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Compliance & ethics officers in the realm of bias

Bias and conflicts of interest are, of course, related to each other;  but they also differ, in that the former can be based purely on thoughts (or feelings or beliefs) whereas the latter generally requires something truly tangible, such as an economic or familial relationship. Prior postings on bias – particularly those underpinning the field of behavioral ethics – can be found here. But, the world of bias is a vast one, and there is much to be explored about it.

A study recently summarized on the Harvard Law School Forum on Corporate Governance and Financial Regulation offers an interesting example of one type of bias among CEOs. The author of the study – Scott E. Yonker, of Cornell University – sought to determine “Do Managers Give Hometown Labor an Edge?”, based on a review of certain employment-related decisions affecting company operations of varying distances from the hometowns of the companies’ respective CEO’s. The answer – somewhat unsurprisingly, at least to me – was Yes: “The results show that following periods of industry distress, units located near CEOs’ hometowns experience fewer employment and pay reductions, and are less likely to be divested relative to other units within the same firm. Units located closer to CEO birthplaces experience 4.1% greater employment growth and 2.4% greater wage growth compared to similar units. Since employment and wages fall by 3.0% at the average firm unit following industry distress, these findings suggest that hometown units are largely spared. Moreover, these differences have seemingly permanent effects, the wage differences last at least three years, while employment differences revert about three years after industry downturns. With regard to divestitures, units that are more distant from CEO birthplaces are about 6% more likely to be divested.”

Is this at all relevant to the work of compliance & ethics professionals? I think the answer to that is Yes, as well. Or more accurately, It should be.

Of course, “hometown” forms of bias are not as pernicious as are those concerning race, gender and other categories of individuals who have historically been the victims of societal oppression. But the true promise of C&E programs extends to addressing all forms of unfairness, both because non-merit-based decision making in the workplace is (from an economic  efficiency perspective) presumptively bad for businesses (i.e., an inefficient use of resources); and because such decisions can lead to demoralization of a workforce (adversely impacting, among other things, the ethical conduct of those so affected).

Ultimately, for a company to have not only a strong compliance program but also an ethics one, the CEO and other leaders would empower the C&E officer to identify and challenge decisions that may be based on bias. (Note that I don’t mean literally  all such decisions, but those that are significant in potential impact and have a meaningful  ethics/fairness dimension.) The leaders would do so because they would understand that being fair is not just a matter of good intentions; rather, it can  also require expertise and effort – both  of which the C&E officer can bring to a challenging set of circumstances.

The C&E movement has  made a lot of progress in the past quarter century, but we are a long way from getting to such a place. Still, as is often said, it is good to have a goal.

Discipline for C&E violations: four components of program efficacy

For all sorts of reasons, maintaining an effective system of discipline can be  among the most challenging aspects of C&E work.

In my latest  column in Compliance & Ethics Professional  (page 2 of attached PDF) I examine the four essential components of such a system.

I hope you find it useful.

 

A free web cast on compliance and ethics program assessments

On December 6 at 2:oo p.m.

Sponsored by Syntrio.

More information can be found here.

I hope to see you there.

Should we have double ethical standards?

Of course, almost no one would answer Yes to the question put as bluntly as this. But – by word or deed (or, more often, lack of word or deed) – that is where things frequently end up.

It is a seemingly timeless issue. Most recently, it has been part of the national conversation arising from disclosures of sexual misconduct by various powerful individuals that – at least partly due to a double standard – had been long allowed to go unchecked by others. But the question of double standards has also come up over the years in the conflict of interest realm.

Earlier this month, a story in the New York Times asked if various Trump appointees should be considered – as the President suggested – too rich to be affected by conflicting interests. (“’They’re representing the country,’ Mr. Trump said in June at a rally in Iowa. ‘They don’t want the money.’”) As discussed in this post (from the pre-Trump era), there are many reasons to reject this way of thinking:

“[T]he notion of being too rich to be corrupted is sadly an oft-told tale.   It comes up frequently in the gifts/entertainment and other COI areas when C&E officers are asked to approve a transaction (e.g., entertainment provided by a vendor) for a high-level employee that would be impermissible for others in the organization. The basic thought is that the individual in question already has so much money (or what money can buy) that more won’t affect her judgment.

“There is a logic to this, but it is based on the increasingly discredited homo economicus view of human nature.   This view would presumably treat the corruptibility of a person in a given situation as a fraction with the amount being offered as the numerator, the individual’s total wealth the denominator, and the larger the overall number the greater ethical risk. (I.e., a mathematically derivable ‘personal corruptibility index’ of sorts.)

“By contrast, when viewed through the lens of behavioral science (and  much human experience), the rich and powerful can be seen as more corruptible than others, as discussed in prior posts such as this one.   The most memorable expression of this may be the saying attributed to the late Leona Helmsley that ‘only the little people pay taxes.’   But the reflection of actual COI risk being concentrated near “the top” echoes through our news stories on a near daily basis.

“Additionally, there are many types of conflicts that cannot be measured in a purely monetary way, such as those involving  glory (as described here), friendship (discussed in the second case in this post) or family relationships (discussed here). Even if they are not inherently more susceptible to COIs, from a situational perspective, the high and mighty presumably are faced with more frequent pressures and temptations of this sort than are most other individuals (as briefly touched on in this earlier post).”

Finally, the notion of organizational justice should be included in this mix, meaning that having  double standards in one area can harm the ethicality of an organization overall. Any type of wrongdoing creates some peril in this regard, but COI double standards are of particular concern. As described in this post: “The special harm that COIs can cause to organizational justice arises from their frequently personal nature: because COIs often involve a personal benefit to an individual employee that is denied to others, the latter (i.e., rule abiding employees) can feel personally harmed (from a relative perspective) by the COI in a way that they would not feel, for example, with an antitrust offense or violation of export regulations.”

In sum, being rich and powerful does not, in my view, serve as a mitigant for conflicts of interest; if anything, it should be seen as a cause of COI risk. And I would be surprised if the same was not true with harassment risks too.

 

A conflict of interest on the grandest of scales

Drought, floods, air pollution and political unrest. That is just part of the climate change nightmare we are leaving to future generations, as described in an important report issued late last week by the US government.

Most of the conflicts of interest discussed in this blog over the past six years have been individual COIs – where a person has interests that are actually (or apparently or potentially) at odds with those of her employer or other principal. To a lesser extent, we have also covered organizational COIs – where an entity (e.g., a health care provider or investment bank) has interests that conflict with those of persons or firms to whom they owe a duty of loyalty (as a matter of law or otherwise).

Far less common in our prior posts than either of these is a COI type that might be called a societal – meaning a set of circumstances where an individual or entity with relevant decision making power has interests that diverge from those of society as a whole (or least much thereof). Of course, if taken literally such a condition could be attributed to almost any individual or entity, but a societal COI analysis should focus on the cases of the greatest peril to society.

The most worrisome societal COIs (at least to me) are those where the interests of decision makers today do not align well with those of the people who will be affected by the former’s decisions in the future. Deficit spending is a good example of this. But the mother of all societal COIs is undoubtedly climate change.

What does it mean to be faced with a societal conflict of interest? As with any COI, affected decision makers should respond with a heightened sense of ethical duty – including demonstrating an appropriate tone at the top, being humble as well as virtuous, maintaining an alertness to risk and deploying compliance and ethics “tools” (e.g., communications, checking) as warranted.

But by their nature and size, societal COIs are much more difficult to mitigate than are other sorts. Ultimately, the most effective response is structural – meaning taking measures addressed to modifying the underlying COI conditions themselves.

However, this can be a daunting task. Given the political nature of some societal COIs, mitigation should (in my view)  be bi-partisan/moderate in nature to have real chance of succeeding. Moreover, as a matter of not just politics but also economics, I believe that such solutions should be as market based as is reasonably possible.

So, is it possible to do all of this?

Only time – of which we may have too little – will tell, but a very promising approach is the Carbon Fee and Dividend proposal by the Citizens Climate Lobby  (“CCL,” about which I have blogged before). As described on that organization’s web site: “A national, revenue-neutral carbon fee-and-dividend system …would place a predictable, steadily rising price on carbon, with all fees collected minus administrative costs returned to households as a monthly energy dividend. In just 20 years, studies show, such a system could reduce carbon emissions to 50% of 1990 levels while adding 2.8 million jobs to the American economy.” In short, this policy would help reduce the societal COI – as today’s decision makers would bear the costs of their undesirable actions, rather than continuing to push the burden almost entirely to the future, as is currently the case.

But does the plan have the potential to succeed in these bitterly partisan times? Importantly, CCL’s efforts are bolstered by those of the Climate Solutions Caucus in the House of Representatives consisting of 30 Republicans and 30 Democrats. Moreover, the fact that, unlike some other climate change proposals, this one is revenue neutral and market based gives it a real chance to secure support from across the political spectrum,

There is a lot more information about the Carbon Fee and Dividend on the CCL web site and I encourage you to read it and consider joining the organization, which seems to offer a solution that is as good a vehicle as any for mitigating this vast and potentially calamitous conflict between present and future interests.

Was the Grand Inquisitor right (about compliance)?

In Dostoevsky’s short story The Grand Inquisitor,  Jesus Christ returns to earth in Spain at the time of the Inquisition, only to be arrested by Church leaders. As explained by the Grand Inquisitor (courtesy of Wikipedia), “Jesus rejected [the Devil’s] three temptations in favor of freedom, but the Inquisitor thinks that Jesus has misjudged human nature. He does not believe that the vast majority of humanity can handle the freedom which Jesus has given them. The Inquisitor thus implies that Jesus, in giving humans freedom to choose, has excluded the majority of humanity from redemption and doomed it to suffer.”

In a very thoughtful and useful post last week in the FCPA Blog, noted C&E practitioner and scholar Carsten Tams celebrates the recent award of the Nobel prize in economics to behavioral scientist Richard Thaler. Among other things, as Tams notes, “Thaler advocates for an alternative, less coercive method for influencing behavior [than the predominant model]: a Nudge. In a book by the same title that Thaler co-authored with the eminent legal scholar Cass R. Sunstein, he defines a nudge as any aspect of a choice architecture that steers people’s behavior in a predictable way, without forbidding any options or significantly changing their economic incentives. Unlike mandates or fines, nudges are specifically designed to preserve freedom of choice and avoid coercion. To qualify as a nudge, the intervention must be easy and cheap to avoid. The goal of nudges is to make desired behaviors easier, simpler, or safer for people.”

I agree with Tams that behavioral ethics information and ideas offer many promising possibilities for enhancing corporate compliance programs. (See this index of prior posts on “behavioral ethics and compliance” and also this webcast from Ethical Systems.) But I also worry that when it comes to C&E programs, the Grand Inquisitor’s view of human nature may be at least partly right.

I say this not as a matter of principle. On such ground I reject that view completely. Rather, my concern is one of experience, borne of more than a quarter of a century developing, implementing and assessing C&E programs.

In that time, I can’t recall learning of anything suggesting that the employees of client organizations wanted more choice when it comes to C&E-related matters. And, I have seen and heard much to the contrary, as countless interviewees have praised their employer organizations for providing clear instructions – backed up by strict enforcement measures – on how to act when faced with C&E challenges. As one C&E practitioner said about what employees at his company asked from him: “They want me to tell them what to do.”

A more concrete way of looking at this is to note that while people generally cherish freedom, the freedom to make a mistake that can get them sent to prison for a long period of time is likely viewed less favorably.

I should stress that I do not generally follow – in my role as family member, friend and citizen – what might be called a Grand Inquisitor type perspective. (Presumably Dostoevsky didn’t either – and the story should be read more as a provocation than a statement of principles.)  It also does not define – I hope – most of my work in the C&E field.

Rather, it is offered as  just one perspective for possible inclusion in the larger mix of information about human nature that – from a behavioral ethics (or other) perspective – can  help guide us in developing and implementing effective C&E programs.

For more on the possible limits to behavioral ethics and compliance, see this post.

As if you didn’t already have enough to worry about

My latest column in Compliance & Ethics Professional  – available on page 2 of this PDF – examines the underappreciated risks of being sued for defamation arising from doing compliance work.

I hope you find it interesting.

Free web cast on behavioral ethics

On Wednesday September 27 at noon Eastern Azish Filabi of Ethical Systems and I will be speaking on a behavioral ethics web cast presented by the Ethics & Compliance Initiative. More information about the webcast can be found here.

Azish and I hope you can join us.

Come to the Advanced Compliance & Ethics Workshop

Its that time of year – time for the Practising Law Institute’s Advanced Compliance & Ethics Workshop, which Rebecca Walker and I are co-chairing.

You can attend on October 30-31 in NYC or on the web or on November 6-7 in San Francisco.

The agenda and list of our all-star faculty can be found here.

Rebecca and I hope you can make it.

 

The lawyer as whistleblower

When can a lawyer blow the whistle on her own client?

My latest column in Compliance & Ethics Professional (p2 of PDF) takes a look at this ethically fraught issue.

I hope you find it of interest.