The need for dedicated conflict-of-interest (COI) management has never been greater than it is today. Several headline-grabbing incidents, including the recent revelations of noncompliance at Memorial Sloan Kettering Cancer Center, have spurred action among entities across the private and public sectors.
Regulatory bodies, such as the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, Inc., the Internal Revenue Service, and a myriad of global anti-corruption statutes require entities to have effective compliance programs that address COI, bribery and kickbacks. These bodies are paying more attention to the issue of COI. Sentencing guidelines for COI violations are two- to three-times higher now than they were less than a decade ago,and that is one driver for the renewed interest in COI management.
Internal considerations also drive the interest in COI: Companies are eager to avoid costly reputational damage from a COI problem, and are also focusing on “enterprise fiduciary” to determine if the people within the organization are making the best choices for the organization or merely for themselves.
“There’s been a lot of rapid growth in the field over the past few years,” said Chris Cazer, CEO of Osprey Compliance Software LLC. “If you just do a simple search on LinkedIn, you’ll see thousands of new jobs dedicated to managing conflict of interest. Companies realized that they need to take ownership of the problem.”
COI: the basics
There are statutes and standards regarding COI across industries, borders and throughout the public and private sectors. The definition, however, remains basically the same: A conflict of interest exists when an individual has a personal interest in a matter over which he or she has some measure of control. Personal interest is generally considered to be a “substantial financial interest,” either directly or indirectly, such as through family members or associates. Individuals can exercise a measure of control in a variety of ways, such as directing research into a topic, voting on policy, or deciding on a purchase. One key element is the imbalance caused by the measure of control an individual exercises over the matter at hand. If, for example, an individual stands to gain financially while another individual or entity stands to lose, then that constitutes a clear conflict of interest.
In an article for Raconteur, Rob Handfield, Bank of America distinguished professor of supply chain management at the University of North Carolina, describes COI as “when you take care of your needs as an individual above those of the organization.”
In general, COIs arise in four different ways:
Giving and receiving of gifts.
Family and personal relationships.
Use of company resources.
For supply chain managers, COIs arise most often in the procurement phase. Individuals like to do business with friends, and although personal relationships are important to conducting business, there is a fine line between networking and conflicts of interest. Even if a CEO has a personal relationship with a supplier, it is crucial to establish regular channels for procurement and stick to them regardless of the relationship. Not doing so can be damaging to an organization’s reputation, thanks to media attention and increasing public interest in business transparency and ethics. COI can compromise an organization’s integrity and breed a demoralizing culture of corruption. Productivity declines, staff turnover increases, and otherwise ethical employees become persuaded by the organization’s culture to turn corrupt, or they decide to leave the company.
How to manage and mitigate COI
The first and most basic step towards assessing the risk of COI within your supply chain is to distribute COI surveys and require all employees involved in the business process to disclose potential COI, such as business interests, family connections to business interests, any investments that may be related to business at hand, and any personal relationships to vendors, partners, clients or other individuals involved in the process.
Cazer, whose company, Osprey Compliance Software, created a tool specifically designed to help entities assess and manage conflict of interest, said that disclosures need to be easy to understand, complete and comprehensive enough in the surveys. In order to achieve compliance, different surveys will likely be needed for different audiences. For instance, board of directors, researchers, physicians and procurement managers may each have different disclosure questionnaires with differing COI definitions and mitigation options.
Today, software tools are helping streamline the process and create interactive databases that can be quickly checked and updated; a far cry from the stacks of paperwork that exemplified COI risk assessments in the past.
“You cannot achieve 100% compliance without technology,” said Cazer. “I do not see how a PDF or a paper-based system would scale. That would impose too much risk. How would they insure that all [individuals] have responded? How will they review and identify conflicts? How will they search for [potentially risky] relationships when prepping for a new project? Where is the multiyear audit trail with mitigation plans?”
“I am amazed when I hear that some enterprises are satisfied with partial results.”
Everyone that an organization determines should be reviewed for COI must complete the full COI process. The COI review process includes disclosure, review for conflicts, identified conflicts ruling, and if necessary, mitigation with a fully auditable process.
Additionally, all statutes and standards regarding COI require the establishment of an effective compliance program; the United States Justice Department’s “Evaluation of Corporate Compliance Programs,” for example. Part of an effective compliance program includes preventive measures, and for procurement those measures include multiple levels of sign-off and a sourcing council or contracts committee connected to the board, which approves all types of contracts above a specific level or of a certain type.
Several headline-grabbing scandals, as well as increased scrutiny from regulatory bodies, have made the risk of conflict of interest a top priority.
Software and machine learning are crucial tools for assessing and preventing conflict of interest, replacing the mountains of unreliable paperwork that governed such assessments in the past.