COI’s live and breed internally and externally- know where to look and what to do in both environments to mitigate and even eliminate risk

Like any strong relationship, it begins on a foundation of trust

EDITOR’S NOTE: This post is part one of a four-part series that examines Conflicts of Interest and how to manage such in today’s changing and complex workforce.

John was hired last year as a mid-level sales executive. When he joined the company, he disclosed he was previously employed by the organization’s top competitor who provides services to similar clientele, but a sufficient amount of time passed between the two jobs, and since John disclosed this right away, it was not deemed a risk; however, the compliance department recorded this as part of their due diligence process.

A year later and you see this competitor exponentially growing in market size. Their website is starting to mimic your company’s and the offerings are becoming almost identical. The company is losing key clients to them, and everyone is scratching their heads asking how this happened?  John feels his throat drop into his stomach.

While John disclosed his previous employment with the competitor, what he did not disclose was that he had a personal relationship with the competitor’s head of sales at the time, who is still currently head of sales, but is now John’s wife. He didn’t think to disclose his relationship with his wife to the new company since she was not employed at the new company as well.

 John’s wife had taken their dinner conversations to the competitor’s strategy table, and the rest is history.

Compliance needs to determine where this sits on the COI scale, the actions to take and how to stop this from occurring again.

Where did the problem begin with John’s case? Was it in his understanding of the new company’s COI policy? Was leaking company information to a direct competitor intentional or inherent given their relationship? Where is the gap in the current policy and process that overlooked this detail? What can compliance do to not let this happen again?

COIs exist internally and externally –  consider all of the potential risks.
It’s imperative to remember that COIs not only exist internally, but externally. Knowing all of the risks that exist in concert with each other is a top challenge area for compliance executives, especially when it comes to trying to eliminate them or mitigate and disclose their existence to boards or investors. Regulators see over and over again companies fail to properly identify and then appropriately address their conflicts.

It sounds simple – disclose any conflict of interest you may have with a company whether you are an employee of the company or a third-party employer, yet surveys show nearly 50 percent or more of COIs are left unreported, the National Business Ethics Survey found.

If you serve on a board, disclose it. If you are running for or holding political office, disclose it. If you have a personal relationship with someone also employed at the company, at a competitor or at a third-party provider, disclose it. Yet, each COI policy, its requirements and expectations change from company to company, public or private sectors, industry type, authority level, level of compliance, etc.

As with any relationship, telling the truth outright can be difficult, not to mention the very idea of truth and its definition varies from person to person, and most people overestimate their own ability to remain objective and put the company’s best interests ahead of their own. It’s complicated and can get messy fast. The same is true for conflicts of interest. Relationships changes of any kind, whether company-based or personal, can create the potential for new conflicts. Instead of only thinking about what corporate transactions are taking place, think about which of your relationships, both personal and professional, are changing.

On the other side of the coin, compliance teams and their leaders are finding it increasingly difficult to know where to look for COIs that are hidden in the nooks and crannies of a company, and as such, COIs remain a huge management challenge, which runs in parallel to growing complexities of organizations from its workforce demographic to its global presence. Compliance executives identify a conflict based on gut – they just know one when they see one. But how can a company have that same level of intuition?

Arm your employees with a thorough understanding of what a COI is and then ask them to tell you about theirs. Disclosures hinge on consistency, educational materials about what a COI can look like, how it is defined by the company and how it impacts the employee – both internally and eternally with third-party vendors or suppliers.

COIs pose a great liability.
Preventing actual or apparent COIs requires an effective regime. You must involve the board and all stakeholders in the process. Take for example this Supreme Court case in Delaware – Rural/Metro Corp. Stockholders Litigation, which underscored that effective monitoring of COIs alone is not sufficient, and boards don’t always do a good job at doing so. The court’s decision in the case echoes that the board has an “affirmative duty to take sufficient steps to uncover any conflicts of its advisors, including by requesting ongoing disclosure of material information that might impact the board’s decision-making process.” While a technical compliance point, it’s an important one. When it comes to COIs, managing up with your board may be the way to go, but that puts the onus directly on you – the compliance executive’s shoulders. So you need to figure out what information you need and that information needs to be accurate and thorough in the event the board calls on you for information to make an informed decision.

Ongoing management and oversight is necessary.
That COI policy may tell your employees they have an obligation to avoid COIs and the very appearance of such. The purpose of a sound policy is to make better decisions when situations arise and employees know of the process of making a compliant decision – even if that process creates an appearance of a COI.

Likely, that policy, albeit it incredibly important, lives in the land of lost toys – that is, with all of the other policies that were sent to all employees perhaps on their first day or immediately after a COI training. Without constant enforcement, this policy along with the others is not top-of-mind for employees.

Requiring ongoing COI disclosures should be a necessary component of any monitoring regime, yet many organizations and compliance program fall short in this respect. Develop approaches that are truly up to the often difficult task by establishing an enforceable policy – which beings to shape when you know where to look for COIs.

Link ethics to conflicts of interest.
Think of ethics as the heating system in your company that keeps everyone warm – the system that keeps compliance and risk management systems moving with ease and fluidity in an effective way. COIs can be thought of as the disruptor that shuts off the heat – such as a big storm that freezes all the buildings pipes and causes a power outage leaving the heating system to fail, in turn, threatening the well-being of the employees and the company.

With the amount of changes organizations see from shifting compliance regulations to workforce complexities, these disruptors are only increasing. Combined with the wrong culture and incentives, COIs can do significant harm.

You must ensure there is every safeguard available to protect the heating system of your company, and that begins with knowing what is available to help you.

Observe environment to identify potential COIs  

  1. Verify regulations or contracts that require COI management
  2. Evaluate current COIs and disclosures
  3. Analyze history COI-driven misconduct trends
  4. Understand ecosystem of third parties, including suppliers and customers
  5. Understand existing COI policies, procedures and controls

Data focus: leverage data from the following business units

  • Legal
  • Disclosures
  • Incidents
  • Procurement
  • Sales
  • HR

Don’t be in the middle of a polar vortex and have your heat fail. Be prepared, in the know and ready to defend your company in the time of any outage or disruption with a strong and reliable COI process that has your back no matter the scenario; one you can trust and depend on.

OCEG Webinar Promo