Edited by Jeff Kaplan
|
Conflicts
In this section of the blog (and the various sub-categories below) we will examine the many ways in which interests can conflict for COI purposes.
|
|
In a post several years back I discussed what could be called “reverse conflicts of interest,” starting with an example from my work:
A company enters into a complex business arrangement where one of its managers has a relationship with the other entity. The relationship is fully disclosed and approved pursuant to company policy on COI waivers. After time, the arrangement runs into business difficulties. Although the company has lived up to its contractual obligations, the other entity seems to feel that the company should have done more to make the arrangement work. Based partly on that, some employees of the company question whether that entity had been promised more than was disclosed by the manager, causing the employees to take various defensive measures which put further strain on the arrangement. Ultimately, the arrangement collapses.
As a general matter, if properly disclosed and approved, some COIs can be waived (although some should not be permitted under any circumstances). Such approvals can be either a true “green light” or subject to being managed on an ongoing basis, i.e., a “yellow light.”
Like many C&E-related determinations, this type of decision tends to be made based on a balancing of costs versus benefits (hopefully, with a reasonably high burden of showing that the latter outweigh the former).
The case above illustrates what I believe is a factor that should generally be considered by companies deciding whether to grant a COI waiver: whether there will be reasonable possibility of overcompensating for the COI in ways that are harmful to the company. The potential for such “reverse COIs” could turn on many factors – perhaps most significantly, on the extent to which the contemplated relationship must rely on trust. (That is, the greater the need for trust, the greater the possibility of suspicion – at least as a general matter.)
Historically, reverse COIs may not have been common. But as sensitivity to COIs has grown dramatically over the past few years …they seem more likely to occur than ever before, and should be on a company’s radar in making COI waiver determinations.
In the many years since that post I cannot say that I have seen many reverse COIs. But I did find notable the following discussion from the recently published “Conflict of Interest Disclosure With High Quality Advice: The Disclosure Penalty and the Altruistic Signal” by Sunita Sah of the Johnson Graduate School of Management, Cornell University and Daniel Feiler of the Tuck School of Business at Dartmouth: “In this paper, we explore whether laws requiring conflict of interest disclosure damage the advisor-advisee relationship more than is intended. Across six experiments (N = 1,766), we examine situations in which advisors give high quality advice but still must disclose a conflict of interest. As predicted, such disclosures yield negative attributions regarding the advisor’s character, even when advice is of high quality (and advisees have full information to judge advice quality), and even when the advisor’s professional responsibility and self-interest are aligned, or the advice runs counter to the advisor’s self-interest. This disclosure penalty decreases trust in honest advisors…” (emphasis added).
In short, a reverse COI experiment, of sorts.
Finally, given the extent to which President Trump’s extraordinary COIs have garnered widespread attention, it will interesting to see if over time the reverse COI phenomenon has a widespread effect on how we view COIs in the government realm generally.
|
|
|
|
While other stories dominate the news these days, it is likely that national attention will turn to COIs as the presidential election gets closer. If Biden is nominated, then much will be said about possible COIs involving his son Hunter serving as a director of a controversial Ukrainian energy company. On the other side of the coin, President Trump has recently been accused of having more than 3000 COIs.
In anticipation of this, I thought it might be useful to revisit a post describing about the First Defense Insulation on inherent conflicts of interest.
At his trial for Libor rigging several years ago, evidence was introduced that former trader Tom Hayes had told the Serious Frauds Office that “many of the people responsible for submitting panel banks’ Libor rates also traded products linked to the rate, creating an inherent conflict of interest” and that “’[n]ot even Mother Teresa wouldn’t manipulate Libor if she was trading it,…’”
While obviously somewhat self-serving, this colorful bit of analysis still helps to underscore the overarching behavioral ethics point that to reduce the risk of ethical transgression … one cannot always count on the characters of those involved. Rather, the situation will often play the decisive role.
Inherent COIs are an instance of that. Granted, they are just one of many such types, but they may also be more common than most others, and hence worth further study.
And beyond an area of interest to behavioral ethicist scholars, seeing some COIs as being inherent (or near to inherent) can be useful to others, too, such as:
– C&E professionals, who should consider the category of inherent COIs in their risk assessments.
– Senior managers and directors, who should – as part of their C&E program oversight – make sure that nothing their company is doing or contemplating doing falls into (or anywhere near) this category of risk.
– Enforcement personnel, who often can find good fishing in the inherent COI waters.
– Individual business people, who – in making career decisions – should steer clear of jobs that could involve inherent conflicts of interest.
It is worth noting – in light of the election – that virtually any COI involving the President of the U.S. could be inherent, given his extremely broad powers.
Finally, note that anti-COI measures can be undertaken on an “inherent” basis too, as described here.
|
|
|
|
Years ago, a firm I knew moved its chief compliance officer from a relatively nice office to a decidedly not nice one. The move was intended to send a message and it was received that way. I noted at the time that this would not end well for the firm. Sadly, I turned out to be right.
In a recent post on the Harvard Corporate Governance Blog, “Bernie Ebbers and Board Oversight of the Office of Legal Affairs,” Michael W. Peregrine, McDermott Will & Emery LLP revisits the once-famous World Com accounting fraud scandal from the early 2000s and particularly the aspect of it that entailed the CEO (Ebbers) marginalizing corporate counsel. The details of this matter are less important (to me) than are the author’s very useful recommendations for mitigating this sort of risk.
Here are a few – of many:
1.Providing periodic board education on the nature of the general counsel’s role as counsel to both the board and management.
3.Incorporating in the general counsel’s job description the role of promoting compliance with the law and ethical standards.
10.Giving the general counsel access to, and collaboration with, other corporate executives with risk, audit and compliance portfolios.
12.Providing for general counsel participation in periodic executive session meetings with independent directors.
13.Establishing effective reporting relationships between general counsel and the in-house counsel assigned to corporate subsidiaries.
14.Assuring participation by appropriately senior in-house counsel in board, committee and management meetings relating to risk, legal or compliance matters.
15.Identifying members of the internal legal team to whom employees may confidentially address concerns.
16.Confirming that compensation of the general counsel is not determined in a way that might reasonably be considered to compromise the independence of its legal advice.
Of course, most of these questions can – with some modification – be asked about a company’s chief compliance officer, as well as its general counsel. And in conducting program assessments one should consider identifying and addressing marginalization in both roles.
|
|
|
|
The current attention to President Trump’s using his official position to bring business to his properties – discussed here – has drawn national (and even global) focus on the area of conflicts of interest. It is thus an opportune time for the COI Blog to review some basic principles.
First, as Justice Louis Brandeis famously said: “Our government is the potent, the omnipresent teacher. For good or for ill, it teaches the whole people by its example.” While Brandeis was speaking about violations of law the point seems just as applicable to ethics.
Second, and as one would expect, the impact of COIs can go beyond the economic value of the transaction at issue. How much does it matter that organizations, individuals and governments pay close attention to identifying and mitigating conflicts of interest? One way to answer this question is to consider – as I used to ask students in my business school ethics class to do – what the world would look like without such focus and sensitivity. Below are some of the observations that I have heard from them over the years:
– Individuals might be reluctant to take the medicines that their doctors recommend for fear that those recommendations are motivated more by the doctors’ financial relationships with pharma companies than by the patients’ well-being.
– Individuals and organizations might not use financial advisors for fear that the advice they receive is driven by hidden, adverse interests – and would instead devote otherwise productive time to trying to become their own financial experts, resulting in a significant misallocation of capital as well as time.
– Organizations could hesitate to take a wide range of everyday actions for which they need to trust their employees and agents to do what’s right by the organizations – or would proceed only with highly intrusive and costly surveillance-like measures in place.
In short, Conflict of Interest World is a place of needlessly diminished lives, resources and opportunities.
Finally, and returning to the issue of Trump’s COIs, the negative impact of presidential impunity regarding COIs is particularly worrisome in a way that is unique in our history. In the coming years we will be compelled to make sacrifices to address increasingly urgent needs regarding climate change and public debt. If government’s motives on these and other critical issues are subject to question due to COI’s then the (already small, in my view) likelihood of sufficient sacrifice being made is further diminished, with potentially catastrophic consequences for our country and planet. (For more on the link between morality-based sacrifice and the success of human societies see Jonathan Haidt’s The Righteous Mind.)
|
|
|
|
In Expert Product Reviews and Conflict of Interest, Tom Hamami writes: “Many firms that produce expert product reviews have a vested interest in increased consumption of the products they review. The classic example is the Michelin Guide, which reviews restaurants, originally conceived to stimulate usage of automobiles and therefore also demand for automobile-related goods and services. The result is a conflict of interest; such firms have financial incentive to give better reviews than products merit… [Hamami] compare[d] video game reviews from two sources: one a video game magazine owned by a game retailer and the other a game website that does not sell games. The goal of the research is to evaluate to what extent, if any, the retailer-owned outlet inflates its reviews in order to boost sales. …, [Hamami indeed found] some evidence of increased inflation in periods shortly following the release of a game’s corresponding piece of hardware. Other literature on this industry finds that reviews have the largest effect on the sales of low-quality games, and [indeed he finds] evidence of review inflation for [such] games. These results are consistent with theoretical predictions for a firm that optimizes the trade-off between sales revenue and the reputational costs associated with biasing reviews.” On the other hand, “somewhat surprisingly, [he finds] no evidence of seasonal variation despite the increased demand for video games in the fourth quarter of the year.”
So, a mixed picture – and one that is indeed consistent with the author’s review of relevant literature on COIs of this sort. E.g., one study finds “evidence of a strong positive influence of advertising on media coverage in the fashion journalism industry…” But another finds “minimal differences between the reviews of two wine publications, one of which accepts advertising and one of which does not…”
How much does this matter?
Assuming that the COI is disclosed or is otherwise apparent – as I imagine is so in the great majority of cases – there is evidently no “information deficiency,” a key factor in evaluating both the likelihood and impact of a COI. Nor do the COIs reviewed by Hamami seem to be of the sort that the average buyer cannot evaluate on her own (as might be true, for example, of pharmaceutical or complex financial products). Indeed, the very focus on “reputational costs” suggests that consumers do appreciate and take into account the negative impact of a COI on the publisher of product reviews.
But even disclosed and understood COIs generally do have a pernicious effect on our society, as they can contribute to the cynicism that many feel about the press and business world. I don t know how to weigh that against the other factors mentioned above, but it is certainly part of the picture.
|
|
|
|
What role do corporate lawyers play in preventing wrongdoing by executives in their client organizations? And how is this role impacted by behavioral ethics?
In “Behavioral Legal Ethics Lessons for Corporate Counsel,” to be published in the Case Western Reserve Law Review, Paula Schaefer of the University of Tennessee College of Law first examines “the corporate lawyer’s consciously held conceptions and misconceptions about duty owed to her corporate client when company executives propose a plan that will create substantial liability for the company—when and if it is caught.” As she shows, lawyers often have an unduly limited view of what that duty is.
Schaefer next “turns to behavioral science and highlights some of the key factors that corporate attorneys are unconsciously influenced by as they try to decide how (or if) to address client conduct that may amount to a crime or fraud.” Those factors are:
– Attorney self-interest. A key point on how to become a criminal defense lawyer is this: “Corporate advisors keep their jobs (as inside or outside counsel) when they keep executives happy; they do this by finding ways to implement corporate executives’ plans, and not by saying no.” Of course, on some level this is obvious but, based on the research of Tigran W. Eldred of New England Law School, she notes that lawyers are often not aware of the extent to which self-interest corrupts the professional conduct of attorneys vis a vis clients.
– Obedience Pressure. A key point here: “Obedience research explains the power an authority figure or colleagues have to influence bad advice.” The best-known study in this area is, of course, that conducted by Stanley Milgram, which measured the extent to which participants were willing to inflict shocks on apparent learners in the experiment when instructed to do so by an apparent authority figure and which demonstrated just how powerful obedience pressure could be. As Schaefer notes: “In the case of a corporate attorney addressing planned conduct that may be criminal or fraudulent, the authority figure is likely the corporate executive that the attorney reports to in the professional relationship.” And as she notes this is likely to create more pressure than the instruction of some man in a white coat in Milgram’s experiment.
– Conformity Pressure. Here, Schaefer describes experiments by Solomon Asch concerning the extent to which the participants gave knowingly incorrect answers to a question because of the fact that other participants did so. The results showed a high degree of such correlation. As she notes: “Asch’s research should be particularly concerning for lawyers. For Asch’s subjects, the stakes were low—the subjects likely did not know the other participants in the study and had no ongoing relationship with them. Further, the right answer was black and white, and they still felt pressured to choose the wrong answer selected by the majority. For a corporate lawyer addressing possibly fraudulent or criminal conduct, the group (with whom she feels pressure to conform) might be fellow attorneys or other decision makers at the corporation.”
– Partisan Bias. Schaefer writes: “The research reveals that partisanship makes it difficult for a lawyer to filter and interpret information objectively. One study found that students who participated in a moot court competition overwhelmingly perceived that their assigned side had the better case. In another study, subjects were asked to play the role of attorney for plaintiff or defendant in determining the settlement value of a case. Even though both sides received identical information, those who were randomly assigned to play the plaintiff predicted an award substantially higher than that predicted by the defendant.”
Schaefer next considers “interventions to combat a corporate attorney’s wrongful obedience and conformity.” All of these seem sound, but I don’t have space to discuss them here.
However, I do want to add that – although not the focus of Schaefer’s paper – the research may also be relevant to the longstanding debate about whether the general counsel or other member of the law department should serve as chief ethics and compliance officer (CECO) or if the individual in that role should be independent with respect to reporting purposes. At least to me, the research suggests that it may be more difficult for in-house attorneys to rise above the potential conflicts in this role than is generally thought.
Of course, even an independent CECO would be subject to the various biases described in this article. However, they would still – in my view – stand a better chance of ethical success since the notion of independence is truly foundational to their role, i.e., there is presumably not the same confusion about their duty than Schaefer found was the case with in-house attorneys.
Finally, note that I am not saying that this means that the General Counsel can never serve in a CECO role – only that the implications of this research should be considered along with various other factors in determining what approach makes the most sense for a given company.
For further reading:
– The Legal Ethics Blog
– An earlier post from the COI Blog with a different view on lawyers as compliance officers
|
|
|
|
As noted in the Washington Post last month: President Trump recently released financial disclosure forms which “show that the Trump International Hotel produced $41 million in revenue, which, according to CNN, brings to more than $80 million the total amount he has made from the property during his presidency. The hotel accounted for almost a tenth of his company’s revenue last year. High demand on the part of Republicans, lobbyists and foreign governments helps explain the hotel’s success. T-Mobile executives spent nearly $200,000 there as they sought approval for a merger with Sprint. A variety of foreign countries have held events at Trump International. The Trump Organization says it donates all the profits it makes from foreign governments. But the president, who has refused to divest from his company, undoubtedly still benefits from high, price-driving demand at his landmark property, not to mention the profits domestic lobbyists produce. For those seeking to influence the Trump administration, padding the president’s wallet with conspicuous spending at his hotel must seem like a viable strategy.”
But could a man apparently worth billions be influenced by a mere $200,000? When reading this story I was reminded of a study from 2016 on the impact on prescription writing of pharma companies buying meals for doctors. One of the results was stunning: “As compared with the receipt of no industry-sponsored meals, we found that receipt of a single industry-sponsored meal, with a mean value of less than $20, was associated with prescription of the promoted brand-name drug at significantly higher rates to Medicare beneficiaries.” (Emphasis added.)
The last (for now) word on this subject goes to this timeless exchange: George Bernard Shaw: Madam, would you sleep with me for a million pounds? Actress: My goodness, Well, I’d certainly think about it. Shaw: Would you sleep with me for a pound? Actress: Certainly not! What kind of woman do you think I am?! Shaw: Madam, we’ve already established that. Now we are haggling about the price.
|
|
|
|
The conclusion of the Mueller investigation does little to resolve the much broader set of concerns regarding President Trump’s conflicts of interest. These are too numerous to be chronicled on this site, but are being tracked on a weekly basis by the Sunlight Foundation, which even offers a searchable data base of Trump COIs. Additionally, a study recently conducted by USA Today showed that by failing to divest his various investments before taking office, Trump has created more than 1400 COIs.
The late Leona Helmsley is reported to have said that “only the little people pay taxes.” Trump’s view of COIs – that the President can’t have one – while similar in spirit to Helmsley’s timeless quip, is correct as a strictly legal matter.
As noted by USA Today: “There is no specific law that directly prohibits the president from owning any assets — whether real estate or anything else — that conflict with his official duties.” But the analysis is very different from an ethical perspective.
First, the foreseeable negative impact of a COI by a President is great. This is less a matter of the specific economic harm arising from an individual conflicted transaction as it is one of setting a bad example.
Justice Louis Brandeis famously said: “Our government is the potent, the omnipresent teacher. For good or for ill, it teaches the whole people by its example.” While Brandeis was speaking about violations of law the point seems just as applicable to ethics.
Indeed, I believe that the negative impact of presidential impunity regarding COIs is particularly worrisome in a way that is unique in our history. In the coming years we will be compelled to make sacrifices to address increasingly urgent needs regarding climate change and public debt. If government’s motives on these and other subjects are subject to question due to COI’s then the (already small) likelihood of sufficient sacrifice being made is diminished. (For more on the link between morality-based sacrifice and the success of human societies see Jonathan Haidt’s The Righteous Mind.)
Second, the likelihood of a president having a COI is – at least as a general matter — very high. That is a function of the near-infinite breadth and depth of a president’s power to help or hinder various interests – which, in turn, can reward him for his action/inaction.
Several weeks ago the House of Representatives passed a wide-ranging bill that – among other things – would encourage presidents and vice presidents to divest assets or create of blind trusts, but the Republican leadership has pronounced the legislation “dead on arrival.” Given how many of the other provisions of this bill are controversial, maybe Congress should be focused more narrowly on what is truly an ethics no brainer.
|
|
|
|
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.
|
|
|
