Industries and Professions

COI issues can vary considerably by industry , and the same can be said with respect to ethics standards for various professions (e.g., law, journalism). In this section of the blog we will seek to explore, among other things, broader lessons for business organizations that might be drawn from industry- and profession-specific COI matters.

Conflicts of Interest in the News (032412): Domain Names, Wall Street, Government and Tennis

Conflicts of interest and internet domain names: The “Internet Corporation for Assigned Names and Numbers (ICANN) depends on its U.S. government contract to coordinate the unique addresses that tell computers where to find each other, without which the global Internet could not function. But this month the government warned that the non-profit body’s rules against conflicts of interest were not strong enough and only temporarily extended ICANN’s contract – which it has held since its formation in 1998 – instead of renewing it as many in the industry had expected…. The conflict of interest concerns arise from the fact that some past and present board members stand to benefit financially from the liberalisation of Web addresses through ties to organisations that make money from registering new domain names or consulting on the expansion.”

How Wall Street Deals With Conflicts: “Other professions deal with conflicts in a variety of ways. For federal government employees, there are extensive administrative regulations in place requiring disclosure of any actual or potential conflict. These rules are supplemented by a criminal statute, 18 U.S.C. § 208, making it a crime to be involved in any decision in which the person ‘has a financial interest,’ punishable by up to five years in prison for a ‘willful’ violation. For lawyers, the professional responsibility rules in every state prohibit representing a client if the lawyer has a conflicting obligation to another current or former client, or because of the attorney’s own personal interest in the transaction. A conflict does not prevent a lawyer from continuing the representation so long as there is full disclosure and written consent by the client. The conflict of interest rules are primarily enforced in two ways: a lawyer can be disqualified from continuing to represent a client, or the client can sue the lawyer for damages over a breach of a fiduciary duty… There are no similar options available to police conflicts involving investment bankers… One reason firms can operate despite actual or potential conflicts of interest is that they are not bound by the same fiduciary duty that a lawyer owes to a client or a government employee owes to the public.”

Cabinet minister broke conflict-of-interest rules: ethics watchdog.   “The ethics watchdog for the House of Commons said Thursday that  [Christian] Paradis] broke the rules when he gave a former Tory colleague preferential treatment. Paradis – then Public Works minister – directed his officials to set up special meetings with defeated Conservative MP Rahim Jaffer to discuss a private project.”

Conflicts of interest in the world of professional tennis. “I begin by saying that Mary Joe Fernandez is good people and, I think, someone of integrity. Despite her ties to IMG and despite the fact that her husband represents Roger Federer (and Monica Seles, Lindsay Davenport and Anna Kournikova before that), I’ve never detected bias in her commentary. And let the record reflect: She does not work his matches, though she sometimes interviews him before and after them. All that said, you can’t be a commentator and sit with a player’s wife during the match.”

 

 

 

Conflicts of Interest in the News: Private Equity

This week we’ve been looking at COI issues in different types of business organizations – first non-profits, then joint ventures and now private equity.

While the fight for the Republican nomination for President has occasioned unprecedented (and largely un-illuminating) public scrutiny of the private equity field (i.e., on a net basis, whether it destroys or creates jobs), of greater significance for that industry  are provisions in the Dodd-Frank Act that treat many private equity firms as investment advisors, and thereby impose  various compliance requirements.  And, according to this helpful client alert published by Latham & Watkins,   that new mandate has occasioned scrutiny by the Securities and Exchange Commission  of the following types of possible COIs in the life cycle of private equity funds: “Fund-Raising Stage. Does a firm use consistent and comparable valuation methods and disclose pricing methodologies? Is the valuation methodology documented? Is the firm a party to side letters with certain limited partners, giving them preferential treatment regarding expenses, services provided by related parties or access to co-investments? Are the terms of these side letters fully and fairly disclosed to other limited partners?  Is the firm seeking to raise more funds than it can effectively deploy in an effort to maximize management fees? Investment Stage.  How does the firm allocate investment opportunities between funds? Is co-investing allowed on a deal-by-deal basis, creating a risk that private equity professionals will cherry pick deals with the best prospects for the co-investment vehicle at the expense of the fund? Management Stage . Do investors receive accurate reports regarding fund performance? Does the firm selectively highlight only the most successful portfolio companies while ignoring or underweighting portfolio companies that underperform?  Are fees charged to portfolio companies (transactional, monitoring, consulting, directors) fairly determined, adequately disclosed and consistent with what investors agreed to at the outset of the partnership?  Exit Stage. Has there been an effort on behalf of fund managers not to divest portfolio companies to extend mature funds beyond their normal lives?  How are conflicts handled when portfolio companies are sold by a fund to an affiliated fund?”

This is quite a list – and creating appropriate standards and controls around all of these areas of possible conflict could be quite a task for some firms, although obviously many are not starting from scratch.  (Note:  for beginners, as well as others, an dispensable resource for learning more about private equity compliance programs is Doug Cornelius’ Compliance Building web site. )  Indeed, at least for financial services compliance officers, private equity should be a source of job creation for some time to come.

 

 

 

 

Conflict of Interest Policies for Non-Profit Organizations

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

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

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

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

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

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

 

Conflicts of Interest in the News: 011412 Edition

 

The two big COI news stories of the week were:

–  Economists Adopt New Disclosure Rules for Authors of Published Research.  The reforms follow “heavy scrutiny of economists’ conflicts of interest before the financial crash of 2008.”  This is a good (and certainly overdue) step (and sadly underscores how it often takes a scandal for COI-related reforms to be implemented).  Of course, disclosure by itself does not necessarily mitigate COIs.

Ties of FDA experts to pharma companies revealed. The “FDA asked outside experts in December to discuss the safety of birth control that contains the compound drospirenone, including Bayer’s Yaz and Yasmin. The panel decided by a four-vote margin that the benefit of pregnancy prevention from these pills outweighed their risk of dangerous blood clots. But according to court and public documents, three of the FDA’s 26 advisers had research or financial ties to Bayer. A fourth adviser had a connection to a manufacturer of generic copies of Yaz, Barr Laboratories, now part of Teva Pharmaceuticals. All four of these advisers voted that the drugs’ benefits outweighed risks, meaning the pills could stay on the market…” Beyond the impact on the decision at issue, one can imagine the harm that COIs of this sort have on public trust of the FDA.

Other news of the week concerns COIs and…

Government contractors.  This is an analysis from the Corporate Compliance Insights website of an important decision from the General Accounting Office concerning government contractors hiring former government officials, underscoring, among to other things, the need to do meaningful conflicts checks in hiring.

Journalists: “Next week, thousands of tech journalists will descend on Las Vegas to get a sneak peek at coming tech gadgets at the International Consumer Electronics Show.  Many will also probably come away with grab bags of goodies…The question, of course, is whether journalists can properly serve their readers when the industry is handing them bottles of top-shelf booze and pricey toys.”

Supreme Court Justices.  A tricky issue,  indeed: who decides COI issues for the court of last resort?

Regulators: “A former Securities and Exchange Commission official has agreed to pay a $50,000 fine for going through the revolving door and working for alleged Ponzi scheme mastermind Robert Allen Stanford after purportedly taking part in SEC decisions to not investigate Stanford, the Justice Department said Friday.” (Bad facts – but also an unusual case.)

And, thanks to Broc Romanek of the invaluable – particularly for securities and corporate lawyers – theCorporateCounsel.net for featuring our post on COIs in serving on other companies’ boards.  Apparently this was the occasion for much discussion there – and so we will return to the topic before not too long.

Coming up next week: more on COI risk assessment, moral hazard and a video coming attraction for a series on cognitive bias and “behavioral compliance and ethics.”

 

Conflicts of Interest in the News: 010712 Edition

Three stories of particular note this week:

“Is It a Conflict of Interest? Yes, but It’s Legal.”  “In most states and municipalities, government officials who vote to spend taxpayer dollars on proposals that also put money in their own pockets as lobbyists could be accused of illegal conflicts of interest. Not in Illinois.”  For more information about the general topic here see  this  earlier post about COIs in local government and  note that the big picture question (for me) is this: given the financial crunches in which  state and local governments increasingly find themselves,  will stricter approaches will be taken to these sorts of COIs?  Put otherwise, will voters see that we may have lost our margin of ethical error?

“Citi Analyst Lures Hot Internet IPOs” (may require registration).  This is a follow-up to what may have been the most significant COI story of the last decade – concerning securities analysts.  Rules issued in the wake of that scandal “‘dramatically reduced the blatant hypocrisy’ of analysts issuing ‘buy’  recommendations publicly while they privately told bigger customers to sell,’ said Jay Ritter, a finance professor at University of Florida. But analysts can serve as ‘rainmakers,’ he says, to win IPOs and get paid more along the way.  In Mr. Ritter’s view, that is a lesser conflict, but some investor advocates claim conflicts remain. ‘You still have analysts being used to tout stocks to generate  underwriting fees,’ said Jacob Zamansky, who represents investors seeking to recoup losses from Wall Street. He called the changes ‘cosmetic.’”

Note: in a future post I’ll revisit this intriguing and important page of COI history, which (among other things) gave rise to the immortal saying of one analyst (later barred from the securities industry): “What used to be a conflict is now a synergy.”

Swiss Central Bank Boss Denies Insider Trading.  “Dismissing allegations he placed the trade himself, he insisted it was carried out by his wife …without his knowledge.”  The broader lesson here may be that where the appearance of a  COI can be especially harmful (which is presumably the case involving a suspiciously timed currency trade made by the spouse of a high ranking central banker) individual honesty alone is not enough – one also needs to be attentive to the actions of family members.  Another way to view this: sometimes families need compliance programs.

 

 

Weekend News Round-Up: How Conflicts of Interest Can Hurt

Probably the two most prominent COI stories recently in the news concern insider trading by members of Congress and  David Stern’s running both the NBA and one of its teams.

But the most instructive piece about COIs that I’ve seen in the past few days concerns a woman with MS learning from a state data base of pharma company payments to doctors that her physician had received more than $300,000 in such payments, with “the makers of the two drugs he had recommended to her listed as major contributors.”  She notes: “As a patient experiencing a neurological disease that has no known cause and no known cure, I expected my neurologist to be direct and honest with me. I expected honesty in interpreting my MRIs; in giving me a prognosis; in explaining his rationale behind treatment recommendations and in providing verifiable, scientific information about them; in educating me about MS; and in telling me about any conflicts of interest with drug companies. Actually, I expected that my neurologist would have no financial conflicts of interest whatsoever.”

The story powerfully illustrates the general point that COIs  can be devastating  to important  relationships of trust – and, as you can imagine, the woman found it impossible to continue receiving treatment from this doctor.

The story also shows that disclosure can be helpful, but note this conclusion. “At the end of [my conversation with my new doctor,] I asked if many patients inquire about possible conflicts of interest. He shook his head ‘no.’ I was the only one.”