Conflict of Interest Blog

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.”

Deadly – and small – gifts and entertainment

Virtually every conflict of interest policy contains monetary limits for individual acts of gift giving or entertainment, but not all seek to quantify how many of such acts are permitted to occur in a given time period. This issue was raised in a particularly grim way – as described in this article in MarketWatch – by a recent study which “found that both deaths from opioid overdose and opioid prescriptions rose in areas of the country where physicians received more opioid-related marketing from pharmaceutical companies, such as consulting fees and free meals,…”

Relevant to the specific issue in this post, Magdalena Cerdá, director of the Center on Opioid Epidemiology and Policy at NYU Langone Health and the senior author on the study, stated: “A lot of the discussion around the pharmaceutical industry has been around high value payments, but what seems to matter is really the number of times doctors interact with the pharmaceutical industry,… ‘A physician’s prescribing pattern could be influenced more by multiple inexpensive meals than a single high-value speaking fee,’ she noted.”

She also said: “’We think it’s because the more times physicians interact with someone from the pharmaceutical industry, the easier it is to build a relationship of trust,… ‘We in no way think the prescribing is some kind of nefarious intentional behavior by physicians. The fact that it is the frequent, low-level payments that have the most effect shows that it’s more unintentional ‘…” Of course, unintentional conflicts tend to be more difficult to address than are intentional ones.

More generally, this finding  seems to me to be significant in a broad-based way as it presumably applies to other commercial contexts as well. And, compliance officers in all industries should make sure that their COI policies address not just high-value gifts and entertainment but also high volumes of such.

Behavioral ethics and compliance index 2019

While in the more than seven 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

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

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

Positioning the C&E office

– What can be done about “framing” risks

Compliance & ethics officers in the realm of bias

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

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)?

Compliance culture assessments – the why and the how

The latest post on the Compliance Program Assessment Blog.

Rebecca Walker and I hope you find it useful.

Inherent anti-conflicts of interest

A post some years back explored the idea of “inherent conflicts of interest,”  COIs so embedded in a situation that they are essentially impossible to resist. In an important column this week in Wired UK , the eminent behavioral ethicist Dan Ariely describes an approach he has developed which might be considered inherent anti-COIs. He writes:

An example of this, with which I am involved, is Lemonade, an insurance provider. In the standard insurance model, consumers pay fees and, when something bad happens, they file a claim. The problem is that in this model, an insurance company benefits financially when it refuses to pay out, creating a conflict of interest in its staff between the needs of consumers and the need for the company to make a profit. This is a tremendous conflict and some staff are likely to misbehave.

Lemonade, on the other hand, is not set up as a two-sided game between the consumer and company. Instead, we have made it a game with three players: the consumer, the insurance company and a charity that the consumer chooses. The consumer makes their payments. Lemonade keeps a fixed percentage, say 20 per cent, and pays claims from the remaining 80 per cent. Any money left over at the end of the year goes to the charity. Under this system, Lemonade makes the same profit whether it pays claims or not. And, if a consumer decides to inflate their claim, they are taking money from the charity they have nominated.

The shift here is a move from a system where companies simply ask customers to trust them, to a system where companies deliberately set up their business model in order to create trust.

In 2019, I believe we will see more companies using this approach and more consumers rewarding them for it. We are every day becoming more weary of the conflicts of interest and dishonesty that plagues so much of business and soon we will start choosing companies that have systems in place to avoid them.

I think that this is a terrific idea and hope that we will indeed see more examples of it in the coming year.

Finally, part of my wish list for 2019 is that we will also  learn from this experience more about what works generally and what doesn’t when it comes to messaging/marketing to turn ethical behavior to commercial advantage.  Among other things,  inherent anti-COIs should be a marketing “plus” not only in the insurance business but also in selling medical services and investment advice, among other things.  But actually making the cash register ring this way seems likely to be a real challenge.

International Chamber of Commerce publishes conflict of interest guidelines

The International Chamber of Commerce – apparently the world’s largest business organization – recently published Guidelines on Conflicts of Interest in Enterprises. It is available for free download here.

Among other things, the Guidelines provide a useful summary of what should generally be included in a COI compliance policy:

Objective: first, the prevention of Conflicts of Interest, and if nevertheless they do arise, dealing with them, disclosing them and finally mitigating the risks of them arising;

Scope: applicable and binding for all directors, officers, managers, employees, agents and representatives (Associates) of the Enterprise;

Definitions: include clear definitions;

Provisions:

– comply with all applicable laws and regulations in addition to internal regulations of the Enterprise, including privacy laws and policies;

– all decisions and actions by all Associates shall be taken in the best interest of the Enterprise;

– Associates shall not take business opportunities that belong to the Enterprise for themselves;

– Associates shall immediately disclose any Conflicts of Interest;

– Associates shall abstain or withdraw from debating, voting, or other decision-making processes or activities when a Conflict of Interest exists or might arise;

– Senior Management shall lead by example and give guidance on Conflicts of Interest;

– job applicants and newly hired or appointed Associates shall disclose any Conflicts of Interest immediately during the hiring or appointment process;

– every member of Senior Management shall update his/her disclosure on Conflicts of Interest at least annually to the Compliance Officer, or any other person in charge of the Conflict of Interest Policy;

– provision on communication and training on Conflicts of Interest;

– provision explaining where guidance may be obtained in case of questions or concerns; and

– provision on regular reporting of Conflicts of Interest and evaluation of the Policy.

Overall, I agree with these recommendations, but to me the principal value of the Guidelines lies more in the very fact that it exists than the particulars of its various provisions.

That is, perhaps because COIs are so widespread and diffuse (meaning not the subject of a unified legal regime), they often seem to discourage meaningful efforts to mitigate them in the type of programmatic way that one typically sees with anti-bribery and competition law. The Guidelines – issued by an organization with six million members – is an important step in the direction of making such approach a mainstream expectation.

(For more information on the components of a COI compliance program see the various entries and subentries under “Compliance” on the index on the left hand part of this blog – also available here.)

Conflict of interest? Who decides?

Many companies have, of course, escalation provisions for responding to allegations of wrongdoing. But do they need such provisions with respect to routine self disclosures of conflicts of interest?

At least for some companies that allow line managers to approve disclosed conflicts the answer is, in my view, Yes. That is in part because managers may – thanks to the behavioral ethics phenomenon of  “motivated blindness” – be inclined to “go easy” on a particularly valued employee who has disclosed a COI.  Line managers may also fail to appreciate in such situations the danger to the compliance program generally of an overly liberal approach to COIs – particularly to the sense of “organizational justice” at the company.

But what should an escalation provision entail? Here are some possibilities, meaning circumstances where the line manager should be required to enlist the help of HR, Compliance or Legal in addressing a disclosed COI:

– Disclosure is by a relatively high-level person.

– Disclosure is by a person in a controls function.

– Conduct would tend to diminish trust of key stakeholders in the company. (Most important of all the criteria – but also hardest to apply.)

– Conduct involves a relatively high degree of money or other tangible or intangible  interests.

– Resolving disclosed conflict would entail complicated fact finding.

– Resolving conflict would entail interpretation of legal or regulatory mandates.

Finally, and perhaps less obvious than the others, going forward, would the manager be sufficiently aware of the relevant actions of the disclosing employee to help ensure adherence to Company COI standards? In other words, can the manager act like a de facto COI monitor?

A short post on directors’ compliance duties

From the most recent issue of Compliance & Ethics Professional (p 3 of PDF).

I hope you find it interesting.