by Jeff Kaplan
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 some 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 a reasonable possibility of over-compensating 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.)
I cannot say that I have seen many reverse COIs. But I did find noteworthy the following discussion: “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.
Note that I am not suggesting that the prospect of a reverse COI should have significant ramifications for a typical company’s C&E program.
But the case described at the beginning of this post is unlikely to be unique in relevant part.
Moreover, as time goes on:
* The economy will become more complex and with it the sheer number of COIs should become greater too (what might be considered gross COIs).
* Due to legal, ethical and professional developments COIs are more likely to be recognized (wrongly or not) (net COIs).
So, companies should consider some risk assessment and education around this area.
The first time I saw Kristy Grant-Hart she put on a show about magic compliance dust and then brought the audience to reality by breaking the news that there is
In our years of assessing compliance and ethics (C&E) programs, my partner Jeff Kaplan and I have pinpointed several key attributes that we consider essential to an effective program, including