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.

Catching up on CEO COIs

As noted in a previous post, CEO’s tend to have different COIs than the rest of us. Today’s post will look at a few CEO-related COI stories that have been in the news lately.

Most notably, yesterday the pharma company Novartis dropped a controversial plan to pay outgoing CEO Daniel Vasella up to $78 million over the course of six years. As described by Forbes, “The board had originally justified its decision in order to ‘protect’ the drug maker, since Vasella knows ‘the company’s business intimately, having built the leading R&D organization and personally recruited most of the top executives.’ In other words, the payoff was hush money designed to keep him from telling secrets to competitors.” The notion that a board could even consider paying a CEO something extra for keeping shareholder secrets is – at least on its face – pretty distressing.

Public sector organizations have CEO’s, too – and various press accounts have noted that super-lawyer Mary Jo White, who President Obama has nominated to head the Securities and Exchange Commission,  will need to take conflict avoidance measures if confirmed for that post.  But as noted in this recent story in Bloomberg News , while it is hardly unusual for a lawyer going from private practice to public service to have COIs of this sort, White’s particular contemplated mitigation approach to her potential COIs (which concern not only her law firm partnership but that of her husband, himself a prominent securities lawyer) appears to be of less than optimal efficacy.

I should stress that I don’t think there is any chance that White will personally act in a conflicted way in the discharge of her duties at the SEC.  But individual honesty is presumably not the end of the analysis regarding any leader’s COIs – and that is particularly so where a) the leader leads a government agency whose mandate includes, among other things, addressing COIs (at least in the financial services field);  b) that agency has an uneven record over the years in enforcing that mandate; and c) there is a reasonably strong concern among press and public that the reason for the agency’s shortfall is one of regulatory capture.

And speaking of the SEC, there is this story   from yesterday about a deposition of hedge fund chief Steve Cohen whose firm, SAC Capital, is being investigated for insider trading.  Cohen apparently testified: “I’ve read the compliance manual, but I don’t remember exactly what it says,’’ and, according to John Coffee, a noted securities-law professor at Columbia, “That’s a dangerous statement. The fact that he doesn’t know what’s in his compliance manual is useful to the SEC,” should it decide to pursue the firm on a “control person” theory of liability (which essentially involves supervisory neglect).

But is this really a COI issue?  It is in the sense that under Delaware law compliance oversight failures by directors and officers can be deemed a violation of the duty of loyalty, which – even if not technically involving a conflict – is from the same neck of the woods as COIs.

Finally, just today an internal investigation cleared former Chesapeake Energy CEO Aubrey McClendon of any “intentional wrongdoing” in connection with the controversial borrowing practices that were the subject of the prior post linked to at the top of this one.  But presumably it did not do the same with respect to creating an appearance of a conflict  – given the facts as described in the prior post, that could not be done with a straight face.  And with CEOs, proper appearances can matter just as much as avoiding actual COIs, as evidenced by the great costs and disruption that befell Chesapeake when the borrowing practices became known to the company’s shareholders and others.  Indeed, the company evidently continues to be the subject of an SEC investigation concerning these matters, and COI watchers may be able to look to the outcome of that inquiry for an early view of how seriously that agency will address conflicts in the era of Mary Jo White.



Conflicts of interest and trimmed fiduciary duties

In a recent post to his Conflict-of-Interest.Net blog (which is mostly about COIs in the university context), Prof Bryn Williams-Jones of the Université de Montréal writes about a story from earlier this year regarding “changes to [a certain university’s] COI bylaw for its board of governors; the critique being made by the University is that student representatives on the board were in a COI when discussing issues of student tuition. What’s odd about this move is that it seems to assume that all members of the board are neutral with regards to all subjects. And so because students can’t be neutral about issues regarding students, then they probably shouldn’t be on the board. The problem, though, is that the very reason that students are and should be representatives on boards or committees of various sorts, is to represent student interest – they are explicitly not disinterested, nor should they be!”

This is a good point, and there are indeed other situations like the one with the board of governors where interests can differ but are not seen as conflicting, for the very reason that the individuals in question are not seen as representing all relevant parties.  One example occurs with the boards of joint ventures – where a JV’s owners typically waive their respective fiduciary duties of loyalty with regard to JV board members.

However, when going down this path – not only in the board context, but in any other involving what might be called a trimmed fiduciary duty – it is critically important to have clear governance documentation, to avoid the type of confusion of which Prof. Williams-Jones writes.

Conflicts of interest in the Facebook IPO?

In the wake of the Facebook IPO the chief underwriter, Morgan Stanley, has been accused of a conflict of interest in alerting some, but not all, potential purchasers of the stock to negative news about the company.  Additionally, the sharp drop (more than 25% from its initial price  as of this writing) of Facebook shares is itself taken as indication of some kind of wrongdoing by the firm.

With respect to the latter issue, a piece in a blog published by The Telegraph argues –  pretty convincingly, I think – that this criticism is unfair: “the Facebook IPO hasn’t been all that great for those who bought shares in it is true. …But that’s not the point. Quite the contrary: that sagging share price is evidence of the huge success of the stock offer. For… the banks were not working for the new investors. They were selling to the new investors. And their gaining a good high price for the shares was exactly what they were supposed to do. Further, there is in fact a conflict of interest at such banks. If an IPO gets away with a good pop ….as the shares rise after issue, then the bank has failed its own customer, the issuer, for it has left money on the table. Money that rightly should be going into the pockets of the issuing company or the previous shareholders. However, making an issue with a good pop increases the business franchise of that issuing bank. It makes the various fund managers, hedge funds and investment managers like them. Be willing to do more business with them and thus increase their longer-term profits. Which is where the conflict comes in: screw the issuing company and be the popular boy on the block, or actually work for your customer, the issuing company, and damage your own longer term prospects?”

And what of the claim of selective disclosure?  According to this report,  the head of the chief industry self-regulatory body (FINRA) said, “The allegations, if true, are a matter of regulatory concern,..”  On the other hand, this analysis  suggested that due to rules that investment banks must follow in IPOs, Morgan Stanley in fact acted properly – although the piece also noted that the rules, which were intended to reduce conflicts of interest in the securities industry,  themselves are unfair.

For readers looking to learn more about this – particularly thorny – legal landscape, here  is a place to start.  But while in any  regulated business (such as financial services) an analysis of conflicts or any other ethics-related issue should generally start with the law, that ought not to be the end of the inquiry.  So, as this story develops, the COI Blog will return to it to see what broader ethical lessons (if any) can be drawn from it.

Finally, for “extra credit,” consider this story from the somewhat parallel universe of commodities regulation about a set of new rules which are also intended to reduce conflicts of interest but which some critics feel will end up having unintended negative consequences (perhaps similar to what happened with Facebook): “To the extent that the rule inhibits the flow of analysis and trade ideas to small investors, it will give an informational trading edge to larger entities…”





F. Scott Fitzgerald famously said that “The rich are different than you and me,” and, along the same lines, CEO conflicts of interest can be pretty different than those involving people like you and me.  Consider this story – which likely would not have taken place with anyone other than a CEO – about what in going on at Chesapeake Energy.

As background, the company permits its CEO, Aubrey McClendon, to take personal stakes in the wells it drills.   By itself this arrangement – while unusual and controversial – does not, in my view, inherently involve a COI.  Indeed, one could argue that by investing side by side with the company, the CEO aligned his interests with those of the company’s shareholders.

However, “[i]n order to pay for stakes in new wells, McClendon borrowed money — using his stakes in existing wells as collateral — from a group that Chesapeake was trying to sell assets to. Investors complained that the arrangement raised a conflict of interest. They worried that Chesapeake might have sold its assets to the firm because the firm agreed to lend McClendon money, and not because the terms of the deal were the best Chesapeake could have received.  The arrangement was not previously disclosed to shareholders.” Or, as noted in another (more bluntly written) account:  “The overlapping relationship has led many analysts to say that there was at least the appearance of a conflict of interest since Mr. McClendon could give his lenders a sweetheart deal in exchange for a preferential interest rate on his loans.”  (Perhaps some of these analysts recall the harm caused by the tangled personal financial dealings of then CEO Bernard Ebbers at WorldCom.)

Where was the board – which included a former governor of Oklahoma and former US Senator – when this was going on? According to this story, Chesapeake’s general counsel initially claimed that the board “was fully aware of the existence of the loans” but the company soon reversed course on this.   As described by Ben Heineman, a former General Electric Co. general counsel who teaches corporate governance and business ethics at Harvard: “the Chesapeake board, in effect, is declaring that it would ‘rather just look ill-informed and negligent than complicit in McClendon’s deals.’”

Adding to this turmoil – a story has now surfaced of an undisclosed financial tie between the CEO and a director  (albeit one dating back several years).  And, the Securities and Exchange Commission has opened an internal  investigation.

What does all this mean for the shareholders (i.e.,  people like “you and me”)?  Many have apparently lost faith in senior management and the board, which has led to a massive loss in their investments in the company. This is, of course, entirely predictable when a CEO creates an apparent COI of this magnitude and the board – the only meaningful check on a CEO – is either negligent or complicit.

CEO conflicts really can be unique, not only in terms of what they are but also the impact they can have.



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


The Two Types of Conflict of Interest Dilemmas

By Marty Taylor

The Institute for Global Ethics has spent the last 20+ years providing tools for people to negotiate right-versus-right (RvR) ethical dilemmas. In IGE’s world, some ethical dilemmas are conflicts of interest (COIs). We call other COIs right-versus-wrong (RvW) moral temptations. How do we distinguish between the two? The best litmus test is the personal advantage test. If the decision-maker’s COI requires a choice between serving others and serving self, especially in a venal way that disadvantages others, it is likely to be an RvW moral temptation. Let’s examine the following two examples.

You make the final decisions in procurement for your enterprise. Two suppliers competing to win a contract offer nearly equal products at the same price. Deciding between the two is difficult. One of the suppliers offers an attractive intern opportunity to your college-age daughter. He says it’s a coincidence. It seems like a “win-win,” and a “no brainer”, because no one is hurt by the offer and your daughter would benefit. However, your decision would compromise the procurement process, and your daughter might win a prized internship unfairly because of the contract, not because of merit.

Your ethics officer would see this situation as a COI—or perhaps the appearance of a COI—and require that the supplier offering the internship be removed from the selection process—the optics are bad. Moreover, accepting the internship would be inappropriate with any current or future supplier. It’s a RvW moral temptation. Your family benefits and your company’s stakeholders might get a rotten deal.

Now, a different situation—you’re still a procurement officer. Your colleague who does site visits has become sick just before a critical visit to a contract relationship you manage. As a willing team player, you’re expected to take over the site visit. But this weekend you are also expected to support your high-school son’s efforts in a regional music competition. Your wife is house-bound with her elderly parent. With more notice, she could have arranged care for her parent. You can miss the competition, leaving your son alone, or you can cancel the site visit which will disturb the supplier and your department. This is a RvR ethical dilemma—an individual (your son) versus community (your company) dilemma. Both choices are right, but there’s no position that can achieve both needs. It is also a COI—the needs of your son conflict with the needs of your job and there’s no clear resolution.

Our Ethical Fitness® process helps people to analyze and resolve their dilemmas. But they are still dilemmas! Conflicts of interest are frequently ethical dilemmas, but the negative connotation for COIs comes from the unfortunate choices people make to achieve selfish ends at another’s expense.

Marty Taylor is the Director of the Center for Corporate Ethics (a division of the Institute for Global Ethics), a former longtime employee of Eastman Kodak Company, and author of the bestseller, The Joy of Photography. He speaks and writes about ethics in business whenever possible. He can be reached at