Supervising spouses and other family members in the workplace

A story earlier this week in the NY Daily News  reported:  “The doctor picked by [NYC] Mayor de Blasio to run the municipal hospital system was slapped with a conflict-of-interest ruling after his wife went to work for the hospital he was overseeing. The city Conflicts of Interest Board issued its ruling against [the doctor] in 2008, but allowed the arrangement to continue as long as [he] avoided matters involving his wife…”  The particulars of the case are not especially interesting, but it did serve to remind me that in the more than two years of its existence the COI Blog has yet to cover the often important issue of supervising family members at work.

But first a disclosure: my parents met in a workplace (the newsroom of the Minneapolis Tribune, in the 1940’s), where my father (then a night city editor) supervised my mother (then a police reporter) and, but for the personal relationship they formed there, I literally would not exist.  So, I have what could be called an existential bias on this issue.  On the other hand, at least judging by the classic film about journalists about that era – His Girl Friday – maybe workplace relationships weren’t  prominent on the ethical radar in the industry then, so perhaps I’ve over-disclosed (which comes with writing a COI blog, and for which my mother will hopefully forgive me).

But in the contemporary world, conflict-of-interest issues involving supervision of family members in the workplace can be among the most sensitive that a C&E officer ever faces.  Often one (and sometimes both) of the individuals involved is at a high level within the corporate hierarchy, making the issue as inviting to approach as a field of landmines.  Moreover, because of the strong loyalty instincts that people tend to have about their families, allegations about conflicts of this sort often trigger strong defensive reactions – as discussed in this earlier post  (which should be read mainly  for the immortal story about the late Mayor Daley’s saying – with respect to his having the city of Chicago do business with one of his children:  “If I can’t help my sons, then [my critics] can kiss my ass.”)

On the other hand, other employees may feel deeply resentful of those involved – particularly where the relatives in question are seen (rightly or wrongly) as receiving favored treatment and benefiting from job-related opportunities that otherwise might have gone to such other employees.  The others could also feel stifled in how they do their work.  For instance,  many employees might  be  uncomfortable criticizing a favorite business idea that the spouse of a senior executive has – even if they  think it is no good. Unlike most other COIs, those involving family members on the job tend to be very visible  – and grating, possible even on an everyday basis.

Not surprisingly,  many companies’ COI policies address the issue of supervision of family members.  A somewhat typical policy of this sort is the following from Tower Bank: “The potential for conflict of interest clearly exists if your spouse, partner or immediate family member also works at the Company and is in a direct reporting relationship with you. Officers or employees should not directly supervise, report to, or be in a position to influence the hiring, work assignments or evaluations of someone with whom they have a romantic or familial relationship.”

Of course, a direct reporting relationship between spouses is widely seen as being problematic – and that part of the rule should be easy to apply as they spend a lot of time together even in intimacy and learning from this review of Lovesne Gushj to have even a better time.  But the “being in a position to influence” part of the rule is much broader, and presumably anyone higher up in a reporting chain is in such a position regardless of how many layers there are in between.

Still, the more layers there are, the more checks against abuse exist – even if they are not strong checks (since they rely on subordinates in preventing and detecting conflicts by their workplace supervisors).  One company that relies explicitly on the number of such layers is United Technologies, whose policy asks the question, “[i]s it a Code of Ethics violation for my spouse and myself to work in the same department at our UTC Division?” and provides this answer: “In most instances this would not be a problem as long as neither employee reported to the other. A sufficient number of reporting levels (at least three) between supervisor and family member must exist to preclude conflict of interest issues.” While not a cure-all, this seems like a strong approach to me.

A final point: given the nature of this particular type of conflict the concern is often less actual COIs than apparent ones.  For this reason, effective mitigation must address the issue of what will employees think about a proposed solution to such a COI – including the broader question of whether such a solution will undermine the workforce’s view of management’s commitment to ethics in general.   More on apparent COIs can be found here, but the bottom line is that this is among the most difficult types of COI to mitigate.

What counts as a conflict of interest policy?

Conflict of interest policies were in the news last week.   The first story comes from the world of medical schools. As described in a recent issue of Science Codex, “U.S. medical schools have made significant progress to strengthen their management of clinical conflicts of interest (CCOI), but a new study demonstrates that most schools still lag behind national standards. The Institute on Medicine as a Profession …study, which compared changes in schools’ policies in a dozen areas from 2008 to 2011, reveals that institutions are racing from the bottom to the middle, not to the top. In 2011, nearly two-thirds of medical schools still lacked policies to limit ties to industry in at least one area explored, including gifts, meals, drug samples, and payments for travel, consulting, and speaking. Only 16% met national standards in at least half of the areas, and no school met all the standards.”  This finding is unfortunate because –as discussed in an earlier posting – COI policies in medical schools have been shown by research to be effective in actually reducing COIs.

A different type of COI policy story concerned a whistleblower lawsuit brought by a “former senior bank examiner for the Federal Reserve Bank of New York [against] her ex-employer, which claim[ed] she was fired because she refused to change her findings that Goldman Sachs Group Inc. … lacked a firm-wide conflict-of-interest policy.”  As best I can tell from the various pieces about the case, the examiner felt that although the firm had divisional COI policies and a COI section in its code of conduct it was deficient in that it lacked a stand-alone, firm-wide document in policy form addressing COIs of the sort that was evidently common in other investment banks.    Of course, as with any lawsuit, we will learn more here as the case  progresses.  But the initial complaint alone does raise what is for the COI Blog an interesting question: what exactly counts as a COI policy?

The answer here will depend on the context.   For many (indeed most) organizations a code of conduct provision on COIs is policy enough.  Indeed, as can be seen from some of the links in this earlier post, COI provisions of a code can be as detailed as those in a stand-alone policy.

But for large, complex organizations – and particularly those with complex COI issues, as an investment bank likely has and Goldman Sachs clearly has had (see posts here and here) – a stand-alone, firm-wide policy seems like a good idea, as a way of ensuring sufficient attention is devoted to the area and that standards are applied thoroughly and consistently throughout the organization.   And, it is hard to see what the argument against having such a policy would be.

This is not to suggest that I think that there is merit to the whistleblower’s claim or that the firm was deficient in this respect.  Rather, as with most news-related posts on this blog, I’m only using the story of the day to make a more general point about COIs.

“Those are my principles, and if you don’t like them… well, I have others,…”

So famously said frequent contributor to this blog, Groucho Marx.  Well, we know that’s not right, but should we go all the way in the opposite direction, and agree with Einstein that “Relativity applies to physics, not ethics”?  At least when it comes to COIs the answer is a clear Sometimes (or Maybe).

Certainly the underlying principle of being faithful to those to whom one owes a duty of trust seems to leave no room for compromise. But in practice it often is not that simple, given that loyalties can… conflict. For instance, and as described in guest posts from Lori Tansey Martens, in some societies  there are sound ethical underpinnings for approaches to hiring that in the West would be considered unacceptable nepotism. More generally, what could be considered a relativist approach to COIs is embodied in the law – specifically the Securities and Exchange Commission’s rules regarding codes of conduct for senior financial executives and CEOs of public companies.  That is, rather than banning COIs outright for individuals in such positions, codes must provide for “the ethical handling of actual or apparent conflicts of interest between personal and professional relationships… .”   Finally, as we have explored in other posts, there are indeed a variety of circumstances where COIs are not in fact ethically worrisome. Still, public companies seeking to meet the Sarbanes COI code requirement and other organizations seeking to handle COIs ethically can’t rely on a Marxist (referring to Groucho) approach to this area.

One step that can be helpful in this regard is to write into the company’s relevant compliance documentation (such as an ethics committee charter) words to the effect that, “Conflicts of interest will be permitted only upon clearing showing that doing so is in the best interest of the organization.” The idea is to erect a high standard for decisions of this type – so that a close call means no go.  (Note that this should be an easy thing to do in most businesses  – but, in my experience, relatively few organizations have done it.)

Another step is to structure decision making regarding conflicts so that there is “strength in numbers” and taking other measures discussed in this post.   Building up a solid infrastructure for  dealing with COIs may help not only to ensure that COIs are handled ethically, but can deter some of them from arising in the first instance.

Gifts, entertainment and “soft-core” corruption

I once asked students in an executive MBA ethics class if they thought that their employer organizations should have restrictive policies on gift receiving.  Nearly all said that such policies were unnecessary – as the students were sure that they wouldn’t be corrupted by gifts from suppliers or customers.  I then asked if the school should allow teachers to receive gifts and entertainment from students. As you can imagine, the response was very different.

The ethical challenges of dealing with gifts have been with us since at least around 1500 B.C. when, according to this piece on the Knowledge at Wharton web site, “Gimil-Ninurta — a poor citizen of the city of Nippur in Mesopotamia — tried to enlist the assistance of the mayor of Nippur by offering him a goat. The mayor accepted the goat, but rather than providing assistance ordered that Gimil-Ninurta be beaten.” However, the extraordinary focus in present times on preventing bribery has drawn unprecedented attention to more “soft-core” versions of the problem, including traditional gift giving.  (For instance, in the past week, several large companies in Malaysia adopted a “no festive gift” policy.)

Global companies addressing issues of gift giving and receiving in the current environment indeed have a lot to deal with.

First, there is a growing body of laws and rules from around the world governing gift giving that must be complied with.  (The co-publisher of this blog –  ethiXbase – maintains an extensive data base of these standards for its members.)  For many companies and individuals, what previously had been in the realm of ethics/good-to-do has moved squarely into the province of law/need-to-do.

Second, one needs to be mindful of different cultural standards relating to gift giving and other COI-related issues, as discussed in this guest post  by Lori Tansey Martens of the International Business Ethics Institute.  A gifts-and-entertainment policy that is culturally narrow-minded can be ineffective.

Third, the operational aspects of compliance/ethics in this area can be daunting. Among other things, not only global companies but also organizations in highly regulated businesses may need to use technology to promote and track compliance to a sufficient degree, as described in this guest post by Bill Sacks of HCCS.

Moreover, all companies – regardless of where they operate or what they do – should have well thought out compliance standards for gift giving and receiving. This post  describes some of the considerations that might go into such a policy and this survey conducted by the Society of Corporate Compliance and Ethics in 2012 (available to members on the organization’s web site) could be useful for policy drafting, as well. For global companies, this recent piece by Tom Fox on FCPA cases involving gifts, entertainment and travel should be a helpful resource.

Finally, one should consider the role of behavioral ethics in developing/implementing gift-related compliance measures, and particularly the fact that we tend to underestimate how much COIs can impact our judgment. For instance, last year, the Wall Street Journal  reported on a study in which different groups of professionals were asked to assess the necessity of conflict of interest standards of conduct both for other professions and their own: “Doctors participating in [in a study] tended to think [certain COI-related] strictures sounded pretty reasonable [when applied to financial planners]. However, when ‘financial planners’ was replaced by ‘doctors,’ and ‘investment companies’ by ‘pharmaceutical companies,’ the doctors started to raise objections — that the supposed conflicts were hypothetical, for example, and that no one’s views about which drugs to prescribe could ever be swayed by a coffee mug. And investment managers surveyed by the researchers reacted similarly: The rules for doctors sounded fine to them, but the ones for investment professionals seemed petty and unnecessary.”

Is there a behaviorist-based cure for this aspect of “soft-core” corruption? Dan Ariely’s column in this weekend’s Wall Street Journal – although not specifically about COIs/gifts – may be instructive on that score.  He was asked the broad question, “What is the best way to inject some rationality into our decision-making?” and responded, “I am not certain of the best way, but here is one approach that might help: When we face decisions, we are trapped within our own perspective—our own special motivations and emotions, our egocentric view of the world at that moment. To make decisions that are more rational, we want to eliminate those barriers and look at the situation more objectively. One way to do this is to think not of making a decision for yourself but of recommending a decision for somebody else you like. This lets you view the situation in a colder, more detached way and make better decisions.” His piece also describes the results of a fascinating experiment that helps demonstrate this.

One can readily see how this framework could be useful for promoting ethical and law abiding behavior relating to gift giving and receiving, where our instincts might not be a reliable guide for identifying appropriate behavior.  Indeed, Ariely’s recommendation could help business people address many other areas of ethical challenge too.

Drafting or revising conflict of interest policies

G.K. Chesterton once said “There are no uninteresting things, only uninterested people,” but some would argue that that meant that he never saw a conflict of interest policy.   You can bet that series of justly famous beer commercials won’t show The Most Interesting Man in the World line editing such policies.

But being a less interesting person, they do interest me. Indeed,  more so than with most other risk areas, effective compliance here requires close attention to policy creation and maintenance, as a company must clearly define what it considers to be a COI and what its employees should do when faced with an actual, apparent or potential conflict. So, this post collects some resources and thoughts that may be useful for COI policy drafting/revising.

First, it is often helpful to start with a sample.  While codes of conduct are – at least for public companies – essentially required to be posted on the web, the same is not true for more detailed COI policies (at least in the private sector – there are, by contrast,  plenty of examples for universities and other non-profits to be found with a quick search).  But a few corporate COI policies are available on the web, such as those of Best Buy,  Novartis  and PG&E  (the last one is actually part of a code – but is quite detailed, and so worth including here).

Second, while it is helpful to start with a template, one also should base the policy on a COI risk assessment, as discussed in this series of prior posts.

Third, if you are part of a global company you should keep in mind cultural differences that are relevant to COIs as you draft or amend your policy.

Finally, in policy drafting/revising, consider how (if at all) you intend to “check” for COI compliance, such as through a certification regime,  auditing,  and/or technology-based controls, since with each of these the capacity for checking should inform (although not necessarily dictate) the provisions of the policy.

Fascinating stuff? Certainly not!  But that’s okay, because often in the C&E realm what is most interesting is when things go wrong – and it is the mission of the C&E officer to keep work life happily boring.

Moonlighting – legal violations, ethical breaches and good compliance practices

Just in the past few months:

– A police officer was caught allegedly “moonlighting” as a pimp – and was fired.

– An IRS employee with broad supervisory authority (to decide, among other things, which taxpayers were audited) was found to have set up a private tax advisory business – and was charged with a violation of a federal conflicts of interest law.

– A business organization (which was already tainted by a high-profile COI scandal) was discovered to be allowing some of its salaried managers to “moonlight” as hourly workers for the organization – and was publicly embarrassed.

(Also worth noting – but not, in my view, as clearly wrong as the others: a judge in New Jersey is under fire for moonlighting as a stand-up comic.)

Moonlighting has been around for a long time. (For COI history-minded readers, here’s an interesting example involving a 19^th century Chilean general who had a second job — as an agent for an arms contractor that sold to the Chilean military.)   But due to macroeconomic headwinds, relatively pervasive job insecurity and the expansion of telecommuting the practice seems likely to grow in the future (although this is only a guess).

While the cases we read about tend to involve intentional breaches or stunningly bad judgment, moonlighting viewed more generally  can be beneficial, and not only for the moonlighter.  Most obviously, the second employer gets the assistance of an employee that might not otherwise be available to it. Less obviously, the first employer can benefit from the employee’s experience at the second job – although this wouldn’t be a factor in all cases. Still, all involved need to be mindful of relevant C&E issues.

First, if you are employed by a governmental body, know the law, as some violations – such as in the IRS case – are punishable by criminal prosecution. (Here is an overview of relevant federal law  and here is one regarding employment with NY City.)  Similarly, if employed in the private sector, know and follow your company’s moonlighting policy – which is often found in the conflict of interest section of a company code of conduct.

Second, if you are an employer, make sure you in fact have implemented a moonlighting policy – and note that the failure to  have one could, in certain circumstances result in a violation of  state “lawful conduct” statutes.  (I don’t know about laws outside the US on this issue.)

Such policies typically include conflicts-of-interest provisions – barring/restricting employment:

–       with  a competitor company or a firm that does (or seeks to do) business with the organization – like a supplier or customer;

–        in  jobs that might entail use of the organization’s confidential information or commercial relationships; or

–       where the work  could otherwise adversely affect the organization’s image or interests.

Beyond such conflicts, these policies generally provide that a second job shouldn’t interfere with performance of duties required by the first – e.g., by making an employee too tired for the latter or causing her to use time that should be spent on the latter for the benefit of the former.

Third, these policies should be promoted and enforced. They should be the subject of periodic communications – and not just buried in an employment manual that no one reads.  There should also  be a formal process to help ensure that approvals are documented and justified and, from time to time, the company should check to make sure the policies are actually being followed.

Fourth, whether as a matter of practice or policy, the “second company” (i.e., one that is hiring the moonlighting employee), should enquire of applicants if they have received any necessary permissions from their principal employer. I.e., an ethical organization will want to make sure not only that it is free of conflicts of interest internally but that it is not causing conflicts in others.

Finally, for a post on COI issues potentially arising from service on an outside board click here.

Does your compliance and ethics program have a “constitution”?

The U.S. Constitution is not,  as the poet James Russell Lowell once reminded us, “a machine that would go of itself,” and neither is a compliance and ethics program.  But, having a constitution can help a C&E program stand the test of time.

In the latest issue of Compliance and Ethics Professional I explore how a C&E program charter can serve in this role, and what such a constitution should generally entail.  If you’d like to learn more please click here and go to the second page of the PDF.

Breaking news: just-published study shows that COI policies can…work!

One of the sources of frustration of toiling in the C&E field is the relatively small amount of data from the workplace on the efficacy of various program measures in actually reducing wrongdoing and otherwise promoting ethical conduct.   While unfortunate, this dearth of proof is not surprising; after all, what company would allow some or all of its employee population to serve as a control group for an “ethics experiment”?

But, as suggested by this article published yesterday in Science Daily, part of this proof gap has been filled by a recent study:  “Psychiatrists who are exposed to conflict-of-interest (COI) policies during their residency are less likely to prescribe brand-name antidepressants after graduation than those who trained in residency programs without such policies, according to a new study by researchers from the Perelman School of Medicine at the University of Pennsylvania. The study is the first of its kind to show that exposure to COI policies for physicians during residency training — in this case, psychiatrists — is effective in lowering their post-graduation rates of prescriptions for brand medications, including heavily promoted and brand reformulated antidepressants.” The study will be published in the February issue of Medical Care.

Note that while evidently precedent setting in terms of medical COIs, there is other  data – from the behavioral ethics field –  showing that well-timed exposure to a rule or ethical standard can  impact behavior in desirable ways. That research – and the ways in which its teachings might form the basis of effective C&E communications strategies – is discussed here.

Is your company ethical, or merely compliant?

According to press accounts last week, the Securities and Exchange Commission has decided not to bring insider trading charges against former Berkshire Hathaway executive David Sokol. Last year that company’s CEO, Warren Buffett,  fired Sokol for allegedly violating its internal “insider trading rules by failing to disclose his purchase of Lubrizol shares, less than four weeks after starting talks with Citigroup bankers on acquiring all the shares in the chemicals company that Berkshire Hathaway did not already own.” The value of Sokol’s investment had risen from about $10 million at the time of purchase to about $13 million when Berkshire agreed to the acquisition several months later.  However, the SEC decided that it could not prove that the information – while clearly non-public – was “material,” which is an essential element of any insider trading case.  Nonetheless, according to one story, “Berkshire followers said … the SEC’s decision is unlikely to sway Mr. Buffett, who has long held his top executives to high ethical standards.”

Many companies say that they require that their employees not only abide by the law but also maintain high ethical standards.  But what does that actually mean in practice?

Perhaps the best way to see if ethics – as opposed to narrowly focused compliance – really matters at a company is to ask (as I do when I conduct assessments of  C&E programs) if the company has ever forgone a significant business advantage that would have been legal but not ethical to pursue/maintain. (This can include discrete business  transactions, campaigns, strategies, relations with other organizations or allowing the continued employment of a star performer who has engaged in ethically dubious conduct but has not broken the  law.)  Very often the answer to this inquiry is no.

A second test of whether a company truly promotes ethical, as well as compliance-based, conduct, is checking whether its risk assessment expressly includes an ethics dimension.  For more on what this means see this article from the CCI web site.

A third such test is to see where a company sets the bar for key areas of conduct in its policies – including insider trading (a topic which, because it is mostly conflict-of- interest based, is of particular interest to this blog).  Examples include limitations on short sales, transactions involving options and “churning.”  While not necessarily involving insider trading, each of these entails actions which, when engaged in by insiders, can hurt a company’s reputation or create incentives for the insider to engage in conduct that is not in the company’s interest. And the same is true for the conduct at issue in the Berkshire Hathaway case.

Note – I’m definitely not suggesting that these three tests are the only relevant measurements of ethicality by corporations. There are indeed many others.  But hopefully they will be of use to some organizations which, like Berkshire Hathaway, seek to hold their employees (and particularly their leaders) to a higher standard.

Conflicts of Interest – a matter of perception?

By Simon Webley

A day doesn’t seem to go by without a news story about a politician or business person who has failed to recognise that they have is a conflict of interest. When this comes to light, they pay the price with their reputation. 

In the Institute of Business Ethic’s  ( IBE) 2010 Survey  of Corporate Ethics Policies & Programmes  (available to download here), ‘managing conflicts of interest’ was identified by 70% of respondents as important to their organisation. Yet guidance provided about managing conflicts of interest seems to be failing to make an impact.

Why do these scandals continue to happen?

The answer I would suggest, is because conflicts of interest are as much about perception, as they are about reality.

Perhaps the most difficult aspect of the topic is where some cultural and regional customs may seem to run contrary to what others perceive as conflicts of interest.  For example, the Chinese practice of leveraging guanxi (special relationships) has been a traditionally accepted (and expected) approach for facilitating favourable circumstances for organisations and individuals.  In Africa, where family bonds are highly valued, nepotism is a common practice, and an employee may face ostracism for not hiring a relative for a position at the firm.  However, most Western-based multinationals actively discourage allowing personal relationships to influence an employee’s business judgment. 

It is important not to underestimate the difficulty of this issue. There are some regions where employees feel that hiring a brother, for example, will be in the best interest of the company as well as the right thing to do.

In general, many employees of companies with international operations may be unclear as to what constitutes a conflict of interest.  Companies have to be particularly diligent to develop conflict of interest standards and communicate these to their staff throughout the world.

 The following list highlights examples that companies should address:

– Participation on boards and panels

– Consulting arrangements

– Gifts and entertainment

– Relatives and friends

– Outside employment

– Personal payment for services (speeches, articles, etc.)

– Personal investments/transactions

– Relations with suppliers/vendors

Guidance on this issue should briefly explain why avoiding conflicts of interest is important for the organisation. For example:  an employee’s personal relationships may be perceived to compromise his/her business judgment; and, decisions clouded by personal interests can negatively influence the long-term welfare of the organisation. Good guidance is for an employee to declare the conflict and then remove themselves from the decision-making process.  (For further help on this issue, please see the IBE’s Good Practice Guide Globalising a Business Ethics Programme.)

As valuable as codes of ethics and policies are in guiding staff, the example from leadership is the most crucial element when it comes to influencing behaviour. This is where’ tone at the top’, that oft repeated phrase, is so important.  If staff see that their leaders (whether they be senior management, board members, or department heads) declare any potential conflict and do so with integrity, then they are likely to follow suit.

 Simon Webley is Research Director, Institute of Business Ethics. He can be reached at S.Webley@ibe.org.uk.