Standards and Procedures

Setting meaningful but also feasible standards of conduct can be among the most challenging aspects of COI compliance efforts, as is the related area of COI processes (regarding, e.g., disclosure and approval), both of whch will be explored in the sub-categories to this section of the blog.

Conflicts of Interest in Joint Ventures – the Rights of “Consenting Adults”

This is the second post this week on COIs involving specific types of business organizations – the first post was on non-profits.  This coming weekend we’ll look at some of the COI stories that have been in the news of late and next week we will resume our series on ways to assess COI risks.

In an earlier post on the murky legal landscape regarding COIs we noted that the fiduciary duty of loyalty operates as a “default” in certain circumstances – imposing various COI-related obligations in the absence of an agreement to the contrary.  But when, one might ask, would anyone give up a duty to be treated in a less than loyal way?  One example lies in the area of joint ventures.

The governance and operation of JVs can certainly raise conflict of interest concerns. For an employee of  a JV’s co-owner who is either on the JV’s board or is seconded to the JV whose interests to be treated paramount?  Given the inherent tension in situations of this sort, those involved have good reason to clearly articulate applicable duties and expectations.

Indeed, as noted in recent Gibson Dunn publication Recent Trends in Joint Venture Governance : “Partners negotiating joint ventures are spending increasing amounts of time developing codes of conduct and policies regarding conflicts of interest.  These codes and policies are intended to legislate how business dealings between the joint venture company and a venture partner or its affiliates will be conducted and define the rights and responsibilities of the joint venture company and the venture partners regarding corporate opportunities.  They often reflect the nature of the industry in which the particular joint venture will operate.  In technical joint ventures, for example, the focus of conflict of interest policies is often the ownership, use and commercialization of intellectual property rights.”

Additionally JV agreements sometimes directly address – and waive – fiduciary duties.  As the Gibson Dunn publication further notes: “The managing boards of joint venture companies also owe fiduciary duties to the venture partners under applicable law.  But venture partners generally have a direct voice on the board.  In addition, when they enter into the venture, they have the opportunity to negotiate specific contractual rights designed to protect their interests.  In fact, in many circumstances, they will waive their common law or statutory fiduciary protections, relying instead on a set of negotiated contractual protections.”

Bottom line: JV owners are considered “consenting adults” who can not only waive individual COIs but the right to be treated in a loyal way by their directors and employees.

I should emphasize that there is a whole host of compliance risks in JVs beyond COI ones.  And this recent post in Corporate Compliance Insights  –  “Joint Ventures and Compliance Risks: The Under-Discovered Country”  identifies  three categories of measures that companies should take to promote C&E in JV’s in which they invest: screening the contemplated JV partners; structuring the JV agreement to promote compliance; and once the JV is operational, having a C&E officer work on an ongoing basis with key company personnel who serve as JV board members or seconded employees in senior positions to manage compliance.

Also, this week Compliance Week is running a story “JV Compliance Takes Varsity Skills”; it is for subscribers only so I can’t link to it, but mention it as further indication that C&E issues surrounding JVs are a hot topic these days.

Finally, related to the issue of COIs and JVs is this post concerning COIs arising from serving on another company’s board of directors.

Conflict of Interest Policies for Non-Profit Organizations

An earlier posting discussed the important – and certainly non-intuitive – finding of behavioral ethics research that doing good can actually increase the risk of doing bad.  In addition to an unexpectedly high likelihood of wrongdoing, those in the business of doing good – e.g., charities, foundations and other non-profits – may face outsized impacts from ethical missteps, particularly related to COIs, given their need to maintain the trust of donors and others to fulfill their respective missions.  In this post we begin to explore measures that non-profits can take to address COI risks.

According to the National Council of Non-Profits, a “policy governing conflicts of interests is perhaps the most important policy a nonprofit board can adopt. To have the most impact, the policy should be in writing and the board (and staff) should review the policy regularly. Often people are unaware that their activities are in conflict with the best interests of the nonprofit so a goal for many organizations is to simply raise awareness and cultivate a ‘culture of candor.’ It is helpful to take time at a board meeting annually to discuss the types of situations that could result in a conflict between the best interests of the nonprofit – and the self-interest of a staff member or board member.” Indeed, the Internal Revenue Service – which has an oversight role over charities in U.S. – expressly recommends that they develop a COI policy .

Non-profits seeking to draft or revise their COI policies can find plenty of publicly available examples from which to draw ideas and language (including some at the National Council of Non-Profits web site).  For instance, the COI policy of the Gates Foundation  contains a clear and comprehensive articulation of what generally would be  considered a COI at the Foundation; a discussion of the types of situations that could give rise to COIs there; requirements concerning disclosure and management of COIs, including mandating the involvement of the legal team in these matters (see this post on the need for independence in COI  management measures); detailed guidance on COI issues regarding the receipt of directors’ fees, authors’ royalties and like matters (for further information on COI issues in serving on outside boards see this post); a provision on outside employment, with – understandably – greater restrictions placed on high ranking employees; and discussions of a range of other COI issues relevant to the foundation, including those concerning matching grants and employee political activities.  The Gates Foundation policy also has an extensive series COI-related FAQs that could be an invaluable source of ideas for those drafting/revising a COI policy for another non-profit.

But, by bringing attention to this resource I don’t mean to suggest that non-profits should simply adopt what the Gates Foundation, or any other organization, has done regarding COIs.  Different non-profits could have COI issues that are, relatively speaking, unique.  For instance, this article about COI policies for cooperative groceries – a very different sort of organization than a foundation –  identifies a series of “emotional conflicts of interest” that may pose risks for organizations of that kind. (E.g., “The board president’s daughter is a co-op employee. After she is denied a raise of the size she had expected, her father begins bringing up concerns at board meetings about the fairness of the pay raise system and staff turnover due to low pay.”)  As with any other sort of COI mitigation effort, the key for non-profits is to engage in some form of risk assessment before designing policies or other compliance measures. And, of course, the effort should include determining what any relevant legal requirements or expectations are for the entity regarding COIs.

Finally, understanding the COI risks of non-profits is important not only to board and staff members of such organizations but also employees of for-profit organizations who deal with non-profits, under the general imperative (often espoused in this blog) of not causing conflict in others.

A future post will discuss COI training for non-profits.

 

Global Challenges in Addressing Conflicts of Interest (Part Two)

By Lori Tansey Martens

In my last post, I outlined some of the challenges that global organizations face when implementing conflict of interest procedures throughout the world.  In this post, I make recommendations to help mitigate some of those challenges. 

Standards and Policies

First, many international employees will be unclear as to the definition of conflicts of interest.  Accordingly, conflict of interest standards should include a clear and precise definition of the concept.  Unfortunately many companies define conflicts of interest around the following lines: A conflict of interest occurs when you have personal interests which may conflict, or appear to conflict, with the company’s interests, or, A conflict of interest arises when we become involved, directly or indirectly, in activities that could impair, or be perceived to impair, our responsibility to act in the best interests of the company.

Sound familiar?  The problem with this type of definition is that it assumes that the employee’s and the company’s interests are at odds – the term ‘conflict’ itself is negative.  Yet, many international employees will see some of these situations not as conflicts, but as “win-wins,” both for themselves and for the company. 

If we could go back and rewrite our terminology on this topic, I would recommend that we talk about “Confluences of Interests” as opposed to “Conflicts of Interests”; however, I doubt that’s going to happen anytime soon.  But companies can certainly embed this concept into their definitions.  For example, companies can add the following to their standard conflict of interest definitions:  We may face situations where there is an overlap between our own personal interests, and the interests of the company.  Even when these situations appear to be in the best interests of both parties, they require particular care and scrutiny by your manager (or other appropriate company resource.)

The policy itself should also include “Q&As” that illustrate the nuances around some of the situations that can arise in an international context.  For example: Q.  In our region, the best supplier for a certain resource is a firm owned by our Managing Director’s wife.  To not buy from this firm will increase our costs significantly.  What should we do? A. In certain situations, the company may elect to do business with suppliers who are closely related to key personnel.  However, in all such cases, in order to promote transparency and to ensure fairness in supplier selection, the personal relationship must be disclosed to the Regional Director, who will make a determination as to the best course of action.

Another global concern is that some companies may consider employee involvement with certain non-profit organizations and charities to be a potential conflict of interest. However, companies should be aware that this is a particularly sensitive issue in Europe. Employees in Europe may view such concerns as a violation of their right to privacy. If companies include this element in the standard, the language should be very precise. For example, companies might specify that service in charities and nonprofit organizations “with aims that are overlapping or in direct conflict with the goals and aims of the Company” should be disclosed.

The standard or policy should also include a statement demonstrating respect for employees’ right to privacy for relationships that are outside the business sphere.  For example, “The Company respects the privacy of personal affairs of all employees, but employees must disclose situations that could result in real or perceived overlaps and/or conflicts between their personal interests and the interests of the Company.”

Finally, the policy should explain why managing confluences of interest are important for an organization. The rationale should extend to both potential ‘conflicts’ (e.g., an employee’s personal relationships may compromise his/her business judgment, decisions clouded by personal interests can negatively influence the long-term welfare of the organization, etc.) and ‘confluences’ (e.g., the company desires full transparency even in situations where both the company and the employee stand to benefit from the particular situation to ensure fairness, avoid misunderstandings, etc.)

Training

The same considerations for policy concerning definitions, illustrations and rationales, holds equally true for training.  Dedicated training on this topic is a must in many international locations given that, as discussed in the previous blog post, it may run counter to prevailing local culture and customs.  And similar to the formation of policy, the training needs to focus on not just the “what,” but the “why” and the “how,” using scenarios, case studies, and potentially even role-plays.

Processes

Multinational companies should avoid blanket prohibitions against all confluences of interest since situations may arise internationally that are unique and ambiguous. Likewise, there may be situations in which overlapping interests are unavoidable. If a company operates in small villages where all residents know each other, it could be difficult for staff to avoid business relationships with relatives or friends.  The conflict of interest processes can anticipate these situations and outline clear procedures for employees to follow.  For example, many companies place the focus on disclosure of these situations to management, or other appropriate company resource, either verbally or in writing, instead of forbidding such situations outright.

While conflicts of interest can pose global challenges, companies can anticipate and mitigate many of these concerns through well thought-out standards, dedicated training and adaptable procedures. 

And I’d like to thank my good friend Jeff Kaplan for allowing me to post on his blog site.  I’m hoping that you’ll agree that this was a good example of an entirely appropriate ‘confluence’ of interest!

Lori Tansey Martens, a 20-year veteran in global business ethics, is the President of the International Business Ethics Institute. The Institute helps companies develop effective global ethics and compliance programs. For more information, please visit www.business-ethics.org

 

 

Special Super Bowl Edition of the Conflict of Interest Blog

While the NFL’s code of conduct for fans doesn’t mention COIs (it is more about not throwing objects on the field.) the Super Bowl is a perennial source of COI issues.  Indeed, Super Bowl tickets received by a US Secretary of Agriculture from a company his department regulated played a central role in a major COI prosecution in the 1990’s – although the Secretary was acquitted and the company’s conviction on a related matter (involving US Open tickets, among other things) was overturned by the Supreme Court.

The case evidently didn’t put an end to government officials getting Super Bowl tickets from those with whom they have official business.  As noted in this post last year by Judy Nadler, senior fellow in government ethics at the Markkula Center for Applied Ethics: “I spoke with a reporter recently who was writing about gifts elected officials were taking but not disclosing. More troubling, many of the officeholders said they ‘couldn’t remember’ whether or not they had gone to the Super Bowl courtesy of a major business interest.”  (Easy to see how one could forget that!)

More common, though, is a business providing Super Bowl tickets to individuals in the private sector, particularly to customers.  Indeed, Super Bowl tickets are frequently the subject of discussions in codes of conduct.  For instance, the Home Depot’s code provides, in relevant part: “In the event that the recipient is willing to pay face value for a ticket or other gifts and entertainment, when in fact the market value is significantly higher than the face value (e.g. Super Bowl or Masters Tournament tickets), the associate must still have the item approved in advance in accordance with this policy.”

As with many COI issues, the devil is in the details regarding the propriety of giving or receiving Super Bowl tickets, and here are a few questions to ask in deciding whether to give:

-Would someone from your company attend the event with the potential recipient or would it be an out-and-out gift?

– What does the recipient’s company’s policy say about gifts and entertainment?

– Does the recipient’s supervisor know about the offer?

– What is the function of the proposed recipient in her company?  (Purchasing, of course, is most obvious from a risk perspective, but others – e.g., an external auditor or even supplier in some instances –  could raise COI risks, too.)

– What is the state of play in terms of new/existing business with the recipient’s company?

– What other costs  (e.g. air travel) would be borne by your company in connection with attending the event?

– Is the recipient an employee of a government agency (including a state-owned enterprise)? Even if not, do they do business with the government – which, in some instances, might be risk causing at least from a reputational perspective?

Finally, two questions about process:

– Is the decision of whether give or not to give reviewed by the compliance officer or other function (e.g., law department) that is independent of the part of the business proposing the invite?

– Are the bases for decisions sufficiently documented?

But, all this is for next year. For now, just enjoy the game!  And, go Giants!  (Disclosure: I’m from NJ.)

Conflicts of interest in serving on another company’s board of directors

Some codes of conduct and C&E policies and certifications identify outside board service as a potential COI.   What should an  analysis of COIs of this sort  entail?  This is a topic about which relatively little has apparently been published.  Below are links to some helpful resources on it combined with a few hopefully helpful thoughts of my own.

First, in this post on the Business Ethics Blog, Chris MacDonald notes that serving on a board typically involves significant compensation (and hence should be considered an interest for COI purposes); an individual’s board member duties could conflict with her employee duties if the entities in question did business with each other; and given the sheer time commitment expected of board service, there could be a significant time-management conflict in situations of this sort.  This is a good foundation for analyzing COIs in these types of situations, to which one might add that even where the two entities don’t do business with each other a conflict could arise if they both do business with a given third party, i.e., employee of Company A joins the board of Company B, which is seeking to do business with Company C, a supplier to Company A.  (This would not necessarily be a COI – but, depending on a variety of circumstances, might be one.)

Second, another valuable post on this topic comes from Meghan Daniels of SAI Global – who offers various questions companies might ask when considering whether to allow an employee to join the board of another entity based on: a) the employee’s role at the company; b) the time commitment involved in the contemplated board service; c) the status of the external company; and d) the relationship between the two entities.

Third, here is a useful code provision on board service from a publicly available code of conduct:

Entergy recognizes that there may be limited cases where it is in the Company’s best interest for you to hold a position on the board of directors of a for-profit entity not affiliated with Entergy. However, the position must not place you or the Company in a potential conflict of interests situation, must meet all regulatory and legal requirements, and must be appropriately disclosed to all relevant parties. There are certain laws and regulations that can impact this service and you must discuss the situation with your supervisor and receive appropriate approvals prior to taking action.

Two points about this language: a) the need to make disclosure to “all relevant parties” is important, as disclosing to the company alone might not be enough; b) the policy appropriately focuses on the company’s interest in deciding the issue at hand.  Note, too, that the laws and regulations referenced here may be largely specific to the industry that this company is in, and being familiar with any relevant laws applicable to one’s own organization can be critically important for addressing issues of this sort.

Fourth, worth considering  (although perhaps of less immediately obvious relevance to our topic) is a judicial  decision in a case called Raley  v. Superior Court.  In Raley, the Court ordered the disqualification of a lawyer’s firm  from participation in a litigation against a corporation that was owned by a  trust, the trustee of which was a bank on whose board the lawyer sat, based, in part, upon the fact that the lawyer’s fiduciary duties to the bank and trust  “require him to make every reasonable effort to maximize” the assets of the  trust, which could lead to his acting contrary to the firm’s client in the litigation.

As relevant to the issue addressed in this posting, this language underscores  just how strong the ethical and legal duty that arises from board service is – which, in turn could support a strict approach  to determining COIs when an employee of one entity seeks to serve on the board  of another.  The case is indeed a reminder that serving on a board is serious business,  and before agreeing to such service an individual – and, if relevant, her  employer – should think through all that that entails from an ethical and legal  perspective.

Fifth, in some situations a company might decide to permit an employee to join another company’s board subject to management of any COIs flowing therefrom.  If going this route, all concerned need to consider the implicatons vis a vis the confidentiality of the latter’s information.

Finally, I  should stress that there are a host of possible advantages to an organization in  having one of its employees serving on the board of another entity (as reflected in the language from the Entergy code).  Here is a good piece identifying some of those   and my post should not be read as suggesting any presumption against  permitting such service – it is offered only to help identify what some of the  relevant COI issues might be.

Other People’s Conflicts

Samuel Johnson once famously said of some unfortunate soul, “He is not only dull himself, he is the cause of dullness in others,” and in this posting we’ll examine how companies can avoid the misfortune that sometimes comes from causing conflicts of interests in others.

To start, a brief bit of COI history.

Several years ago an advertising agency lost a highly lucrative account with Wal-Mart and – according to some press accounts at the time – part of the reason for the loss was the agency’s entertaining of a Wal-Mart executive in ways that allegedly caused her to violate that company’s code of conduct. Although the agency presumably violated no law, its loss of future revenue could be seen as costly as some of the largest criminal fines in history.

The case led many companies to add to their codes of conduct a requirement that in providing gifts, entertainment or travel to employees of third parties one must not cause those employees to violate their respective employers’ codes. But is such a provision by itself enough to mitigate risks of this kind?

For any given business organization, addressing this issue should, of course, be driven by an assessment of relevant risk. However, for all organizations it may be useful to consider the range of available C&E measures that can be taken here, and “work backwards” to determine if their respective risks warrant implementing the measure in question.

First, there is the language of the code itself. While at first blush a mandate that employees must not cause a violation seems strong, a preferable approach may be to specify that employees must ensure that they do not cause a violation. The latter sort of requirement (particularly if reinforced the right ways) suggests a higher and more meaningful burden on the employees who deal with third parties.

Second, companies can establish a practice of periodically collecting customers’ and other relevant third parties’ codes and disseminating gifts and entertainment language to at-risk employees and their respective managers. Even if it is not possible to do this for all third parties, the effort can be useful if codes for major customers are obtained.

Third, COI training can emphasize the importance of identifying and following relevant third-party standards. Fourth, companies can deploy “just-in-time” communications to at-risk employees around these issues.

Fifth, for organizations with relatively high risks in this area, managers can be required to monitor for compliance with third-party codes. Sixth, auditors might be tasked with including third-party standards in their audits.

Finally, note that this post deals with the topic of other people’s conflicts only at a very high level. There are many other aspects to this area. Indeed, the whole field of corruption by definition involves “causing conflicts in others,” and many of the largest criminal fines in history (specifically in the FCPA and health care fraud-and-abuse areas) have been precisely about that. The point of this post is to suggest that even without significant corruption risks, all organizations should consider whether they do enough to avoid creating third-party COIs.