managers of the need for strong C&E programs.

– Use that same message to persuade governmental bodies of the need to adopt enforcement approaches that incent business organizations to develop and maintain effective programs.

– Provide C&E professionals with information that can be used to develop and utilize risk assessments, training, enforcement approaches and other C&E program elements in a behaviorally informed way.

– Provide a similar approach with respect to specific types  of wrongdoing, such as conflicts of interest and insider trading.

The current iteration of the map for this can be found here. I hope you find it interesting.  Finally, note that there is obviously a lot of overlap between the two fields. But hopefully having one specifically tied  to compliance is worthwhile, particularly for compliance personnel.

More on “reverse conflicts of interest”

In a post several years back I discussed what could be called “reverse conflicts of interest,” starting with an example from my work:

A company enters into a complex business arrangement where one of its managers has a relationship with the other entity.  The relationship is fully disclosed and approved pursuant to company policy on COI waivers.  After time, the arrangement runs into business difficulties.  Although the company has lived up to its contractual obligations, the other entity seems to feel that the company should have done more to make the arrangement work.  Based partly on that, some employees of the company question whether that entity had been promised more than was disclosed by the manager, causing the employees to take various defensive measures which put further strain on the arrangement. Ultimately, the arrangement collapses.

As a general matter, if properly disclosed and approved, some COIs can be waived (although some should not be permitted under any circumstances).  Such approvals can be either a true “green light” or subject to being managed on an ongoing basis, i.e., a “yellow light.”

Like many C&E-related determinations, this type of decision tends to be made based on a balancing of costs versus benefits (hopefully, with a reasonably high burden of showing that the latter outweigh the former).

The case above illustrates what I believe is a factor that should generally be considered by companies deciding whether to grant a COI waiver: whether there will be reasonable possibility of overcompensating for the COI in ways that are harmful to the company.  The potential for such “reverse COIs” could turn on many factors – perhaps most significantly, on the extent to which the contemplated relationship must rely on trust.  (That is, the greater the need for trust, the greater the possibility of suspicion – at least as a general matter.)

Historically, reverse COIs may not have been common.  But as sensitivity to COIs has grown dramatically over the past few years …they seem more likely to occur than ever before, and should be on a company’s radar in making COI waiver determinations.

In the many years since that post I cannot say that I have seen many reverse COIs. But I did find notable the following discussion from the recently published  Conflict of Interest Disclosure With High Quality Advice: The Disclosure Penalty and the Altruistic Signal by Sunita Sah of the Johnson Graduate School of Management, Cornell University and Daniel Feiler of the Tuck School of Business at Dartmouth: “In this paper, we explore whether laws requiring conflict of interest disclosure damage the advisor-advisee relationship more than is intended. Across six experiments (N = 1,766), we examine situations in which advisors give high quality advice but still must disclose a conflict of interest. As predicted, such disclosures yield negative attributions regarding the advisor’s character, even when advice is of high quality (and advisees have full information to judge advice quality), and even when the advisor’s professional responsibility and self-interest are aligned, or the advice runs counter to the advisor’s self-interest. This disclosure penalty decreases trust in honest advisors…” (emphasis added).

In short, a reverse COI experiment, of sorts.

Finally, given the extent to which President Trump’s extraordinary COIs have garnered widespread attention, it will interesting to see if over time the reverse COI phenomenon has a widespread effect on how we view COIs in the government realm generally.

 

 

 

Assessing conflicts of interest risks

Conflicts of interest have long been seen as an area of significant risk. But that does not always translate into the conduct of meaningful risk assessments.

Part of the reason for this disconnect is a widespread belief that COI risks are already well known. Certainly every C&E professional knows that the major types of COI for most business organizations involve employees a) having financial ties to competitors and third parties that do or seek to do business with the organization, and b) hiring family and friends into the organization. Similarly, the basics of the other two major COI categories – organizational and gatekeeper COIs – are generally understood by C&E professionals working in fields where risks of such conflicts are significant.

But understanding the general risks regarding COI may  not be enough to generate the type of information that an effective risk assessment process requires, which is information that will help design or modify all the risk-sensitive elements of a program to mitigate COIs. These are policies, training,  and other communications,  auditing and accountability. (Note the other program elements – e.g., helplines, investigations,  incentives, discipline  – are obviously important too, but tend not to vary by risk area.)

Each assessment will vary in substance. But here are some areas of inquiry that may be useful to companies just starting out.

– Any relevant COI history at the organization – violations, near misses and inquiries.

– Any relevant COI history at competitor or otherwise comparable organizations, to the extent known.

– Same inquiry regarding customers, suppliers and other third parties with which one  does business.

– COI standards that are not fully understood or appreciated.

– Weakness in “inner controls” (where – due to factors described in behavioral ethics research – moral constraints against wrongdoing are of diminished efficacy).

– Instances or prospects of prosocial COIs (“right v. right” risks).

– Industry-related risks.

– Cultural-related factors.

– Efficacy of process controls (particularly around COI disclosure/approval regimes).

Note that in some instances the inquiry can be done on an enterprise-wide basis but for others it should be granular (e.g., region, business line, function) too.

Come to the Navex Global master class on conflicts of interest

Together with Rebecca Walker and Jolene Wall of REI, I will be teaching a master class for Navex Global on conflicts of interest compliance programs.

More information is available here.

Why it is important to know who the victims of corruption are

A new posting on the FCPA Blog.

I hope you find it useful.

Insider trading and conflicts of interest

The Coronavirus is,of  course, creating considerable volatility in the stock market. With such volatility comes opportunity for investors to make profits, either honestly or otherwise. Are companies prepared for what might be an increase in insider trading risk?

In many companies the principal “owner” of insider trading compliance is the corporate secretary or other member of the law department – not the compliance & ethics officer. That is generally fine, as the subject is of a fairly technical nature.

But in my view the CECO should still have  a “line of sight” into insider trading compliance too. This is particularly so given that insider trading laws are – at least in part – conflict-of-interest based, and COIs are within the “heartland” of a CECO’s duties.

The basics

The core of an insider trading compliance program is the policy, which every public company (and some private companies) should have. A typical policy should cover the following

– Explanation of insider trading, including definitions of key terms such as “material” information, non-public information, purchase and sale.

– Procedures to prevent insider trading, including preapprovals and black-out periods.

– Policy and procedures on “tipping.”

– Any additional transactions that are prohibited by the policy, such as trading in options in the company stock or buying on margin,

– Rule 10b5-1 trading plans.

– Penalties and enforcement.

The basics also include:

– Insider trading training and periodic communications.

– Certificates of compliance.

– Avenues for seeking guidance and reporting concerns.

The role of the CECO

Most of these items are, as noted above this is fairly technical. But an insider trading program can also have a broader cultural dimension.

For instance, as noted in an earlier post: insider trading should be seen as a form of private corruption, rather than as a more technical and indeed victimless form of wrongdoing,  which it is sometimes seen as. This can give enforcement and compliance efforts  a degree of moral force that they might otherwise lack.

Can the corporate secretary make the case about insider trading being a form of private sector corruption? Sure – but in all likelihood the CECO can do it better because she will be able to place insider trading within the larger conflict of interest framework. This could make both areas stronger.

Again, I’m not trying to take work from the corporate secretary. But having the insider trading program learning from the CECO could help companies strengthen their compliance in a time of heightened risk.

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You might be interested in this piece about abuses in the gifts and entertainment area  being viewed as “soft-core corruption.”

The gut as accomplice

A review of core behavioral ethics concepts (“Rule-breaking without Crime: Insights from Behavioral Ethics for the Study of  Everyday Deviancy” by Yuval Feldman, Benjamin van Rooij and  Melissa Rorie) noted: “Behavioral Ethics has shown that … people relying on System 1 cognition (characterized by intuitive and emotional decision making, more so than System 2’s deliberation and planning) are more likely to be unethical.”

For the past three years we have seen countless examples of President Trump relying on his gut in making decisions for the country – most recently in saying he would trust his instinct in deciding when to reopen the economy. More generally, as described in an article in The Atlantic ,“Trump’s Most Trusted Adviser Is His Own Gut. The president’s glandular instinct has become a substitute for all expertise and all nuance.”

Even if he loses the election in November, Trump’s triumph of instinct over reason will have caused lasting damage to the moral fabric of our country. To counteract that, we need to strengthen the moral imperative not just to be honest but also to be careful and deliberative, particularly when making decisions that will significantly impact others.  We should heed these words of  Samuel Johnson: “It is more from carelessness about truth than from intentionally lying that there is so much falsehood in the world.” And carelessness is obviously at the root of many other types of wrongdoing too.

One specific  example is suggested by a presentation – “Beyond Agency Theory: The Hidden and Heretofore Inaccessible Power of Integrity,” by Michael Jensen and Werner Erhard – discussed in this earlier post. The authors argue that honesty requires more than sincerity: “When giving their word, most people do not consider fully what it will take to keep that word.  That is, people do not do a cost/benefit analysis on giving their word.  In effect, when giving their word, most people are merely sincere (well-meaning) or placating someone, and don’t even think about what it will take to keep their word. This failure to do a cost/benefit analysis on giving one’s word is irresponsible.”

There are many other examples of how more deliberative thinking can lead to less gut-led actions.   Big picture: ultimately we need to get to a place where being  uncareful is broadly seen as unethical in the same way that being dishonest is.