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Managing Conflicts of Interest to Prevent 'Ethics by Crisis'

Matthew Dolan June 25, 2014

Introduction

An integral part of compliance within any organization is a robust ethical culture that serves to drive employees’ actions. Many corporate leaders will rest when a well-written code of conduct is on the shelf and employees attend annual ethics training. Although these are important pieces to building an ethical culture, no amount of training or any rule book will drive an employee to do the right thing in an ethical dilemma. It is the culture of a company that will drive an employee to do the right thing, to seek advice, or to report misconduct. Employees who ask questions or seek advice in a tough ethical situation will ensure that a company avoids damage to its reputation. As Warren Buffet directed his employees, “We can afford to lose money – even a lot of money. But we can’t afford to lose reputation – even a shred of reputation.”

One of the overlooked ethics issues in which organizations are vulnerable to reputational risk is conflicts of interest. Organizations will lose credibility and damage their reputation if there is any perception that the playing field is not level in winning business, hiring employees, granting contracts, or the conduct of the board of directors. A conflict of interest exists when a board member or employee possesses a financial or personal interest, which may be impacted by their official responsibilities or duties. A conflict of interest can harm an organization when a board member or employee’s action, inaction, or decision would materially affect his financial or personal interest, placing the interest of the company at odds with the employee’s financial or personal interest.

Risks

Conflicts of interest are detrimental to an organization because they are death by a thousand cuts. Conflicts of interest may result in self-dealing or preferential treatment that will impact every facet of an organization, from the ability to attract talent to the ability to ensure the most competitive pricing for goods and services. More importantly, conflicts of interest, if not properly managed, can undermine the integrity of an organization. Employees, customers or the public will lose faith in your organization when they sense that the system or process is rigged to give preferential treatment to those with an inside connection. Conflicts can be managed if the company is able to identify the conflicts an employee may have, and then put into place restrictions and monitoring to ensure the conflict does not adversely impact the organization or create an appearance of impropriety.

Conflicts of interest are often rationalized and justified by the trust that is gained by steering business to friends, family, board members, or acquaintances, because of the benefit gained in dealing with a known quantity. This slight benefit comes at a high cost when contracts are not fairly and objectively bid or an organization is not attracting top talent. A properly managed conflicts process will ensure red flags are raised when a conflict exists so that organizations are not on the losing end of the conflict of interest.

In recent years conflicts of interest made their way into the news when a government official was caught steering billions of dollars worth of contracts to a defense contractor with which her daughter and son-in-law were employed. After retiring from government, she immediately accepted a job with this same defense contractor. For her conduct, she was sentenced to nine months in federal prison, the chief financial officer at the defense contractor was fired, and the defense contractor had to re-compete for the contract. This scandal struck at the heart of the integrity of the defense acquisition process and drew into question every contract that had been negotiated or approved by this official. The cost to the government was immeasurable, with other defense contractors challenging numerous others contracts that the official and the defense contractor had a hand in.

Conflicts of interest will always exist, so properly managing conflicts is essential to a well-run ethics program. Since conflicts of interest are likely to impact a large number of employees, it is good practice to build a culture in which employees feel they can seek advice and clarification without adverse consequences. Managing conflicts of interest is a way to demonstrate that ethics questions can be raised and resolved by a quick and painless procedure. If employees witnesses the process of resolving conflicts of interest, they are more likely to feel comfortable in raising other issues that may avoid a crisis or damage to reputation.

Managing Conflicts of Interest

Many leaders desire a zero-tolerance environment regarding conflicts of interest. This is counter-productive, as employees are less likely to come forward to disclose the conflicts and probably less likely to come forward on other ethics issues. Although there are some conflicts that will require resignation or reassignment, most conflicts can be resolved with the employees recusing themselves from any official action that may impact their personal financial interest. The organization is better off knowing where the conflicts exist; thus, building a process where the conflicts are disclosed will give managers the ability to ensure decisions are being made with the organization’s best interest at the forefront. The goal in a properly managed conflicts system is to create an ethics culture in which employees feel comfortable to disclose conflicts, and in which such issues can be effectively resolved, with clear direction being given to employees.

Some organizations fall into crisis mode at any hint of a conflict of interest. This overreaction to a manageable conflict creates a culture in which employees are reluctant to come forward to seek advice or clarification on ethics issues. Treating conflicts of interest as routine and not “bad news” will create a culture in which employees feel comfortable to come forward when they see ethical misconduct or need advice on an ethical course of action.

Organizations should integrate a conflicts interview or questionnaire into pre-employment screening to ensure they are hiring employees that have minimal interest adverse to the organization. The purpose of the pre-screening review is to identify the major conflicts that may disqualify or adversely impact a potential employee’s ability to do his or her job. As part of a pre-screening process, it also conveys the message to the new employee that ethics is integral to the company’s business.

Once an employee has started working, the compliance department should have a process in place through which they can flesh out the facts of the potential conflict and then respond in writing to the employee, with clear direction on the limitations. This may require a personal interview where the employee can provide more background on a potential conflict, so that the company can assess the risk based on the conflict as weighed against the employee’s access and responsibility. A personal interview may be worthwhile because conflicts may arise in many areas that the employee may not consider. Conflicts may arise through a second job, a financial interest or even volunteer activities.

Employees should be made aware that the majority of conflicts of interest could be resolved without having to terminate or reassign the employee. Possible remedies to a conflict of interest may include:

Recusal: The employee agrees either to forego or cease participation in any official action related to the conflicted matter.

Divestiture: The employee sells or otherwise disposes of his or her interest in a financial asset causing the actual or perceived conflict.

Waiver: The organization can also authorize an employee to participate in matters that would otherwise raise impartiality concerns, if the conflict of interest is insubstantial such that it would not cause a reasonable person to question the covered party’s ability to act impartially.

Reassignment: Reassignment of the employee is the result of a recusal; it may be the reassignment of the matter to another employee or reassignment of the employee in question to another responsibility.

Resignation: The employee leaves his or her position in an outside organization that caused the conflict, or, in the most severe situation, resigns his or her position within the company.

Most conflicts can be dealt with through the employee’s recusal, but the critical aspect of the program is being able to identify the conflicts so supervisors can work to minimize the risk to the organization.

Monitoring Conflicts of Interest

Once conflicts of interest are identified, the organization must put into place an overt system to monitor the conflicts, through which the employee is well aware that the organization will be monitoring. Depending on the nature of the company’s business, the company can ensure the employee is abiding by the stated restriction in a number of different ways:

Annual Financial Disclosure: Requiring the employee to disclose financial interests annually may help identify conflicts, and may provide indicators of unexplained increases in the employee’s wealth that may be a sign of problems.

Data Analytics: Depending on the nature of a company’s business, anomalies can be identified in employee activity through the analysis of data related to your business.

Fraud Hotlines: This is a last line of defense for companies, but an integral part of any ethics program. Employees must have a mechanism through which they can anonymously report potential issues through an independent third-party provider without any fear of reprisals.

Periodic Re-certifications: Continually asking employees to update disclosures is an integral part of keeping ethics at the forefront and reminding employees of their obligations under the company’s ethics program. This can include training, acknowledgements of understanding and re-certification that the disclosures they have made are still accurate.

Investigations: A company must have the capacity and capability to properly investigate reported misconduct or violations of its code of conduct, and appropriately record the results of those investigations.

Conclusion

The creation of a corporate culture that drives ethical behavior starts with integrating ethics into a company’s strategic plan. Employees need to know how to do the right thing as well as why they are doing the right thing. Senior leaders need to consistently convey the strategic message of ethics and integrity into normal operations in order to reduce risk, and take ethics beyond words in a code of conduct into actions in corporate performance. Integrating ethics into a well-thought-out conflict of interest policy allows ethics issues to be raised and resolved proactively and prevents “ethics by crisis,” where employees only see ethics issue being raised when there has been a failure.

Managing conflicts of interest is an integral part of a robust ethics program and will identify the risks to an organization by having employees disclose personal financial interests that may be adverse to their obligations to the company. In addition, a well-run conflicts management system will help organizations to build a strong ethical culture in which employees feel comfortable to seek advice and clarification on ethics issues.