Conflict of Interest Blog

Shifting Perspectives on COI in the Modern Workforce

An article by Rebecca Walker and me on the Navex Global website.

We hope you find it interesting.

Behavioral ethics training for managers

In “Companies Need to Pay More Attention to Everyday Unethical Behavior” – published last month in the Harvard Business Review  – Yuval Feldman, Professor of Legal Research at Bar Ilan University, argues:

Many large scandals have sounded the alarm on the need to monitor corporate corruption. The typical response from policy makers is to propose a patchwork of reforms to address various corporate transgressions. But by and large, these reforms focus on preventing gross and blatant violations of the law – and they ignore the more banal, ordinary acts of unethicality that are far more common in organizations. Numerous studies have documented the prevalence of practices such as stealing office supplies, inflating business expenditures reports, and engaging in behaviors that raise conflicts of interest. While these may sound negligible, these violations reduce trust over time and alter prevailing business and legal norms. Their aggregated effect can be quite harmful. Behavioral ethics research suggests that this type of misconduct occurs not because people are unethical or deliberately choose to act unethically, but because they fail to understand that their behavior is indeed unethical and can have harmful consequences. Thus, sanctioning rule breaking and looking for “smoking guns” will not prevent most employees from acting unethically. If organizations want to do a better job at preventing misconduct, they need to adopt a two-stage approach. The first stage focuses on increasing people’s awareness of the illegality and unethicality of their behavior. The second stage is about ensuring that employees clearly recognize that misconduct will be penalized.

Achieving what is contemplated by both of these stages could sound daunting – particularly the first. However, for companies that already have compliance and ethics (“C&E”) training for managers and supervisors there may be an opportunity to use that training to increase employees’ awareness of the sort of risks described by Professor Feldman.

That is, such training can be expanded to include:

– A brief explanation of the findings of the above-referenced behavioral ethics research.

– An explanation that managers’ C&E duties include identifying seemingly negligible risks in their respective parts of the organization that could over time adversely affect trust there.

– An expectation that these risks will be addressed by managers when speaking to the workforce (e.g., in townhalls, staff meetings, etc.) and through written communications.

Note that I am proposing a more or less “local” approach to this issue, as opposed to a top-down one, as I believe that having managers of various ranks involved in the process is necessary to make the effort risk based. Also, hopefully being given this role will lead managers to reflect on their own ethical performance.

Note that there is much more that can be done in communications and training to use behavioral ethics information and ideas to prevent and detect  wrongdoing. See prior posts collected in this index.

There is also more to be said about slippery slopes, some of which can be found in this prior post.

Finally, here is an article on drafting managers’ C&E duties.

Essential ingredients of an effective conflict of interest policy

In today’s edition of the FCPA Blog.

I hope you find it useful.

Conflicts of interest for “the little people”

The conclusion of the Mueller investigation does little to resolve the much broader set of concerns regarding President Trump’s conflicts of interest. These are too numerous to be chronicled on this site, but are being tracked on a weekly basis by the Sunlight Foundation, which even offers a searchable data base of Trump COIs. Additionally, a study recently conducted by USA Today showed that by failing to divest his various investments before taking office, Trump has created more than 1400 COIs.

The late Leona Helmsley is reported to have said that “only the little people pay taxes.” Trump’s view of COIs –  that the President can’t have one – while  similar in spirit to Helmsley’s timeless quip, is correct as a strictly legal matter.

As noted by USA Today: “There is no specific law that directly prohibits the president from owning any assets — whether real estate or anything else — that conflict with his official duties.” But the analysis is very different from an ethical perspective.

First, the foreseeable negative impact of a COI by a President is great. This is less a matter of the specific economic harm arising from an individual conflicted transaction as it is one of setting a bad example.

Justice Louis Brandeis famously said: “Our government is the potent, the omnipresent teacher. For good or for ill, it teaches the whole people by its example.” While Brandeis was speaking about violations of law the point seems just as applicable to ethics.

Indeed, I believe that the negative impact of presidential impunity regarding COIs is particularly worrisome in a way that is unique in our history.  In the coming years we will be compelled to make sacrifices to address increasingly urgent needs regarding climate change and public debt. If government’s motives on these and other subjects are subject to question due to COI’s then the (already small) likelihood of sufficient sacrifice being made is diminished. (For more on the link between morality-based sacrifice and the success of human societies see Jonathan Haidt’s The Righteous Mind.)

Second, the likelihood of a president having a COI  is – at least as a general matter —  very high. That is a function of the near-infinite breadth and depth of a president’s power to help or hinder various interests – which, in turn, can reward him for his action/inaction.

Several weeks ago the House of Representatives passed a wide-ranging bill that – among other things – would encourage presidents and vice presidents to divest assets or create of blind trusts, but the Republican leadership has pronounced the legislation “dead on arrival.” Given how many of the other provisions of this bill are controversial, maybe Congress should be focused more narrowly on what is truly an ethics no brainer.

 

Being a parent as a source of ethics risk

In 1973, in speaking to colleagues on the  Cook County Democratic Committee, Mayor Richard Daley of Chicago defended his having directed a million dollars of insurance business to an agency on behalf of his son John with the immortal words: “If I can’t help my sons, then [my critics] can kiss my ass. I make no apologies to anyone.”

I thought of this when I read about the college admission bribery scandal that emerged this past week. The scandal called to mind other cases where parents violated the law to benefit their children. 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.  In 2016, JP Morgan settled a “Princeling” case, which involved the bank’s hiring the sons and daughters of important Chinese officials in return for business. And there are many other cases like these – presumably going back to our early history.

The behavioral ethics and compliance perspective focuses on structural causes of wrongdoing. There are many fruitful avenues for behavioral ethics inquiry suggested by the college admission bribery scandal. The one that most interests me is whether it is easier to commit a crime when one is doing so not to help oneself but to help one’s child.  (Note that I understand that there are also personal reputational benefits that parents get from having their child admitted to a prestigious university but still think that the principal beneficiaries of this corruption are the children.)

Given how powerful the drive to help one’s offspring is – both as a matter of the instincts we are born with and the social norms that we adopt – the answer is almost certainly Yes, at least as a general proposition. If this turns out to be an operative fact in the admissions bribery scandal, then I hope a lesson will be that parents should refrain from doing things for their children that ethically they wouldn’t do for themselves.

As the scandal unfolds I’ll also be interested in learning what was the role – or lack thereof – of risk assessment and auditing in the respective compliance programs of the universities involved. Based on the press accounts it seems as if this kind of corruption was probably fairly common. If that is so, where were the compliance programs?

“Just-in-time” risk assessment

In 1994 I spoke at a meeting of a company’s executives that took place shortly before the end of the company’s financial quarter, and in the same session the CEO made the point that the executives needed to be vigilant against any mischief designed to dress up the quarter. This was my first exposure to “just-in-time” training/communication. And although more companies time their compliance measures in this sort of way now than did then (mostly because there are more measures to time), it is an area where many organizations can and should up their respective games.

The basic idea of just-in-time communications (also sometimes called “point of risk” communications) – as described in this post – is that compliance communications are most likely to have the desired impact if delivered shortly before exposure to the risk in question. As noted in that post, this mechanism could be used to address a wide range of risks: “anti-corruption – before interactions with government officials and third-party intermediaries; competition law – before meetings with competitors (e.g., at trade association events); insider trading/Reg FD – during key transactions, before preparing earnings reports; protection of confidential information – when receiving such information from third parties pursuant to an NDA; … accuracy of sales/marketing – in connection with developing advertising, making pitches; and employment law – while conducting performance reviews…”

To his discussion I would like to add the notion of a just-in-time risk assessment.  Specifically, when conducting risk (or program) assessment interviews or surveys, compliance personnel should inquire a) for any given area or risk, whether there is a need for just-in-time training/communications; and b) if so, what the specifics of such training/communications should be.

Finally, the need to look for opportunities of this sort can be added to lists of managers’ C&E duties (e.g., those set forth in the code of conduct, training for new managers, and perhaps personnel evaluations). This will not only help companies develop more “just-in-time” communications but will raise the level of managers’ C&E knowledge and commitment generally.

Behavioral ethics and compliance assessments

New from the Compliance Program Assessment Blog.

Rebecca Walker and I hope you find it interesting.

Socialism and conflicts of interest

There was a time in my life when I might have embraced the cause of socialism, but that was many years ago and today I proudly march under the banner of centrism. And the current  flirtation with socialism in the US has me worried – at least a little bit.

My concern is not that the US will become a fully socialist country (already having been a partly socialist one for many years, mostly in a benign way). If that didn’t happen in the 1890’s and 1930’s it seems unlikely to happen now.

Rather, my worry is that the prospect of socialism could lead to a powerful counter push to the right.

What – if any – is the relevance of COIs to this prospect?

As I have argued in this blog on occasion, a strong and healthy approach to COIs can be immensely beneficial to many aspects of our society. Conversely, a world without such an approach could be one of “needlessly diminished lives, resources and opportunities.”   In such a society, the case for socialism can indeed be seen as compelling. If private parties don’t live up to their ethical duties then government will fill the vacuum.

A strong and healthy approach to COIs means, of course, enforcement of COI-related laws, rules and norms.  See, e.g., this recent piece  on underenforcement of the fiduciary duty of loyalty.

But more important than enforcement is having a broad view of COIs – one that takes into account the phenomenon of “moral hazard.” As noted in an earlier post, both in the areas of climate change and public debt the wellbeing of the young is being sacrificed to conflicting interests of others – with likely calamitous effects. And of course there are many other areas where intergenerational COIs pose grave  threats to our society.

Addressing this sort of COI will be a considerable task. But the alternative may be a political, economic and social order based on an extremist ideology.

Conflict-of-interest policies and procedures

My latest column in C&E Professional (3rd page of PDF).

I hope you find it useful.

Loyalty on the decline?

President Trump’s firing of then FBI director Jim Comey for refusing to pledge personal loyalty to him has given loyalty a bad name.  But on the whole loyalty plays an essential role in our business ethics/law framework.

In The Diminishing Duty of Loyalty Professor Julian Velasco of Notre Dame Law School notes:  Fiduciary duties comprise an integral part of corporate law. It is generally understood that directors owe the corporation and its shareholders two fiduciary duties: the duty of care and the duty of loyalty. Although both duties are firmly established in corporate law, they are not treated equally. It is generally understood that the duty of loyalty is enforced far more rigorously than the duty of care. …In this Article, I demonstrate that the duty of loyalty is not enforced as rigorously as is commonly believed.

Given the importance of the duty of loyalty to business ethics, this is unhappy news. But Velasco also sees some basis for a broader view of the duty of loyalty than is currently prevalent – resting, in part, on the broader view of what can cause disloyalty that was articulated by the Delaware Chancery Court in 2003:

Delaware law should not be based on a reductionist view of human nature that simplifies human motivations on the lines of the least sophisticated notions of the law and economics movement. Homo sapiens is not merely homo economicus. We may be thankful that an array of other motivations exist that influence human behavior; not all are any better than greed or avarice, think of envy, to name just one. But also think of motives like love, friendship, and collegiality, think of those among us who direct their behavior as best they can on a guiding creed or set of moral values.

Velasco notes: When writing or citing passages such as these, courts are implicitly acknowledging the need for a more comprehensive inquiry into loyalty than current law allows. I share his hope that the law will move more in this direction. And I hope also that in the realm of compliance & ethics programs – where decisions are often made regarding what types of loyalty are cognizable for conflicts of interest purposes – the broad view articulated above and in several other cases cited in his article will be embraced.

Finally, the need to strengthen the duty of loyalty does not diminish the need for a strong duty of care. As Samuel Johnson once said: “It is more from carelessness about truth than from intentionally lying that there is so much falsehood in the world.”