Professional services firms and governing conflicts of interest

The past month has seen significant media coverage of professional services firms and conflicts of interests. This is not new. Globally, it arises on a fairly consistent basis whereby there are conflicts of interest allegations made.

Our firm was established in 2005 to meet a need for minimal conflicts of interest in the work we do. This was particularly pertinent at the time, in the wake of the US Sarbanes Oxley Act, which came about after the collapse of Enron and WorldCom.

Professionals services firms, as well as company boards will now be mindful of the latest action of the Finance Department requiring all federal government departments and agencies to consider ‘prior ethical behaviour’ when determining contractual appointments.

Recent Senate Estimates Committee hearings on the issue have provided stark reminders for all directors of the dangers of conflicts of interest and a lack of actual independence (vis-à-vis perceived independence). The Senators have focused on the conflicted interests and lack of actual independence of most witnesses before the Committee and continue to ask, why? What was the reason for the relationship if there was a clear conflict and lack of independence?

So, what are the lessons for board directors and the professional services firms? This checklist can apply to engagements of all kinds seeking remuneration advice:

  • Who is providing advice to the board on management remuneration?
  • Are the directors satisfied there is no actual or perceived conflict of interest with the provider of that advice?
  • Is the provider of the advice independent from management? That is, does the provider have any other relationship with management?
  • If there is another relationship, how have the directors satisfied themselves there is no conflict of interest in the provision of the remuneration advice?
  • If the remuneration advice/framework was to be examined in a commission, government committee or court (as we have seen in Australia, the UK, Germany and US in recent years), can the directors comfortably attest to the independence, integrity, and conflicts of the adviser?
  • Does the board’s governance systems and procedures have regard for any potential independence, conflict of interest, ethics, and integrity issues of its remuneration adviser?
  • How did the engagement come about? Who instigated and who managed the process?
  • What governance controls does the adviser have to address conflicts of interest and independence issues?

For some relevant and interesting reading here is an extract from the paper commissioned by the Hayne Royal Commission from Professor Sunita Sah of the Cornell University (see HERE) on “ethical fading”:

“……Furthermore, advisers’ sense of “professionalism” was often stated by CEOs of the accounting firms when testifying before the U.S. Securities and Exchange Commission in 2000 as a reason they could remain unbiased and objective in the presence of conflicts of interest.

While a sense of professionalism may help in protecting against intentional corruption, it cannot reduce unintentional bias that the individual is unaware of committing. In fact, such belief in one’s own ability to remain impartial and professional may actually make matters worse …. When in the presence of a conflict of interest, advisers in a corporate or business context may engage in a process called “ethical fading,” in which moral issues are pushed to the background or even removed from the decision-making process and business issues become more salient. This is especially likely if there is pressure to meet business or sales targets.

To summarise, financial advisers’ conflicts of interest are not merely problems for the intentionally corrupt (i.e., “bad apples”), but also for well-meaning professionals who succumb to unintentional bias…”

No-one likes to see what is happening at present – there is a huge risk of over regulation resulting. But, lessons can be learned and save history from repeating itself, in one form or another.

© Guerdon Associates 2024
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