The other day I wrote about antitrust training and I opened with describing how it is one of the less popular training topics, or at least I perceive it to be. I never thought I’d get remotely interested in something like antitrust but it did inspire me to look further into some of the other training topics we offer that are maybe a bit on the less popular side of compliance training, at least compared to the big boys like anti-bribery training, workplace harassment training, code of ethics training and the like.
Then I saw this headline “J.P. Morgan Questioned for Conflicts of Interest” in the Wall Street Journal and it caught my eye. And then I saw this headline in the Financial Times “Moody’s in New Conflict of Interest Claim” and I thought maybe conflicts of interest are more popular than I thought.
First, let’s describe a conflict of interest; I think that’s the best place to start because given how much we’ve written about millennials lately (and in fairness, it seems like everyone else in ethics and compliance is as well), I’m not sure that college students, recent graduates or entry-level workers could really define it.
Here is what Dictionary.com states:
The site also has a second definition attributed to the AmericanHertiage® New Dictionary of Cultural Literacy, Third Edition:
Both of those definitions make it clear that a conflict of interest can really only exist when someone is in a position to profit from a decision. It stands to reason, then, that those employees within lower levels of an organization would be less likely to be in that position, which is why we probably only hear about conflicts when they happen at the executive or board level. Perhaps that is why I don’t remember ever receiving conflict of interest training early in my career.
So, who should take conflict of interest training? Whether or not organizations give conflict of interest training to their entire employee populations, only to executives or just board members, they at least typically advise employees to avoid conflicts of interest via two other channels: the Code of Conduct and a conflict of interest policy. I read another article by Kelly OtteNotes who strongly advocates that Boards in particular, have good, written, clear policies on conflicts of interest. She wrote from her own experience as a board member of a non-profit. (In fact, the IRS requires that non-profit organizations have a written conflict of interest policy.) She writes:
That last part of her last sentence says a lot: when board members DON’T RECOGNIZE what they are doing is a conflict. To me, that not only indicates a real need for conflict of interest training but perhaps an annual attestation on the conflict of interest policy, especially at the board level.
So, what happened with Moody’s? Well, according to a new academic study, Moody’s appears to show favoritism towards its top shareholders when rating the bonds of companies. The study looks at ratings made by Moody’s between 2001 and 2010 and compares them to ratings issued by its larger competitor Standard & Poor’s, and found that Moody’s had a “tangible bias” in favoring firms in which Berkshire or Davis Selected Advisors – its two biggest shareholders – owned at least a 0.25% stake. Of course Moody’s disputes the conclusion, but this will no doubt revive the debate that arose after the financial crisis, over the potential conflicts of interest at credit rating agencies… conflicts that are sort of inherent in their business model. They are, afterall, paid to evaluate the riskiness of trillions of dollars worth of bonds. Should Moody’s even be allowed to rate Berkshire-related investments?
And J.P. Morgan found itself in the Wall Street Journal because regulators were investigating the percentage of private-banking clients the company was steering to its own investment products versus third-party clients. The SEC carefully monitors whether brokers sell people products that are right for them or whether they sell products that make their firms the most profit. While J.P. Morgan has been in trouble for conflicts of interest before – in 2011 it paid $384M to American Century Investments for promoting its own funds – in this recent case, the company voluntarily expanded disclosures to regulators spelling out more clearly how much of each client’s assets are invested with the bank’s own products, to avoid any appearance of a conflict of interest.
It’s important for employees at all levels to understand what conflicts of interest are, how they can harm a company and what to do if an employee uncovers one. But that may be accomplished within a Code of Conduct and a conflict of interest policy. Full conflict of interest training and awareness may not be necessary for all employees but should be implemented for management, executives and board members so they don’t inadvertently harm their company’s compliance efforts.