Recently, we had the privilege of leading a webinar alongside two executives from Philip Morris International—a company that’s been one of our most innovative and engaging customers to work with to date. They not only boast a mature and sophisticated compliance program, but their forward thinking has pushed us to develop and bring new software capabilities to the compliance market.
Without a doubt the largest of those undertakings—and the one that stands to make the largest impact for compliance practitioners—is a new disclosure management solution that allows companies to collect, manage, track and report on disclosures of potential conflicts of interest within their organization.
We’ll dive into the vision for the product, along with the features and functions that deliver on that vision soon. But first, some background on conflicts of interest and the impact they have on corporate compliance…
What is a Conflict of Interest (COI)?
In short, a conflict of interest occurs when an individual’s personal interests have the potential to interfere with their ability to act objectively in the best interests of the company. “Personal interests” may include social, financial or political activities and oftentimes include personal relationships.
For its part, Philip Morris International (PMI) uses a triangle to illustrate what constitutes a conflict. The triangle includes two related parties and the company itself. The idea is that the relationship between the two parties—where one is in a position to exert some influence as a result of the relationship—becomes problematic for PMI when the relationship’s influence affects the company.
“The element that we really wanted to emphasize is the ability for the employees to influence decisions related to that third party or to share confidential information with that third party—both with the risk of favoring their personal interests over the interests of the company,” explained Marc Leu, Global Head of Ethics and Compliance Risk Management at PMI.
Leu gave the following example:
In certain aspects of our business, where we buy tobacco from farmers, it’s a pretty close community—to the point that somehow people were mostly related. So we were guessing for a population of 50 employees, we would get 80-90 disclosures. But in the end, none could really influence a decision to benefit themselves, the other party or their relationship in a way that had an adverse impact on Philip Morris. So the answer becomes straightforward: You don’t need to change anything, because there’s a lack of employee influence and company impact.
And therein lies the difficulty of managing COIs (among a few others)…
The employee perspective
Conflicts of interest are, by their definition, personal. One of the initial struggles companies face when dealing with conflicts of interest is understanding and achieving the delicacy that’s required when asking employees to disclose relationships or activities from their private life.
In that same vein, it can be tough to effectively address and overcome the common misperceptions that (1) all relationships present a conflict; and/or (2) that all conflicts present a problem and could jeopardize the employee’s status or relationship with their employer.
Another challenging aspect of conflicts of interest is that most people tend to overestimate their ability to remain objective when their professional and personal interests are at odds with one another. If your employees inherently believe that they can manage conflicts on their own, they won’t see a need or incentive to disclose them.
In addition, the risk and impact of COIs are usually more pervasive at more senior levels of an organization. As an employee moves up the organizational ladder, they’re more likely to wield more influence, make more decisions, have greater access to confidential information and have broader networks outside of an organization than less tenured or senior counterparts.
The organizational perspective
The reason many organizations give for not tracking or managing conflicts of interest is the sheer volume of disclosures they estimate they’d be handling. Unlike cases of misconduct, where the volume usually represents a fraction of the employee population, compliance executives often believe that they’d have a much larger number of disclosures—more than would be tenable to manage.
The fear then becomes that, in the event of a compliance fallout, there would be a record of the fact that the organization knew about the conflict but did nothing to address it and prevent any misconduct that occurred as a result.
The threat that COIs pose to an organization
“You want to have an environment where people believe decisions are made fairly,” — Marc Leu, Global Head of Ethics and Compliance Risk Management, Philip Morris International
You want to have an environment where people believe decisions are made fairly.
Transparency around conflicts of interest is a critical part of fostering that environment. PMI’s code of conduct, Guidebook for Success, goes on to elaborate, “This means that we can rely on each other to make good decisions, and builds our reputation for doing business honestly.”
Indeed, the simple perception of conflicts of interest in a business can cast doubt on how level of a playing field the business operates on, as COIs can be corrosive to the perception of—and confidence in—organizational justice at a company. New hires, promotions, vendor selections, partnerships, investments and more that seem to be awarded subjectively can drive skepticism and mistrust among internal and external stakeholders—and lead to losses in productivity, employee retention, business opportunities and a company’s reputational value, among other things.
Left unchecked, conflicts of interest can also breed misconduct and risk for companies, including fraud, corruption, insider trading and more. Customer, partner, investor and employee confidence in a business can be shaken—and the long-term financial and reputational stability of your firm diminished—if misconduct driven by conflicts of interest is brought to light.
The opportunity in properly managing COIs
“[Managing conflicts of interest is] not only to prevent risk or to help employees and foster a culture of organizational justice, but it’s about just doing the right thing in the right way.” — Charles Pare, Manager of Compliance Risk & Planning, Philip Morris International
Though challenging, properly collecting and managing conflict of interest disclosures presents a few key opportunities for organizations, not least of which is the reduction in compliance risk a company achieves by having more and better disclosure data to act on—and analyze—around employee relationships that may pose a problem. In addition, effective disclosure management can also:
• Provide an easier and positive first interaction among employees: Through disclosures, the compliance department can—and should—be less threatening and provide an overall more positive and welcoming experience than reporting misconduct or other compliance engagement points.
• Provide a first and ongoing interaction with compliance: Focusing on an ongoing, fluid disclosure process keeps the lines of communication open among employees beyond sporadic hotline reports or periodic training and policy requirements.
• Allow gap analysis and early insight to risk: More disclosures, with richer and more structured data contained in them, arms the corporate compliance team with richer insight into employee behaviors, risk disposition and drivers and where compliance initiatives may be working—or falling short.
• Foster employee responsibility: Giving employees ownership of their disclosures gives them some proverbial “skin in the game.” They’re disclosing their personal relationships, in their own secure portal. Giving employees ownership in compliance can increase their interest and engagement in the company’s culture of compliance.
• Let compliance add value: Shifting the onus of responsibility for disclosures to employees can free your compliance team from data entry and allow them to add value in the field, conducting analysis, issuing clearances, etc.
• Reduce the noise: Increase the number of legitimate disclosures—and cut down on the extraneous reports you have to sift through—by providing a more intuitive experience for employees.
How the status quo falls short
There are two predominate ways that organizations currently manage conflicts of interest:
- Annual certifications: Whether paper-based or electronic, these disclosures are largely free-form text submissions. This leaves the compliance team with mounds of unstructured and disconnected information.
- Hotline reporting: Employees submit disclosures—and the compliance or legal team manages them—through the same hotline or web reporting portal and case management system used to handled incidents.
These methods present a number of challenges that reduce a company’s ability to effectively collect and manage disclosures:
- Unstructured and disjointed data is difficult to filter through and digest, let alone revisit or analyze.
- The compliance team spends more time on administrative tasks related to taking in and updating data than analyzing and acting on it—where they’re most valuable.
- One-time, annual disclosures limit employees’ abilities to revisit or update information once a disclosure’s been made, even as relationships or jobs change that may create or remove a potential conflict.
- Employees are left with a fairly intimidating experience, usually including a boatload of form fields and questions laced with legal jargon and mandatory fields (think red, bold and ALL CAPS text).
Over time it really became an administrative nightmare.
Reflecting on the shortcomings of traditional method of disclosures, Pare laments, “There were obvious gaps in disclosing, certain areas of the organization were either not reporting at all or clearly under reporting and a lot of unnecessary disclosures. Over time it really became an administrative nightmare.”
“On top of it, we had a few cases where we lost good people whose only mistake was to believe they could manage their conflict of interest,” Leu added. “We definitely had to change for better!”
The big idea
The concept for Convercent’s Disclosure Manager as it stands today was largely inspired by PMI’s market-leading perspective on conflicts of interest, which entails:
- Employee ownership
Disclosing a conflict, or updating the disclosure as things change over time, is each and every employee’s responsibility. Compliance needs to empower employees on the disclosure journey, make sure they get input and responses on what they need to do, and keep the disclosure status and clearance up to date.
- Compliance oversight and objectivity
The role of compliance is to be the guardian of the program, ensuring independent and consistent reviews and responses. It’s the role of compliance to see that every disclosure gets a clearance, but the final decisions about how a conflict can be cleared is left with relevant management.
- System of record
Have one system that facilitates the entire disclosure process and captures all information in a central place.
- Clear communication
Make it clear to employees that the problem with a conflict of interest is not simply to have a relationship that presents a conflict, but to have an undisclosed relationship and stay in the situation where a conflict might be present. You need to remove the fear of disclosure—because not all relationships are necessarily conflicts and all conflicts are not necessarily situations that can’t be dealt with—along with encouraging employees that disclosing relationships is the best solution.
With that in mind, PMI and Converent set out to change how organizations think about, approach and ultimately manage conflict of interest disclosures. In Part 2 of this mini-series, we’ll take a look at the the real-world results of that vision and innovative shift in thinking!