Conflict of Interest Blog

“Maginot Line” compliance

A post in the FCPA Blog on spending too much effort looking backward in risk assessments.

I hope you rind it interesting.

President Biden and behavioral ethics

One of the key findings of the behavioral ethics field is that it is easier to act unethically to an anonymous individual than a known one. As described in this paper by Deborah A. Small and George Loewenstein,  in one study “subjects were more willing to compensate others who lost money when the losers had already been determined than when they were about to be” and in another “people contributed more to a charity when their contributions would benefit a family that had already been selected from a list than when told that the family would be selected from the same list.”    

Like a lot of behavioral ethics findings, this one seems pretty common-sensical.  But it is still good to know that there is data behind it.

And it is particularly encouraging to know about this when one considers the powerful – indeed almost unique – empathetic feature of President Elect Biden’s character. To Biden it seems like there are no strangers.

Over the next four years we will see if Biden’s empathetic words correlate with ethical deeds. But in a sense we already know the answer – because we have seen how his immediate predecessor’s unempathetic words are strongly correlated with unethical actions.

Another Way to Prevent Corporate Crime?

Do prosecutors need another arrow in their quiver? Professor John Coffee of Columbia Law School thinks so.

In Rethinking Corporate Prosecutions in the Harvard law school corporate law blog Coffee writes:

What threat could cause corporations to agree to turn in senior executives? Clearly, current penalties are not sufficient. In some event studies that we conducted for my book, the stock prices of corporations sentenced to record fines actually went up on the day of sentencing (even though these record fines could not have been easily predicted). This does not prove that corporations cannot be deterred, but only that cash fines on huge public corporations can be easily digested. Yet, heavy penalties can cause externalities that fall on the least culpable: low-level employees who might be laid off, creditors whose debt securities will decline in value, and local communities who depend upon the local industry to provide its tax revenues. We need therefore to focus the necessary penalty on the shareholders—who alone can take action to reform their firm and who are probably for the most part well diversified.

How can one do this? My proposal is the “equity fine”: a fine levied not in cash but in common shares. This fine would transfer some percentage of the corporation’s authorized, but unissued, stock to a victim compensation fund. Forcing the company to issue 10% to 20% of its stock is certainly severe enough to deter shareholders through dilution, but it has no real impact on low-level employees, creditors, or other stakeholders. Nor does it render the corporation less solvent or threaten bankruptcy (as cash fines do).

From a fairness perspective this does sound like a distinct improvement over present practices. But would the “equity fine” also serve as a more effective deterrent to corporate crime than the cash fine does?

My initial reaction to it was that the “equity fine” is built partly on a foundation of “homo economicus” thinking which – as described in in this prior post – reflects a hyper-rational economics-based view of human nature.   But I also see that an equity fine could improve the practice of compliance, particularly in large corporations. By focusing so directly on shareholders, which would include directors, such fines could bring an immediacy to compliance needs that in a variety of ways  (including building on applicable fiduciary duties) could make a compliance program more effective.

2021 behavioral ethics and compliance index

While in the more than nine years of its existence the COI Blog  has been devoted primarily to examining conflicts of interest it has also run quite a few 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 and communication ones); and b) there is some overlap between various of the posts.

INTRODUCTION 

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

– Overview of the need for behavioral ethics and compliance

– Behavioral ethics and compliance: strong and specific medicine

– Behavioral C&E and its limits

– Another piece on limits

– Behavioral compliance: the will and the way

– Behavioral ethics: back to school edition

– A valuable behavioral ethics and compliance resource

– Strengthening your C&E program through behavioral ethics

–  Ethics made easy

 Have you checked your behavioral externalities?

BEHAVIORAL ETHICS AND COMPLIANCE PROGRAM COMPONENTS

Risk assessment

–  Being rushed as a risk

–  Too big for ethical failure?

– “Inner controls”

– Is the Road to Risk Paved with Good Intentions?

– Slippery slopes

– Senior managers

– Long-term relationships

– How does your compliance and ethics program deal with “conformity bias”? 

– Money and morals: Can behavioral ethics help “Mister Green” behave himself? 

– Risk assessment and “morality science”

 Advanced tone at the top

 Sweating the small stuff

Communications and training

– “Point of risk” compliance

–  Publishing annual C&E reports

– Behavioral ethics and just-in-time communications

– Values, culture and effective compliance communications

– Behavioral ethics teaching and training

– Moral intuitionism and ethics training

– Reverse behavioral ethics

– The shockingly low price of virtue

– Imagine the real

– Behavioral ethics training for managers

Assessments

– Behavioral ethics program assessments

Positioning the C&E office

– What can be done about “framing” risks

– Compliance & ethics officers in the realm of bias

 Behavioral ethics, the board and C&E officers

 Lawyers as compliance officers: a behavioral ethics perspective

Accountability

– Behavioral Ethics and Management Accountability for Compliance and Ethics Failures

– Redrawing corporate fault lines using behavioral ethics

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

–  The Wells Fargo case and behavioral ethics

Whistle-blowing

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

Incentives/personnel measures

– Hiring, promotions and other personnel measures for ethical organizations

Board oversight of compliance

– Behavioral ethics and C-Suite behavior

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

Corporate culture

– Is Wall Street a bad ethical neighborhood?

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

–  Ethical culture and ethical instincts

Values-based approach to C&E

 A core value for our behavioral age

– Values, structural compliance, behavioral ethics …and Dilbert

Appropriate responses to violations

– Exemplary ethical recoveries

BEHAVIORAL ETHICS AND SUBSTANTIVE AREAS OF COMPLIANCE RISK

Conflicts of interest/corruption

– Does disclosure really mitigate conflicts of interest?

– Disclosure and COIs (Part Two)

– Other people’s COI standards

– Gifts, entertainment and “soft-core” corruption

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

– Gamblers, strippers, loss aversion and conflicts of interest

– COIs and “magical thinking”

– Inherent conflicts of interest

– Inherent anti-conflicts of interest

– Conflict of interest? Who decides?

– Specialty bias

– Disclosure’s two-edged sword

– Nonmonetary conflicts of interest

– Charitable contributions and behavioral ethics

– More on conflicts of interest disclosure

Insider trading

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

– Insider trading, private corruption and behavioral ethics

Legal ethics

– Using behavioral ethics to reduce legal ethics risks

OTHER POSTS ABOUT BEHAVIORAL ETHICS AND COMPLIANCE

– New proof that good ethics is good business

– How ethically confident should we be?

– An ethical duty of open-mindedness?

– How many ways can behavioral ethics improve compliance?

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

– Behavioral ethics and reality-based law

– Was the Grand Inquisitor right (about compliance)?

– Is ethics being short-changed by compliance?

Have you checked your behavioral externalities?

In The Case for Adding Darwin to Behavioral Economics posted on the Ethical Systems web site,  Robert H. Frank  of Cornell University’s Johnson Graduate School of Management writes:

I use the term “behavioral externalities” to describe choices that affect social environments… Because social environments influence us so profoundly, both for good and ill, we have a powerful and legitimate interest in them. We would prefer to live in ones that bring out the best in us and to avoid those that harm our interests. Yet behavioral externalities have received virtually no serious attention from policy analysts, and it’s here that lie many of the most exciting opportunities for young researchers. Once you’ve been alerted to their existence, it quickly becomes apparent that behavioral externalities are ubiquitous. Careful empirical studies have documented the importance of behavioral contagion in such diverse domains as, among many others, excessive drinking, sexual predation, cheating, bullying, obesity, greenhouse-gas emissions, and compliance with public-health directives. Research has tended to focus on negative peer influences, but there is also compelling evidence of positive influences. The adoption of rooftop solar panels, hybrid cars, and plant-based diets, for example, have all been shown to be highly contagious…. As Darwin understood clearly, our fate depends not only on our own decisions and capabilities but also on those of rivals and partners. And that, in a nutshell, is the case for a broader and more inclusive behavioral economics, one that incorporates the rich insights of behavioral biology.

Several points about this.

First, in addition to policy analysts and young researchers, the notion of behavioral externalities should be of interest to compliance and ethics professionals seeking to understand and address cultural risks facing their respective organizations. (Among other things behavioral externalities are relevant to risk assessment.)

Second, I like the idea of adding to behavioral economics  information from other fields of knowledge. My personal favorite in this regard is moral hazard, which – like  Frank’s example – also involves choices that entail  a “rational man” making decisions that work for her/him but which are bad for the relevant larger group.

Finally, for those of you who haven’t read it I strongly recommend Frank’s Passions Within Reason: The Strategic Role of the Emotions. It is one of the most important works in our field.

An SCCE podcast on assessing corporate culture

Available here.

I hope you find it useful.

Behavioral ethics and the road ahead

With the Supreme Court twice this week refusing to hear challenges by the Trump campaign to various results of the Presidential election, hopefully the country can move forward full steam ahead in addressing the many daunting tasks it faces. But in what spirit shall it do so?

Personally, I have always found great comfort and wisdom in Lincoln’s “with malice toward none.” This fits well within a view of human nature that I generally find persuasive – at least to some degree.

It also dovetails nicely with the approach to human nature underpinning the field of “behavioral ethics and compliance” that is the focus of many of the posts in this blog. See http://conflictofinterestblog.com/2020/01/behavioral-ethics-and-compliance-index-2020.html This view is based – broadly speaking – on the belief that we are not as ethical as we think we are.

This notion of ethical humility can play an important role in persuading others to be more open-minded than they otherwise might be.  It can be especially important when dealing with issues that – due to their complexity or other reasons – earning the trust of one’s political adversary is key to success.

Climate change and the pandemic are, by their very nature, two prime examples of this need for earning trust. But there are many others, too, including some public debt issues.

However there is another side to this coin, and that is that sometimes certainty can be a force for persuasiveness.  This can be seen in various political/revolutionary movements over the years.  Indeed, given how pressing these issues are – particularly the climate change and pandemic ones – arguably there is not enough time to go the humility route.

Which path shall we take? I think – predictably – the answer is some parts of each.

But picking the right ones for humility and for certainty will be a challenge of great difficulty- and consequence.

 

Compliance certifications: an under-used mitigation tool

A just-published post on the FCPA Blog.

I hope you find it useful.

Robots and conflicts of interest

From “Do You Have a Conflict of Interest? This Robotic Assistant May Find It First”  recently published in the NY Times:

What should science do about conflicts of interest? When they are identified, they become an obstacle to objectivity... Sometimes a conflict of interest is clear cut.But other cases are more subtle, and such conflicts can slip through the cracks, especially because the papers in many journals are edited by small teams and peer-reviewed by volunteer scientists who perform the task as a service to their discipline.

The Times  piece further notes: With such problems in mind, one publisher of open-access journals is providing an assistant to help its editors spot such problems before papers are released. But it’s not a human. Software named the Artificial Intelligence Review Assistant, or AIRA, checks for potential conflicts of interest by flagging whether the authors of a manuscript, the editors dealing with it or the peer reviewers refereeing it have been co-authors on papers in the past…(Note: prior coauthoring of an article by itself would not constitute a COI, but could be an indication of one.)  The tool cannot detect all forms of conflict of interest, such as undisclosed funding sources or affiliations. But it aims to add a guard rail against situations where authors, editors and peer reviewers fail to self-police their prior interactions.

Note that the use of data mining for COIs is not new. Indeed, for many years, auditors have looked for matches between the addresses of employees and vendors. And  anti-corruption compliance programs increasingly involve data mining, as is true of competition law compliance too

Moreover, the specifics of efforts like these will vary by industry. (E.g., the co-author relationships of the type referenced above would presumably  be relevant only to businesses where publishing plays an important role.)

But for any company it is worth considering – based upon the company’s risk profile – whether there  are any opportunities of this sort.

 

 

 

A (partial) conflict of interest agenda for Biden

There are many reasons to celebrate the  apparent defeat of Donald Trump in the presidential election, but among the top ones for me is his total antipathy toward rules and norms concerning conflicts of interest.

Trump has created or maintained literally thousand of COIs during his presidency.   The concern here is less what might be considered his ill-gotten gains from the COIs than what is on the other side of the conflicted transaction, i.e. what interest did he improperly trade/betray for the COI.

But more so that this is the larger issue of the lasting general impact from the very rotten “tone from the top” on future ethical conduct issues

I do not believe that many individuals have overtly justified their engaging in  COIs based on Trump’s behavior.  But we also know from behavioral ethics research  that many of the causes of wrongdoing lie below the surface. To me these are the most dangerous aspects of COIs because they undermine the trust that will be necessary for dealing with the many complex and high stakes challenges, we face, including Covad 19 and climate change.

To help restore that trust the president elect should build a COI element into his communications  plan. Note that this need not be an every day affair. But there are presumably lots of opportunities of this sort, and Biden’s communications staff should be directed to make the most of them.