Nearly 1500 C&E professionals have downloaded the free risk assessment e-book

Have you?

It is available from Corporate Compliance Insights.

I hope you find it useful.

Making the most of risk assessment

Today the FCPA Blog published a post I authored on risk assessment.

I hope you find it useful.

Moral hazard and the revised DOJ compliance standards

One of the great afflictions of our age is moral hazard. As noted in an earlier post: “The concept of moral hazard was used originally to refer to the phenomenon that providing insurance tended to promote risky behavior by insured parties.  Subsequently, the idea has been applied more generally to mean the provision of incentives that encourage unduly risky conduct by shifting the impact of a bad decision to a party other than the decision maker.”

Another way of thinking about this area is that moral hazard can arise from of lack of appropriate accountability. A notable example of this can be found in an SEC report several years ago on ratings agencies quoting an e-mail between two analysts concerning their plans to give positive ratings to certain financial instruments that were, in fact, unworthy of such ratings: “Let’s hope we are all wealthy and retired by the time this house of cards falters.” A more consequential example is climate change: those who are most likely to be affected by this unparalleled calamity are generally not the same as those who have the power to slow it down (and ultimately reverse it).  And, the Pandemic presents millions of  moral hazard influenced decisions concerning wearing safety masks and other issues.

Moral hazard is not the same thing as conflicts of interest. But they are close enough to each other to be considered “cousins.”   However, the former does not get nearly the attention that the latter does. (See prior posts on moral hazard collected here.)

Moral hazard poses a significant challenge to law enforcement in many types of business crime cases. That is, the Sentencing Guidelines provide for large fines for organizations convicted of federal offenses, but those who bear the brunt of such punishments (mostly the shareholders) are often different than the individuals (usually executives) who benefit from the wrongdoing. The problem, of course, is that their organizations do not hold them to account through the investigation and disciplinary processes.

The history of corporate business crime enforcement is, in part, an effort to close this moral  hazard gap. The latest chapter of this history was released June 1 when the Criminal Division of the Justice Department published its  third iteration of Evaluation of Corporate Compliance Programs.

The prior iterations of the guidance already had included considerably strong approaches to promoting accountability by individual wrongdoers.  In the new version what  most struck me as relevant to the moral hazard issue was the following question: “Does the compliance function monitor its investigations and resulting discipline to ensure consistency?”

I am not suggesting that this is some sort of panacea for moral hazard in companies.  Moreover, adding this to a  compliance program works only if the compliance function is indeed independent and has a sufficient degree of “clout.”  As well, a company needs to publicize that it is doing such monitoring and also that it imposes discipline for violations in a sufficiently rigorous way.

But if taken to heart a corporation’s having the compliance function monitor its investigations and resulting discipline to ensure consistency could be a helpful (albeit only partial) antidote to moral hazard.

For more information about the revisions to the Evaluation of Corporate Compliance Program see this post on the Compliance Program Assessment 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.

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.


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.

Investigation manuals

An article in  C&E Professional on drafting investigations manuals.

I hope you find it useful.

Assessing compliance incentives

A new post by Rebecca Walker and me in Corporate Compliance Insights.

We hope you find it useful.

Will working at home make us more ethical?

Research we reported on several years ago suggests it could.

In “Truth Telling: A Representative Assessment,” published in October by the Institute for the Study of Labor in Bonn, Johannes Abeler, Anke Becker and Armin Falk report on the results of two recent studies in Germany which suggest that individuals who are given an opportunity and motive to lie/cheat are unlikely to do so where the wrongdoing would take place in their home.  That is, individuals were called in their homes and asked to flip a coin – with the understanding that if they reported tails they would be paid a certain amount of money but they would get nothing if the reported heads.  In one version of the experiment, 56% reported heads, a number which presumably reflects a near zero amount of cheating (and maybe underreporting of the profit maximizing result).   The results of a second version were essentially indistinguishable from the first.

What is noteworthy here is that earlier studies on honesty that were conducted in laboratories showed a substantially higher percentage of cheating.  Thus, comparing those results to the new ones suggests that context may have a significant impact on truth telling – and perhaps other forms of ethical conduct.  This is consistent in a broad way with many other behaviorist studies showing how surprisingly malleable we are with respect to ethical conduct.

But can this information be used to promote compliance and ethics in the workplace, or is it interesting but not especially helpful?  At least as a general matter, I expect that C&E training and other communications could evoke the sense of home that seems to engender honesty, although obviously one would need to take care not to go overboard with such an approach.  (Indeed, some training I developed years ago sought to draw this connection,  and I think it was well received.)

Moreover, building on the apparently well-understood need for being truthful at home may be especially important given the relatively tepid endorsement of truthfulness in the workplace that one finds in many companies, including some with otherwise strong C&E programs.  That is, from what I’ve seen over more than twenty years in the field, one finds far less attention in codes of conduct and other C&E communications to the general importance of truthfulness than one would expect.  This shortfall may reflect the commonly held view that some degree of “bluffing” is appropriate in business, as noted in a famous article in the Harvard Business Review.

The benefit of evoking a “domestic” sensibility regarding ethics is that whatever the apparent logic of the bluffing perspective might be in the business realm (and from my perspective, it was never persuasive) on a gut level we are far less likely to accept it in our home lives, where its unsustainability is self-evident to the point of being intuitive (particularly so for parents, but presumably for any type of family member).  That is, whereas one might be aware of successful business careers built on truth bending it is simply impossible to imagine a healthy family life resting on such a foundation, and, I believe this is something that we not only understand intellectually but feel emotionally.

Of course, C&E professionals can also draw upon some very good data showing that in business honesty really is the best policy, such as this study last year by the Corporate Executive Board.   Appealing to one’s colleagues with a direct case should always be the principal approach to promoting business ethics.  But, as with many behaviorist experiments linked to above, this recent study may provide another, and somewhat less obvious, set of tools for enhancing the ethical performance of organizations.