CCI Interview Series: Jeffrey Kaplan on the Behaviorist Approach to Business Ethics and Compliance

Editor’s Note: This is the first in a new subset of featured articles here at Corporate Compliance Insights called the CCI Interview Series. We will be conducting interviews with some of the most influential figures in governance, risk, ethics, and compliance for this feature, beginning this week with Jeffrey Kaplan. If you are interested in taking part in the CCI Interview Series, visit the Write for CCI page for more details or contact our editor.

The following interview was conducted on April 17, 2009 between CCI founder Maurice Gilbert and Jeffrey M. Kaplan, who holds the following among his many titles: partner in the Princeton, NJ office of Kaplan & Walker LLP; Adjunct Professor of Business Ethics at NYU’s Stern School of Business; and chair of the legal advisory board of SAI Global’s Compliance Division. Follow the link to learn more about Jeff Kaplan.

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CCI Interview Series

Jeffrey M. Kaplan on the Behaviorist Approach

to Business Ethics and Compliance

One of the greatest potential impacts of the Obama Administration on compliance and ethics programs
may be a greater emphasis on behaviorial economic theory, which could lead to a more effective
and preventative behaviorist approach to C&E programs moving forward.

Maurice Gilbert: What impact do you expect the Obama Administration to have on the compliance and ethics (C&E) field?

Jeff Kaplan: At the most obvious level, we’re likely to see stronger enforcement in various areas of business regulation – and that should lead to a renewed appreciation within many companies of the value of C&E programs. There are other – admittedly more speculative, but intriguing and encouraging – possibilities as well.

Maurice Gilbert: Where do you think the stronger enforcement will be aimed?

Jeff Kaplan: There are a number of likely targets, such as the financial services, health care, environmental, government contracting, political corruption, tax, and product safety areas. I expect we’ll also continue to see strong enforcement around FCPA and antitrust. But beyond that, given the pretty pervasive feeling that the economic downturn was caused in significant measure by the irresponsible conduct of many business people, I anticipate that we’ll see a general “toughening” of enforcement activity across the board.

All of this should lead companies to take stronger C&E measures – as a way of avoiding getting on the wrong side of prosecutors and regulators in a time of little, if any, forgiveness. Indeed, in the last year we have already seen an unprecedented number of massive criminal fines. So one can only imagine what types of punishments will be meted out against companies and executives in the years to come. In this environment, effective C&E programs should be seen less as a luxury and more as a necessity.

Maurice Gilbert: Will the economic downturn play any other role in the government’s approach to C&E programs?

Jeff Kaplan: It could. Promoting strong C&E programs – through the “carrot-and-stick” approach first used in the Corporate Sentencing Guidelines, and since used by the Justice Department, the SEC and others – is a way of leveraging government’s resources. It is a highly cost effective way of promoting law abidance in businesses. As we are likely to be in a period of limited resources for quite some time, I expect regulatory and enforcement agencies to do more – from both the carrot and stick perspectives – to promote stronger C&E programs.

Maurice Gilbert: Still, it sounds like you expect more stick than carrot.

Jeff Kaplan: Perhaps. But there are at least two other indications that the “Obama era” could be a time of unprecedented appreciation of C&E programs by the government, and by this I mean the appointments of two of the President’s most senior officials, Eric Holder and Cass Sunstein.

Maurice Gilbert: What is the significance for the C&E community of Eric Holder’s becoming Attorney General?

Jeff Kaplan: As Deputy Attorney General, he essentially inaugurated the Department of Justice’s formal policy of considering C&E programs in enforcement decisions. That is, in 1999 he issued the “Holder Memo”; which was revised in 2003 by what was called the “Thompson Memo”; which, in turn, was the foundation in 2006 for the “McNulty Memo”; which this past August was further revised and incorporated into the US Attorney’s Manual. Holder was also a member of the U.S. Sentencing Commission’s Ad Hoc Advisory Group – whose recommendations played an important role in the 2004 revisions to the Corporate Sentencing Guidelines. So, he may be an ideal appointment from a C&E perspective to the Attorney General’s post, and my hope is that during his tenure Justice officials will do more to promote C&E by publicly recognizing in specific enforcement decisions the importance of effective programs.

Maurice Gilbert: What about Cass Sunstein’s role?

Jeff Kaplan: This is the most speculative – but also the most interesting – possibility from a C&E perspective. Sunstein, a former colleague of the President’s at the University of Chicago, is now a law professor at Harvard and one of the country’s most influential legal scholars. He has been nominated to serve as a sort of regulatory czar, in the position of Administrator of the Office of Information and Regulatory Affairs within the Office of Management and Budget. From a C&E perspective, what is potentially important about this is that Sunstein – along with other top Administrations advisors – is an adherent of what is called “behavioral economics,” and the behavioral economics point of view could lead the government to be more supportive of C&E programs.

Maurice Gilbert: What is behavioral economics?

Jeff Kaplan: It is a psychology-based approach to economics which rejects the assumption of neoclassical economics that rational decisions by self-interested individuals necessarily create efficient markets. It seeks to understand seemingly irrational decision making – or perhaps it is better to say that it utilizes a broader conception of what is rational. Behavioral economics is relevant to regulation as well as purely private sector conduct, and my belief is that applying this approach to C&E – which, after all, is essentially self regulation – is an obvious next step for behavioral economists, such as those advising President Obama.

Maurice Gilbert: Can you give an example of how behavioral economics applies to C&E?

Jeff Kaplan: I’ll give you two. The first is based on an experiment conducted years ago at the Princeton Theological Seminary which sought to determine how much of a difference time pressure would play in determining whether seminarians would stop to help a seemingly distressed individual. What the experiment found was that those not under pressure helped the distressed individual 63% of the time, whereas those under pressure did so only 10% of the time. This difference – based purely on the situation – is truly stunning.

And the significance of this for the field – at least to me – is as follows: the need for strong C&E programs has often been questioned based on the assumption that ethical decisions are driven almost entirely by character, and this view hurts C&E program efforts because character is largely beyond the reach of such programs. What this experiment shows is that this view is incorrect, and that by impacting in a positive way the situations in which ethical decisions are made – which is what truly effective C&E programs do – ethical “results” can indeed be significantly improved.

Another way of describing the significance of this field of knowledge is that C&E officers know that what they do is effective in practice, but that is often hard to demonstrate to others. Behavioral economics helps show that it also works in theory, which may be easier for others – such as regulators and senior business leaders – to grasp.

Maurice Gilbert: What is your other example of the behaviorist approach?

Jeff Kaplan: It comes from Dan Ariely’s book Predictably Irrational, and involves a test that was given in which it was easy to cheat. But getting people to recite the Ten Commandments right before they took the test eliminated cheating entirely. This is also an astounding result, and makes the same point as the other experiment did about the potential efficacy of preventive approaches. Again, I mention both of these only by way of example – the larger point is that the behaviorist perspective should lead to a greater general appreciation of C&E efforts, and hopefully that will translate into governmental policies that reward such efforts beyond what is currently done.

Maurice Gilbert: Does the behaviorist approach also implicate how C&E programs should be implemented?

Jeff Kaplan: I think so. Certainly the Ariely experiment supports the notion of just-in-time C&E training and communications. There are also implications for risk assessment and C&E incentives. But that is a complicated area, and perhaps the subject of another discussion.

Maurice Gilbert: Thanks, Jeff

Jeff Kaplan: Thank you, Maurice.

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Tags: barack obama, Behavioral Economics, C&E programs, Jeffrey Kaplan