Edited by Jeff Kaplan
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Apparent and Potential Conflicts
Most COI regimes address apparent – as well as actual – COIs, and some speak to potential COIs as well. This section of the blog will explore various issues regarding apparent and potential COIs.
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In the fourth volume of his biography of Lyndon Johnson Robert Caro describes how, once in office, the President put his extensive personal business interests into a blind trust… but also took steps to manage those interests on the sly, including having “a private line installed in the White House so he and the trustee could talk without their conversations being taped or made part of the official record.” What would a President Trump do from a conflict of interest perspective with his business interests – which are more varied and valuable than Johnson’s were?
At the outset, it should be noted that federal COI laws do not apply to Presidents, as described in this recent Wall Street Journal article. But, for ethical and presumably political reasons Presidents have sought to address actual, apparent and potential COIs through the use of blind trusts (or, in the case of Johnson, what might be called the appearance of a blind trust).
However, this approach doesn’t necessarily work for all types of property interests. As noted last month in an NPR story: “A blind trust works for liquid assets: stocks, bonds, other financial instruments. Trump has plenty of those, but his biggest assets are all about the Trump brand. The golf courses, high-rises and so forth can’t be easily unloaded. Dropping the Trump name would very likely reduce their value. Bowdoin College government professor Andrew Rudalevige said, ‘To put your identity into a blind trust is a little bit difficult.’ And as Washington ethics lawyer Ken Gross said, ‘You can’t get amnesia when you put it into a trust, and forget you own it.’”
What is Trump’s view of an acceptable blind trust to address these issues? According to the LA Times, he “has said repeatedly that he would have his children manage his enterprises if he became president,…” However, “experts doubt that would be enough distance to remove suspicion. The Office of Government Ethics, which oversees conduct for the executive branch, specifically states that a blind trustee cannot be a relative, and more generally warns about government officials’ actions that could benefit the financial interests of family members. Indeed, given that FCPA cases have been brought where the corrupt attempt to influence official conduct was hiring a government employee’s family member this does not seem like a cure at all. (The late Mayor Daley – when caught giving government business to a son – famously said, “If I can’t help my sons, then [my critics] can kiss my ass. I make no apologies to anyone.” Could anyone rule out a President Trump saying something similar?)
What might the actual COIs be in a Trump presidency? One interesting possibility was identified in an article in Mother Jones last month: “the presumptive GOP nominee …has a tremendous load of debt that includes five loans each over $50 million… Two of those megaloans are held by Deutsche Bank, which is based in Germany but has US subsidiaries. And this prompts a question that no other major American presidential candidate has had to face: What are the implications of the chief executive of the US government being in hock for $100 million (or more) to a foreign entity that has tried to evade laws aimed at curtailing risky financial shenanigans, that was recently caught manipulating markets around the world, and that attempts to influence the US government?” An interesting question indeed.
Would a President Trump be influenced by this potential COI? In light of some of the statements he made during the time he was “self funding” his campaign, it is clear that he believes financial ties can influence how politicians act. Moreover, given the behavioral ethics phenomenon of “loss aversion,” COIs arising from being in debt could be seen as potentially more impactful than are those involved with receiving contributions (although this is concededly a somewhat speculative observation).
This is just one potential COI. Others, according to the LA Times story, include “if a future Trump administration, for example, declared a parcel next to a Trump golf course as public land, causing the value of his golf property to triple; or if a President Trump had dealings with a leader of a foreign country where businessman Trump operates a casino.” And, from a story in The Real Deal: “The Trump Organization …has a 60-year lease with the federal government at a former Washington D.C. post office, where it developed and now operates the Trump International Hotel. If the hotel failed to make its lease payments or violated its lease in another way, would a federal agency be tasked with going after it and crossing the commander in chief?”
Additionally, while the federal COI statute does not, as mentioned above, apply to Presidents, other laws might be relevant to COI-type behaviors. As noted in The Real Deal: “If Trump does actually make it to the White House, one thing he’d need to examine is a little-known Constitutional provision called the Emoluments Clause. The clause — which dates back to 1787 and was meant to bar U.S. government officials and retired military personnel from accepting royal titles in foreign countries — has in recent years been interpreted far more broadly to ban accepting any kind of gift from a foreign entity. And the definition of ‘gift’ has also broadened in scope….For Trump, the provision could get him in hot water if, say, a foreign government offered a tax break to one of his overseas sites in a way that was perceived to be a gift or an act of favoritism. The GOP frontrunner owns golf courses in Ireland and Scotland (in addition to Florida, New Jersey and elsewhere), and while it’s not clear if the overseas holdings receive any tax breaks, many of his courses benefit from them stateside.”
Finally, note that I am not suggesting that this is good fodder for a political attack by the Democrats. Hillary has too many problems of her own COI-wise. Rather, I write because it certainly is interesting – and as challenging from a COI management perspective as any set for circumstances of which I’m aware.
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Perhaps the most interesting recent conflict of interest story in the US concerns the unfortunate impromptu meeting between Bill Clinton and Attorney General Loretta Lynch last week on the tarmac of an airport in Phoenix, when he – learning that she was nearby – boarded her plane to chat. Lynch has denied that there was any discussion between them of the Justice Department investigation of Hillary Clinton’s email use and both women have expressed regret from an appearance perspective that the meeting occurred at all.
As with most other postings in this blog arising from cases in the news, I’m less interested in faulting the individuals involved than in considering whether there is a broader lesson that C&E professionals can draw from these events. In particular, my interest is in what might be learned from Lynch’s involvement since, by all accounts of which I’m aware, she is highly ethical. (The same cannot be said about Bill Clinton.)
For me, the most useful learning here comes from the circumstances of the case – which, according to everything I’ve read about it, really did involve a chance encounter, at least from Lynch’s perspective. Of course, the particular circumstances are highly unusual, but viewed broadly, this sort of situation – meaning one where an individual must make an on-the-spot ethical decision with little time for reflection – is not at all uncommon. Among other settings, it can come up when an employee must decide whether to approve a questionable payment that is described by her boss as urgent, is given sensitive information by a competitor on an unsolicited basis or is asked by senior sales personnel to confirm to a prospective customer things that aren’t true.
When these or other ethical tests present themselves with little or no warning, the best protection for the individual being tested could be having strong ethical instincts. Simply recalling what company policies are may not be enough to do the trick.
However, such instincts cannot be summoned on command. Rather, they must evolve and be sustained over time. And for this companies (and other organizations, including governmental agencies) generally need strong – and culture-based – C&E programs. Indeed, one of the core goals of a culture-based C&E program should be having ethics operate on an instinct-like level.
Of course, one could argue that some forms of wrongdoing trigger instinctive revulsion in most people, without the need for C&E assistance. In the three examples described above, the one about lying to a prospective customer is most likely to do this, since honesty has been a core human value for millennia. The picture is somewhat less clear with the antitrust example – as accepted standards of conduct there are of much more recent vintage than are honesty-based expectations. Corruption – which was both prohibited and widely accepted for many centuries – probably lies somewhere between these two. But, for all of these and other forms of wrongdoing a strong ethical culture should increase the odds of any employee making the right decision when faced with an unexpected, high-stakes choice.
And what about the type of wrongdoing at issue in the Clinton-Lynch meeting which (assuming they did not in fact talk about the email investigation) should be seen as creating the appearance, if not the substance, of a COI? While COIs themselves have been seen as wrong since the time of the Bible (man cannot serve two masters), appearances of such are less likely to have reached the point where they trigger instinct-like negative responses. Thus, having strong ethical cultures may be necessary to reduce risks of this sort too.
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Director COIs are in the news again.
First, the Wall Street Journal reported last week: “Generic-drug maker Mylan NV moved into new headquarters in December 2013 after buying vacant land in an office park near Pittsburgh and erecting a five-story building for about 700 employees. The company hasn’t publicly disclosed that the office park’s main developer is Rodney Piatt, Mylan’s vice chairman, lead independent director and compensation-committee chief. The new headquarters was a big boost for the mixed-use real-estate development, called Southpointe II, where all the land has been sold and some of the last buildings are now rising.” As the article further describes, Piatt sold his interest in two parcels to a business partner for nominal amounts, who in turn sold the parcels to Mylan for several million dollars each, but that does not mean that Piatt received no benefit from the dealings: “Mylan’s decision to build the new headquarters may have helped boost the value of Mr. Piatt’s other holdings in [the development]. After local officials in 2011 approved permits and rezoning for a plan that included the headquarters, a firm managed by Mr. Piatt sold a nearby hotel for $14.8 million, property records show. Mylan’s plans helped spur interest from retailers to sign leases, says… the business partner of Mr. Piatt. ‘The more people there are in offices, the more demand there is for lunches’ and other services,… .”
While there is presumably more to this story than what appears in the article, it is hard to argue with the take of corporate governance expert Charles Elson: “’The optics are terrible. Pittsburgh is a big town with no shortage of real estate. Either they could have gone somewhere else, or [Mr. Piatt] could have relinquished the directorship and eliminated the conflict.’”
The second article – which appeared this past weekend in the New York Times – is no less interesting: “Consider a document recently filed in a 2013 shareholder lawsuit against directors of Dish Network, the television provider based in Englewood, Colo., which contends that the company’s co-opted board cost its investors at least $800 million in one recent episode. The document also provides some seriously good, well, dish on personal and family ties between Charles W. Ergen, the company’s co-founder and chief executive, and two Dish directors the company identifies as independent in its regulatory filings. Lawyers for Dish shareholders found, for example, that the family of Tom A. Ortolf, a director who is head of CMC, a private investment firm, has taken numerous hiking trips with Mr. Ergen’s family. Another fun fact unearthed in the case: Four invitees to a 17-person bachelor party for Mr. Ortolf’s son were Ergen family members. Then there’s the note Mr. Ortolf sent after Mr. Ergen offered two Super Bowl tickets. “I love you man!” the director exulted. George Rogers Brokaw, a managing partner at Trafelet Brokaw & Company in New York, is another independent Dish director with personal ties to Mr. Ergen. Mr. Brokaw’s family hosted members of the Ergen clan at their homes in New York City and the Hamptons, the lawsuit says. Mr. Brokaw also provided advice on a job search to one of Mr. Ergen’s children. Cantey Ergen, Mr. Ergen’s wife and a Dish co-founder who is also a director at the company, is godmother to Mr. Brokaw’s son.” The Times piece further describes: “The close relationships between Mr. Ergen and his directors might not have mattered so much if not for a private investment he made in 2012 [which, the shareholders contend in their suit, represents a usurpation of a “corporate opportunity” belonging to the company] “that could generate personal profits for Mr. Ergen of perhaps $800 million. After shareholders sued, contending that the transaction was a breach of the chief executive’s duty to Dish, a special litigation committee of the company’s board was formed to investigate the deal. As it turned out, Mr. Ortolf and Mr. Brokaw were appointed to two of the committee’s three posts.”
There’s lots to be said about director conflicts (see prior posts collected here ) but perhaps the overarching point is that a big part of the reason that the position of corporate director exists is to ameliorate the conflict-of-interest-like “agency problem” that comes from executives managing other people’s (i.e., shareholders’) money. Since directors’ COIs can raise questions about the ability of a board to perform this vital function, they can be especially pernicious. For this reason, it is part of a director’s job, I believe, to avoid situations that give governance experts like Charles Elson just cause to berate them publicly for creating terrible optics, as he did the Mylan directors. Put otherwise, directors have to be attentive not only to actual COIs but apparent ones too.
Of course, every member of a public company board would swear that they are familiar with this principle. But what is less well appreciated is just how difficult mitigating an apparent conflict can be – and particularly so for powerful people with complex business dealings. For more on what is involved in mitigating apparent COIs see this earlier post. On the other hand, maybe the Mylan board did understand how challenging mitigating the apparent COI facing them would be, and so opted for non-disclosure. Of course, once uncovered, non-disclosure itself contributes to the appearance of wrongdoing.
Turning to the other case of the week, while the Dish directors might feel that the various purely social ties described in the Times piece are not the stuff of conflicts, the conception of COIs under Delaware law does indeed encompass non-financial relationships, as established by an important (but sometimes forgotten) case in 2003 involving the directors of Oracle. As described in this article about fiduciary duties, the court there held that “a director must base his or her decision on the merits of the subject matter rather than ‘extraneous considerations or influences’ and that a director may be ‘compromised if he is beholden to an interested person.’ Most importantly, the court stated that ‘[b]eholden in this sense does not mean just owing in the financial sense, it can also flow out of ‘personal or other relationships’ to the interested party.”
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First, a plug: at the upcoming annual conference of the Ethics and Compliance Officer Association , I’ll be speaking on a panel on “A view from the edge: exploring the future of ethics and compliance.” It is a topic I addressed at the very first ECOA conference – held in 1992, when the organization had a grand total of 19 members and the entire C&E field was so new. I hope to see you at this year’s event, which will be held next month in Dallas.
Second, the COI story of the week – is also about the future. It concerns the Clinton Global Initiative (CGI) accepting contributions from foreign governments, notwithstanding the prospect that Hillary Clinton will run for President. When she was Secretary of State, the organization did not take such donations, but they lifted the ban when she resigned from that post.
Of course, since she isn’t president, technically this isn’t an actual conflict. Rather, it is a potential COI.
What’s the difference? As discussed in this earlier post: Potential conflicts refer, as a general matter, to situations that do not necessarily constitute or appear to constitute a COI but where there is a reasonable possibility of an actual or apparent COI coming into play.
As with the risk analysis of any COI, with potential COIs one should consider the dimensions of likelihood and impact.
On likelihood, there are actually two questions relevant to this inquiry. First, how likely is the COI-triggering event to happen? Here, that event – Hillary becoming President – seems reasonably likely to occur. (The analysis might be different if we were dealing with a “Bernie Sanders Global Initiative,” or organization associated with another long-shot seeker of the office.)
Second, if the triggering event does occur, can effective mitigation measures then be implemented? That might be difficult in this instance because, if she did win the Presidency, presumably returning the donations to the foreign governments, though not impossible, would be pretty unpalatable – particularly if the money was already spent on the many critically important causes the CGI supports.
Finally, the potential impact of a COI seems high here as well. That is, the donations from foreign governments could undermine the trust that the American people have in the President, and perhaps cause suspicion in other countries too.
So I agree that CGI should ban foreign government contributions. But I also applaud the organization for its effective work on climate change (and in other areas), as the actual conflicting interest we have with future generations on that issue may be the greatest COI of all time.
(Some additional reading:
Two conflicts of the apocalypse.
Is the road to risk paved with good intentions?
COI policies for non-profits.)
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The recent indictment of NY State Assembly Speaker Sheldon Silver on corruption charges has – at least for the moment – focused some attention on the age-old practice of “referral fees,” under which a lawyer or other professional receives compensation for referring an individual or entity to some other service provider. In the Silver case, the (now ex-) Speaker received such fees from two different law firms. As described in this piece in the NY Times , one of these firms – “a large personal injury law firm where he has worked for more than a decade” – paid him more than three million dollars based on client referrals from a doctor whose research center had been given $500,000 in state grants orchestrated by Silver. Another part of the prosecution’s case involves his receipt of referral fees from a real estate law firm to which he had steered clients and his performing official action to benefit those clients.
In both of these alleged schemes the principal victims were the taxpayers of NY, whose interests were subordinated to Silver’s personal interest. The element of harm to the two firms’ respective clients was less a part of the picture (although some harm could be presumed with the personal injury referral fees). But in a traditional referral fee situation the harm is principally and often entirely to the client.
Of course, it is not only lawyers who pay/receive referral fees – and who face ethical questions involving these practices. For instance, architects must, as a matter of professional standards, disclose referral fees. As noted in this Advisory Opinion from the American Institute of Architects: “It makes no difference under the disclosure rules whether the architect is certain that the contractor he recommends is the best one for the job or that he would make the same recommendation even if no referral fee were paid. Though the architect may be confident there is no actual conflict of interest, any referral fee is an interest substantial enough to create an appearance of partiality and is a factor about which the client is entitled to know.”
Legal and ethical issues regarding referral fees are disturbingly common in the medical profession. For a discussion of the conflicts of interest inherent in such arrangements see this post from Chris MacDonald’s excellent Business Ethics Blog: “If the person you’re relying on for advice is financially beholden to the person he or she is recommending, you have every reason to doubt that advice.”
Such practices are also common in the financial advisory services realm. See this discussion of relevant ethical standards, and note that – as with doctors – these cases sometimes cross legal, as well as ethical, lines.
Finally, the regulation of referral fees in the legal profession has existed for many years. However, the area is increasingly complicated by the phenomenon of referrals being made by non-attorneys to law firms, as described in this paper by John Dzienkowski of the University of Texas School of Law.
Indeed, in my own practice I have been offered referral fees by vendors selling C&E products and services. I always say No. I’d like to think that my steadfastness is the result of being virtuous, but in reality, it is just a matter of common sense. That is, for clients or prospective clients to have to worry about whether my advice was tainted would be devastating to my business. And no referral fee could ever compensate for that.
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Perhaps the most celebrated story ever about a love affair is Anna Karenina and the story doesn’t end well – as the distraught heroine throws herself under a train. Office romances typically don’t end that way, but they are not without risks – particularly those involving senior leaders.
This is indeed an oft-told tale. Here is an earlier post on “frisky executives” discussing one such case from 2012. Others around that time involved the CEOs of Lockheed Martin and Best Buy. And the latest in this line concerns the CEO of Johnson Controls.
As described in this article of a few weeks ago in the Milwaukee Business Journal, that CEO “failed to inform the corporation’s audit committee about the potential conflict of interest in his extra-marital affair with a consultant hired by the company.” The net result: a reduction “of his annual incentive performance plan payout to $3.92 million, down nearly $1 million.”
A few thoughts on this case, perhaps of use to any CEO conducting a pre-office affair risk assessment.
First, while the economic hit is high it seems justified for a high ranking official – anything less could be seen as a slap on the wrist. Indeed, one of the cases discussed in the “frisky executives” post also involved a million dollar penalty. So, don’t expect economic leniency.
Second, consider the risk to the other party. In the case of the Johnson Controls executive, she was a consultant in a firm that lost an apparently long standing client in the scandal. No surprise there either.
Finally, while disclosure is necessary it may not be sufficient to prevent harm. That is because even if an actual COI can be avoided the appearance of a COI might be inescapable – as the natural suspicion among others in the workplace could be that with the relationship comes workplace favoritism. For more on how some apparent COIs simply can’t be mitigated by disclosure see this post.
(Thanks to COI Blog reader Don Bauer for letting me know about this story. And, happy new year to all.)
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More than a decade ago, Iowa senator Charles Grassley famously said of a company’s general counsel also serving as its compliance officer: “It doesn’t take a pig farmer from Iowa to smell the stench of conflict in that arrangement,…” And since then, there has been a lively (albeit not always as colorfully expressed) debate involving C&E practitioners, lawyers and others concerning the issue of to whom should the C&E officer report.
Earlier this month a survey conducted by NYSE Governance Services and the SCCE captured considerable attention in the C&E field with its finding that 38% of persons “with overall responsibility for the compliance program” in their companies reported to the CEO, 19% reported to the board of directors and only 18% did so to the general counsel. This led the Wall Street Journal to proclaim: “Legal [is] losing its grip over risk and compliance.”
However, two caveats should be borne in mind here. First, the specific question in question – “To whom does the person with overall responsibility for the compliance program report?” – could be read to include merely informational reporting (i.e., the C&E officer meets periodically with the CEO) as opposed to the more significant administrative kind (i.e., the CEO is the supervisor of the C&E officer). Having heard many C&E officers speak over the years about their reporting relationships in a way that uses the two types interchangeably I would be surprised if this ambiguity didn’t account for a slice (and perhaps a large one) of the CEO and BOD numbers. Second, nearly a third of the survey respondents were from the “health care and social assistance fields” – which is much higher than the percentage of such organizations in the economy generally; this is significant because, for regulatory reasons, reporting to the BOD and CEO are more common than in these types of entities than in most others.
A less noticed but no less notable contribution to this debate was the report of a survey published only a few weeks earlier by Mitratech (a provider of enterprise legal management solutions for legal departments). While not posing the same question that the NYSE Governance Services one did, this report noted (among other things) that “[t]he legal department owns the enterprise compliance function in 40% of respondents’ organizations and owns a portion of compliance functions in another 24% of organizations” and also that “[t]he role of the legal department in enterprise compliance is increasing as the responsibilities of the Chief Compliance Officer (CCO) and General Counsel become more tightly intertwined.” These results feel closer to the actual practices I’ve seen in business organizations than do those in the other survey.
Granted, I have never been a pig farmer from Iowa, but I have been around this issue for a long time (my first experience with it dating back to the mid-1990’s when I was asked by a client whether the C&E officer should report to the GC or its Chief Operating Officer). Based on my experience since then, I can say with some confidence that there is no one-size-fits-all approach to the question of to whom the C&E officer should report.
Certainly, in a company where the GC herself is likely to be a source of risk then the case for independent reporting is clear enough. (This is not about the GC being honest as an individual but, rather, giving advice regarding or otherwise playing a role in company activities that are relatively likely to be scrutinized in an enforcement context.) Also, in industries where the government has expressed a preference for not including the GC in the C&E officer’s line of administrative reporting, then that is entitled to a fair bit weight. And, where employees are likely to see the GC as an aggressive defender of the company’s interests – which is sometimes the case where the company is the subject of high-profile litigation – then having the C&E officer subordinate to the GC could inhibit employees reporting suspected wrongdoing.
But there are many other situations where not reporting to the GC would effectively make the C&E officer an organizational “orphan,” because the CEO or BOD – who have a vast array of responsibilities – would in fact do less for her (and the program) than would a GC whose duties and skill set naturally lend themselves to promoting C&E. Indeed, I recall one case where the C&E officer did in fact report administratively to the audit committee; it was a well-intended approach, but the committee gave him little day-to-day guidance, which sadly seemed to contribute to his losing his job. More generally, as C&E program requirements increasingly become part of the sinews of US business law (a trend that seems inevitable), then the case for administrative reporting to the GC may actually be enhanced.
Finally, even if a company does opt for this latter approach, care must be taken to protect the C&E officer’s independence – both actual and apparent – through other means. One of these is having her reporting periodically to the relevant BOD committee in executive session. Another is to provide that the C&E officer’s duties and compensation cannot be adversely affected without prior approval of such committee. Finally, a GC to whom a C&E officer reports should take steps to ensure program independence by other members of the law department – such as through training them on their “reporting up” obligations under S-Ox section 307.
(For additional reading on BOD oversight of C&E programs please see this post by my partner Rebecca Walker and me on the Harvard Law School corporate governance blog.)
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With Father’s Day coming up this weekend, it seems like a good time to check in on conflicts of interest that can arise from arise from being a dad. Given the powerful instincts at work, parenthood is indeed fertile ground for COIs, as illustrated by the immortal words of the first Mayor Daley, who, in speaking to colleagues on the Cook County Democratic Committee, defended his having directed a million dollars of insurance business to an agency on behalf of his son John by saying: “If I can’t help my sons, then [my critics] can kiss my ass. I make no apologies to anyone.”
In the past year, the biggest COI story involving fathers has been the investigation into hiring of Chinese “princelings” by investment banks – and there is no sign of this story going away any time soon. The most recent addition (just in the past week) to the list of those apparently under scrutiny for such practices is Deutsche Bank. And, in what is apparently another recent development relating to this inquiry, the former head of JP Morgan’s investment bank in China was arrested in late May. However, one should not paint with too broad a brush here, as when it comes to the legality and ethicality of hiring relatives the devil will likely be in the details – meaning that while some banks may well have crossed applicable legal/ethical lines others that hired “princelings” could still have acted appropriately (depending on a wide variety of relevant factors).
The most troubling of other recent fatherhood COI stories concerns the award of the 2022 World Cup to Qatar, in which football legend Michael Platini – a member of the FIFA executive committee – played a role. As noted in The Telegraph: “Mr Platini’s son Laurent became the chief executive of Burrda, a Qatar owned sports company” not long after the father’s vote in favor of Qatar’s candidacy, although the latter has denied that there is any connection between the two events.
Out of fairness to the Platinis, I need to emphasize, first, that the controversial employment of the son was previously known; what is new is a wide variety of other troublesome facts about the choice of Qatar that have only recently surfaced – that may frame how one looks at this hiring; and, second, that a special investigator hired by FIFA is apparently due to submit his report on the matter by the end of July – after which more definitive ethical judgments can be made. However, even if the hiring of the son is ultimately found to have been done with the purest of intentions, there is a more general learning worth noting here – which is that, when gauging the possible appearance of a COI, consider if there may be a broader context (i.e, one that is beyond your control – or even current understanding) that, upon becoming known, might influence how others ultimately see the ethicality of one’s actions. (For more on the difficulty of mitigating apparent COIs see this earlier post.)
Finally, the most recent father-and-son COI issue to surface in the US comes to us courtesy of Fox News: “Vice President Joe Biden’s visit Saturday to Ukraine in support of the country’s new democratic government is renewing concerns about his youngest son being hired by a Ukraine company promoting energy independence from Moscow. Hunter Biden will be working for the company while his father and others in the Obama administration attempt to influence energy policies and other issues of the new government, which is gripped in a struggle with Russia and pro-Russian separatists to control the county.” The article also points out: “American conflict-of-interest laws and federal ethics rules essentially do not regulate the business activities of adult relatives of those who work in the White House, and there’s no indication that the situation crosses legal or ethical lines.” Still, there is presumably a little of the late Mayor Daley in all of us fathers, so this bears watching.
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In addition to addressing actual conflicts, nearly all organizations’ COI standards speak to the need to avoid or disclose apparent conflicts. Less often covered are expectations regarding potential COIs.
This may be because the two types of conflicts are often considered to be the same. However, they are two different animals.
Apparent conflicts are, of course, existing situations or relationships that reasonably could appear to other parties to involve a conflict of interest. They are discussed at some length (with examples given) in this earlier post.
Potential conflicts refer, as a general matter, to situations that do not necessarily constitute or appear to constitute a COI but where there is a reasonable possibility of an actual or apparent COI coming into play. (I should stress that, given the thousands of laws, regulations and rules regarding COIs, this is not the only definition of a potential COI. But it is reasonably common and, in my view, reasonably logical.)
For instance, where A works at company X, which has as a supplier company Y, and A’s daughter B is considering applying for a job at Y, this is not yet an actual or apparent conflict because B has not yet moved her job plans forward. But (depending on a variety of facts not provided in this example) the potential for a conflict is there.
As noted in this publication from the North Carolina Board of Ethics: “Potential conflicts of interest … are the most misunderstood concept in public service ethics. Many Public Officials give ‘potential conflict’ a negative connotation, when in fact it is neutral. ‘Potential’ [merely] means ‘capable of being but not yet in existence’ – possible.” The same analysis holds true, I believe, in the private sector context.
Given this widespread misunderstanding, I think it is important to discuss potential (as well as actual and apparent) COIs in codes of conduct, other policies, training and other C&E communications – particularly because, as a practical matter, waiting until a potential COI has ripened into an actual or apparent one might be too late to achieve a satisfactory resolution of the issue. Indeed, the need for focusing on potential COIs assumes particular importance in light of certain findings of the emerging field of “moral intuitionism” which is discussed in this recent post.
As noted there, one of the strong moral intuitions humans have is loyalty, and this suggests that when a COI that triggers loyalty instincts does appear – e.g., a conflict involving a family member, close friend or other individual to whom “in-group” loyalty is felt – our intuitions might not lead us to deal with it an ethical way. To revert to our hypothetical, it is probably easier and certainly more effective for A to get guidance from the C&E office about what to say to or ask his daughter B beforehand about the conflict of interest that could arise from her applying for a job at Y than dealing with the situation after she has already done so (when, due to is loyalty instincts, he might well lapse into a defensive mode).
For this reason, preparing in advance to address a conflict may be particularly important. And focusing on potential COIs in one’s C&E program – again, through the code, other policies, training and other communications – can help make that happen.
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Virtually all codes of conduct prohibit apparent, as well as actual, conflicts of interest. Apparent COIs are generally seen as less serious than actual ones. Moreover, many compliance officers and others who conduct internal investigations are familiar with situations where it is hard to prove an actual COI (even where it seems obvious that one exists) but easy to prove the apparent type – the C&E equivalent of “getting Al Capone on a tax charge.”
But while apparent COIs are often easier to prove than actual ones, they may be harder to mitigate. In that connection, consider the following hypothetical case and question:
X Company is considering using Y Company as a supplier, because Y offers the best goods on the best terms. But Y is owned and operated by A, whose twin brother A Plus is a senior manager of X. A Plus has nothing to do with purchasing anything for X and rigorous controls are put in place at X to ensure that he doesn’t in any way help Y in its dealings with X. Does the fact that X has in fact mitigated any actual conflict mean that it has done so with the apparent one?
The analysis in situations such as this turns in part on the question: Apparent to whom? For instance, is it well known among X employees and the company’s other suppliers that A and A Plus are brothers (as the case suggests from their being twins and from A Plus’ prominent role in the organization)? If so, then the employees and suppliers – two groups whose trust companies like X typically have strong reasons to maintain – would likely need to know the particulars of the mitigation measures to believe that that there is nothing to the apparent conflict. But for various understandable reasons, companies in this sort of situation are often reluctant to publicize their mitigation measures in any detail. And even if they did, there would be a good chance that the parties to whom the conflict is apparent would be skeptical of the sincerity and efficacy of the effort.
Not all apparent conflicts raise significant challenges of this sort. However, some present even greater mitigation difficulties than our hypothetical does – such as where the apparent COIs become known to shareholders (as in the Chesapeake Energy case described in previous posts) who are typically a more distant and dispersed group than are employees or suppliers and thus presumably harder to provide comfort to. But regardless of the particulars of the situation, considering the “apparent to whom” question should be part of every mitigation analysis in addressing apparent COIs.
Finally, note that the concept of “potential COIs” is sometimes used interchangeably with apparent COIs. However, they are clearly distinct from each other, with the former not having to do with present appearances but with the foreseeability of actual (or apparent) COIs coming into play in the future.
(Click here for various posts on the various forms of harm that can be caused by the various types of COIs.)
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