A conflict of interest (COI) is a situation in which a person or organization is involved in multiple interests, financial or otherwise, and serving one interest could involve working against another. Typically, this relates to situations in which the personal interest of an individual or organization might adversely affect a duty owed to make decisions for the benefit of a third party.
An "interest" is a commitment, obligation, duty or goal associated with a particular social role or practice. By definition, a "conflict of interest" occurs if, within a particular decision-making context, an individual is subject to two coexisting interests that are in direct conflict with each other. Such a matter is of importance because under such circumstances the decision-making process can be disrupted or compromised in a manner that affects the integrity or the reliability of the outcomes.
Typically, a conflict of interest arises when an individual finds himself or herself occupying two social roles simultaneously which generate opposing benefits or loyalties. The interests involved can be pecuniary or non-pecuniary. The existence of such conflicts is an objective fact, not a state of mind, and does not in itself indicate any lapse or moral error. However, especially where a decision is being taken in a fiduciary context, it is important that the contending interests be clearly identified and the process for separating them is rigorously established. Typically, this will involve the conflicted individual either giving up one of the conflicting roles or else recusing himself or herself from the particular decision-making process that is in question.
The presence of a conflict of interest is independent of the occurrence of Inappropriateness. Therefore, a conflict of interest can be discovered and voluntarily defused before any corruption occurs. A conflict of interest exists if the circumstances are reasonably believed (on the basis of past experience and objective evidence) to create a risk that a decision may be unduly influenced by other, secondary interests, and not on whether a particular individual is actually influenced by a secondary interest.
A widely used definition is: "A conflict of interest is a set of circumstances that creates a risk that professional judgement or actions regarding a primary interest will be unduly influenced by a secondary interest." Primary interest refers to the principal goals of the profession or activity, such as the protection of clients, the health of patients, the integrity of research, and the duties of public officer. Secondary interest includes personal benefit and is not limited to only financial gain but also such motives as the desire for professional advancement, or the wish to do favours for family and friends. These secondary interests are not treated as wrong in and of themselves, but become objectionable when they are believed to have greater weight than the primary interests. Conflict of interest rules in the public sphere mainly focus on financial relationships since they are relatively more objective, fungible, and quantifiable, and usually involve the political, legal, and medical fields.
A conflict of interest is a set of conditions in which professional judgment concerning a primary interest (such as a patient's welfare or the validity of research) tends to be unduly influenced by a secondary interest (such as financial gain). Conflict-of-interest rules [...] regulate the disclosure and avoidance of these conditions.
Related to the practice of law
Conflict of interests have been described as the most pervasive issue facing modern lawyers.
Legal conflicts rules are at their core corollaries to a lawyer’s two
basic fiduciary duties: (1) the duty of loyalty and (2) the duty to
preserve client confidences.
The lawyer’s duty of loyalty is fundamental to the attorney-client
relationship and has developed from the biblical maxim that no person
can serve more than one master.
Just as fundamental is the lawyer’s duty to maintain client
confidences, which protects clients’ legitimate expectations that they
can make full disclosure of all facts to their attorneys without fear of
exposure.
The basic formulation of the conflicts of interest rule is that a
conflict exists “if there is a substantial risk that the lawyer’s
representation of the client would be materially and adversely affected
by the lawyer’s own interests or by the lawyers’ duties to another
current client, a former client, or a third person.”
The duty of loyalty requires an attorney not to act directly adverse to
an existing client, even on an unrelated matter where the lawyer has no
client confidences. Such a loyalty conflict has been labeled a concurrent conflict of interest. The duty of confidentiality is protected in rules prohibiting so-called successive conflicts of interest, when a lawyer proposes to act adversely to the interests of a former client.
A lawyer who has formerly represented a client in a matter is precluded
from representing another person in the same or a substantially related
matter that is materially adverse to the former client.
These two basic formulations – that a lawyer may not act directly
adverse to a current client or adverse to a former client on a
substantially related matter – form the cornerstone of modern legal
conflicts of interest rules.
Concurrent Conflicts of Interest
Direct Adversity to Current Client
An attorney owes the client undivided loyalty. The courts have described this principle as “integral to the nature of an attorney’s duty.”
Without undivided loyalty, irreparable damage may be done “to the
existing client’s sense of trust and security – features essential to
the effective functioning of the fiduciary relationship…”
A key feature of the duty of loyalty is that an attorney may not act
directly adverse to a current client or represent a litigation adversary
of the client in an unrelated matter. The damage done is to the client’s confidence that the lawyer is serving his or her interests faithfully. The most obvious example of a lawyer acting directly adverse to a client is when the lawyer sues the client.
At the other end of the spectrum is when a lawyer represents business
competitors of the client who are not adverse to it in a lawsuit or
negotiation. Representing business competitors of a client in unrelated
matters does not constitute direct adversity nor give rise to a loyalty
conflict. As one state bar ethics committee has noted:
An attorney's
representation of one client will often have indirect effects on other
existing clients. For example, simultaneously representing business
competitors on unrelated matters may indirectly impair the interests of
each. It will be rare indeed when an attorney's representation of a
client will not have numerous indirect adverse effects on others.
Obtaining a benefit for a client will often mean disadvantaging another
person or entity, and indirect consequences may follow to all who may be
dependents or owners of the attorney's opponents.
The attorney's duty of loyalty, however, extends only to adverse
consequences on existing clients which are ‘direct.’…Of the numerous and
varied consequences which a representation of one client may have on
other clients, well-established legal authority interpreting the duty of
loyalty limits the scope of ethical inquiry to whether the other
affected clients are parties to the case or transaction in which the
attorney is acting.
--CALIFORNIA STATE BAR ETHICS OPINION 1989-113.
--CALIFORNIA STATE BAR ETHICS OPINION 1989-113.
Direct adversity may arise in litigation when an attorney sues a
client or defends an adversary in an action his or her client has
brought.
It may also arise in the context of business negotiations, when a
lawyer negotiates on behalf of an adversary against a current client,
even if the matter is unrelated to any matter the lawyer is handling for
the client. However, merely advocating opposite sides of the same legal issue does not give rise to direct adversity.
Even if a lawyer’s advocacy in an unrelated matter may make unfavorable
law for another client, such effects are only indirect and not subject
to the conflicts rules.
There is no conflict in advocating positions that may turn out to be
unfavorable to another client so long as the lawyer is not directly
litigating or negotiating against that client.
Identity of the Client - Corporations
One
of the most frequently arising questions in corporate practice is
whether parent corporations and their subsidiaries are to be treated as
the same or different entities for conflicts purposes.
The first authority to rule on this question was the California State
Bar Ethics Committee, which issued a formal opinion ruling that parent
corporations and their subsidiaries are to be considered distinct
entities for conflicts purposes.
The California committee considered a situation where an attorney
undertook a representation directly adverse to the wholly owned
subsidiary of a client, when the lawyer did not represent the
subsidiary. Relying on the entity as client framework in Model Rule 1.13,
the California committee opined that there was no conflict as long as
the parent and subsidiary did not have a “sufficient unity of
interests.” The committee announced the following standard for evaluating the separateness of parent and subsidiary:
In determining whether there is a sufficient unity of interests to require an attorney to disregard separate corporate entities for conflict purposes, the attorney should evaluate the separateness of the entities involved, whether corporate formalities are observed, the extent to which each entity has distinct and independent managements and board of directors, and whether, for legal purposes, one entity could be considered the alter ego of the other. -CALIFORNIA STATE BAR ETHICS OPINION 1989-113.
As one commentator has noted, “For a state ethics opinion, California
Opinion 1989-113 has been unusually influential, both with courts
there, with ethics committees elsewhere, and through the latter set of
ethics committee opinions, with…recent decisions in other
jurisdictions.”
The California opinion has been followed by ethics committees in such
jurisdictions as New York, Illinois and the District of Columbia, and
served as the basis of ABA Formal Ethics Opinion 95-390.
The law in most jurisdictions is that parent corporations and their
subsidiaries are treated as distinct entities, except in limited
circumstances noted by the California ethics committee where they have a
unity of interests.
The Second Circuit has adopted a variation of the California standard. In GSI Commerce Solutions, Inc. v. BabyCenter LLC,
the court ruled that parent corporations and their subsidiaries should
be treated as the same entity for conflicts purposes when both companies
rely “on the same in-house legal department to handle their legal
affairs.” However, the court ruled that the lawyer and client can contract around this default standard.
The court quoted with approval the opinion of the City of New York
Committee on Professional and Judicial Ethics, which stated, “corporate
family conflicts may be averted by . . . an engagement letter . . . that
delineates which affiliates, if any, of a corporate client the law firm
represents. . . ."
Material Limitation Conflicts
A concurrent conflict will also exist when “there is a
significant risk that the representation of one or more clients will be
materially limited by the lawyer's responsibilities to another client, a
former client or a third person or by a personal interest of the
lawyer.”
Comment 8 to Model Rule 1.7 states, by way of example, that an attorney
representing multiple persons forming a joint venture may be materially
limited in recommending the courses of action that any jointly
represented client may take because of the lawyer’s duty to the other
participants in the joint venture.
The Supreme Court of Minnesota found a material limitation conflict in In re Petition for Disciplinary Action Against Christopher Thomas Kalla. In Kalla,
an attorney was disciplined for representing a borrower bringing suit
against her lender for charging a usurious interest rate while
simultaneously representing the mortgage broker who arranged the loan as
a third party defendant in the same lawsuit. Although neither client
had brought an action against the other, the court found a material
limitation conflict: “Advocating for Client A would potentially harm
Client B, who was potentially liable for contribution. Kalla’s ability
to fully advocate for both was materially limited by Kalla’s dual
representation.”
Consent to Concurrent Conflicts of Interest
Consent to Current Conflicts
A concurrent conflict of interest may be resolved if four conditions are met. They are:
- the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;
- the representation is not prohibited by law;
- the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and
- each affected client gives informed consent, confirmed in writing.
Informed consent requires that each affected client be fully advised
about the material ways that the representation could adversely affect
that client.
In joint representations, the information provided should include the
interests of the lawyer and other affected client, the courses of action
that could be foreclosed due to the joint representation, the potential
danger that the client’s confidential information might be disclosed,
and the potential consequences if the lawyer had to withdraw at a later
stage in the proceedings. Merely telling the client that there are conflicts, without further explanation, is not adequate disclosure.
The lawyer must fully disclose the potential impairment to the lawyer’s
loyalty and explain how another unconflicted attorney might better
serve the client’s interests.
Prospective Consent to Future Conflicts
It
is not unusual in the current legal environment of large multinational
and global law firms for the firms to seek advance or prospective
waivers of future conflicts from their clients.
A law firm is particularly likely to seek a prospective waiver when a
large corporation seeks the specialized knowledge of the firm in a small
matter, without a high likelihood of repeat business. As the ABA stated in its Ethics Opinion 93-372:
when corporate clients with multiple operating divisions hire tens if not hundreds of law firms, the idea that, for example, a corporation in Miami retaining the Florida office of a national law firm to negotiate a lease should preclude that firm’s New York office from taking an adverse position in a totally unrelated commercial dispute against another division of the same corporation strikes some as placing unreasonable limitations on the opportunities of both clients and lawyers. -ABA Formal Opinion 93-372 (1993).
Prospective waivers are most likely to be upheld by the courts when
they are given by sophisticated corporate clients represented by
independent counsel in the negotiation of the waiver. However, in Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co.,
the California Supreme court held that a prospective waiver that did
not make specific disclosure of an actual current conflict was not
effective to waive that conflict. As the court said,
By asking J-M to waive current conflicts as well as future ones, Sheppard Mullin did put J-M on notice that a current conflict might exist. But by failing to disclose to J-M the fact that a current conflict actually existed, the law firm failed to disclose to its client all the ‘relevant circumstances’ within its knowledge relating to its representation of J-M. 6 Cal. 5th 59 (2018) at p. 84.
The Sheppard Mullin case does not invalidate prospective waivers in California.
It only holds that waivers of current and actual conflicts must
specifically disclose those conflicts, an unremarkable conclusion.
The Hot Potato Doctrine
If a client will not consent to a conflict and allow a lawyer to take on another representation, the lawyer cannot then withdraw from the existing representation, thus turning the existing client into a former client and ending the duty of loyalty. As the courts have stated, the lawyer cannot “drop a client like a hot potato” to cure a conflict. This label has stuck, and the doctrine is now aptly called the “hot potato” doctrine. However, as one commentator has pointed out, the reasoning underlying this line of cases has been sparse, and few courts have attempted to justify this result through an analysis of the ethics rules. The unstated rationale behind the Hot Potato doctrine is that a withdrawal attempted without good cause under Model Rule 1.16(b) is an ineffective withdrawal, which does not successfully terminate the existing attorney-client relationship. When viewed in this light, a withdrawal accomplished with good cause should be an effective withdrawal that does permit a lawyer to take on a representation that would otherwise be conflicting, as long as there is no substantial relationship with the prior matter. The standard used to assess conflicts involving such former clients will be discussed in the next section.
Successive Conflicts of Interest
The Substantial Relationship Test
Conflicts
of interest rules involving former clients are primarily designed to
enforce the attorney’s duty to preserve a client’s confidential
information.
Model Rule 1.9(a) sets forth this doctrine in a rule that has come to
be known as the substantial relationship test. The rule states:
A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing. -MODEL RULES OF PROF’L CONDUCT r. 1.9(a).
Without the substantial relationship test, a client attempting to
prove that its former lawyer possesses its confidential information
might have to disclose publicly the very confidential information it is
trying to protect. The substantial relationship test was designed to protect against such disclosures.
Under this test, the attorney’s possession of the former client’s
confidential information is presumed if "confidential information
material to the current dispute would normally have been imparted to the
attorney by virtue of the nature of the former representation."
The substantial relationship test reconstructs whether confidential
information was likely to imparted by the former client to the lawyer by
analyzing “the similarities between the two factual situations, the
legal questions posed, and the nature and extent of the attorney's
involvement with the cases."
Imputation of Conflicts
The
conflicts of an individual lawyer are imputed to all attorneys who “are
associated with that lawyer in rendering legal services to others
through a law partnership, professional corporation, sole
proprietorship, or similar association.”
This imputation of conflicts can lead to difficulties when attorneys
from one law firm leave and join another firm. The issue then arises
whether the conflicts of the itinerant lawyer’s former firm are imputed
to his or her new firm.
In Kirk v. First American Title Co.,
the court ruled that an itinerant lawyer’s conflicts are not imputed to
his or her new law firm if that firm timely sets up an effective ethics
screen preventing the lawyers from imparting any confidential
information to the lawyers in the new firm.
An effective ethics screen rebuts the presumption that the itinerant
lawyers shared confidential information with the lawyers in the new
firm. The components of an effective ethics screen, as described by the court in Kirk, are:
- physical, geographic, and departmental separation of attorneys;
- prohibitions against and sanctions for discussing confidential matters;
- established rules and procedures preventing access to confidential information and files;
- procedures preventing a disqualified attorney from sharing in the profits from the representation;
- continuing education in professional responsibility.
Judicial disqualification, also referred to as recusal,
refers to the act of abstaining from participation in an official
action such as a court case/legal proceeding due to a conflict of
interest of the presiding court official or administrative officer. Applicable statutes or canons of ethics
may provide standards for recusal in a given proceeding or matter.
Providing that the judge or presiding officer must be free from
disabling conflicts of interest makes the fairness of the proceedings
less likely to be questioned.
In the practice of law, the duty of loyalty owed to a client prohibits an attorney (or a law firm)
from representing any other party with interests adverse to those of a
current client. The few exceptions to this rule require informed written
consent from all affected clients, i.e., an "ethical wall". In
some circumstances, a conflict of interest can never be waived by a
client. In perhaps the most common example encountered by the general
public, the same firm should not represent both parties in a divorce or
child custody matter. Found conflict can lead to denial or disgorgement of legal fees, or in some cases (such as the failure to make mandatory disclosure), criminal proceedings. In 1998, a Milbank, Tweed, Hadley & McCloy partner was found guilty of failing to disclose a conflict of interest, disbarred, and sentenced to 15 months of imprisonment.
In the United States, a law firm usually cannot represent a client if
the client's interests conflict with those of another client, even if
the two clients are represented by separate lawyers within the firm,
unless (in some jurisdictions) the lawyer is segregated from the rest of
the firm for the duration of the conflict. Law firms often employ
software in conjunction with their case management and accounting
systems in order to meet their duties to monitor their conflict of
interest exposure and to assist in obtaining waivers.
More
generally, conflicts of interest can be defined as any situation in
which an individual or corporation (either private or governmental) is
in a position to exploit a professional or official capacity in some way
for their personal or corporate benefit.
Depending upon the law or rules related to a particular
organization, the existence of a conflict of interest may not, in and of
itself, be evidence of wrongdoing. In fact, for many professionals, it
is virtually impossible to avoid having conflicts of interest from time
to time. A conflict of interest can, however, become a legal matter, for
example, when an individual tries (and/or succeeds in) influencing the
outcome of a decision, for personal benefit. A director or executive of a
corporation will be subject to legal liability if a conflict of
interest breaches his/her duty of loyalty.
There often is confusion over these two situations. Someone
accused of a conflict of interest may deny that a conflict exists
because he/she did not act improperly. In fact, a conflict of interest
can exist even if there are no improper acts as a result of it. (One way
to understand this is to use the term "conflict of roles". A person
with two roles—an individual who owns stock and is also a government
official, for example—may experience situations where those two roles
conflict. The conflict can be mitigated—see below—but it still exists.
In and of itself, having two roles is not illegal, but the differing
roles will certainly provide an incentive for improper acts in some
circumstances.)
As an example, in the sphere of business and control, according to the Institute of Internal Auditors:
conflict of interest is a situation in which an internal auditor, who is in a position of trust, has a competing professional or personal interest. Such competing interests can make it difficult to fulfill his or her duties impartially. A conflict of interest exists even if no unethical or improper act results. A conflict of interest can create an appearance of impropriety that can undermine confidence in the internal auditor, the internal audit activity, and the profession. A conflict of interest could impair an individual's ability to perform his or her duties and responsibilities objectively.
Organizational
An organizational conflict of interest (OCI) may exist in the same
way as described above, for instance where a corporation provides two
types of service to the government and these services conflict (e.g.:
manufacturing parts and then participating on a selection committee
comparing parts manufacturers).
Corporations may develop simple or complex systems to mitigate the risk
or perceived risk of a conflict of interest. These risks can be
evaluated by a government agency (for example, in a U.S. Government RFP)
to determine whether the risks create a substantial advantage to the
organization in question over its competition, or will decrease the
overall competitiveness of the bidding process.
Conflict of interest in the health care industry
The influence of the pharmaceutical industry
on medical research has been a major cause for concern. In 2009 a study
found that "a number of academic institutions" do not have clear
guidelines for relationships between Institutional Review Boards and
industry.
In contrast to this viewpoint, an article and associated editorial in the New England Journal of Medicine in May 2015
emphasized the importance of pharmaceutical industry-physician
interactions for the development of novel treatments, and argued that
moral outrage over industry malfeasance had unjustifiably led many to
overemphasize the problems created by financial conflicts of interest.
The article noted that major healthcare organizations such as National
Center for Advancing Translational Sciences of the National Institutes
of Health, the President's Council of Advisors on Science and Technology,
the World Economic Forum, the Gates Foundation, the Wellcome Trust, and
the Food and Drug Administration had encouraged greater interactions
between physicians and industry in order to bring greater benefits to
patients.
Types
The following are the most common forms of conflicts of interests:
- Self-dealing, in which an official who controls an organization causes it to enter into a transaction with the official, or with another organization that benefits the official only. The official is on both sides of the "deal."
- Outside employment, in which the interests of one job conflict with another.
- Nepotism, in which a spouse, child, or other close relative is employed (or applies for employment) by an individual, or where goods or services are purchased from a relative or from a firm controlled by a relative. To avoid nepotism in hiring, many employment applications ask if the applicant is related to a current employee of the company. This allows recusal if the employed relative has a role in the hiring process. If this is the case, the relative could then recuse from any hiring decisions.
- Gifts from friends who also do business with the person receiving the gifts or from individuals or corporations who do business with the organization in which the gift recipient is employed. Such gifts may include non-tangible things of value such as transportation and lodging.
- Pump and dump, in which a stock broker who owns a security artificially inflates the price by "upgrading" it or spreading rumors, sells the security and adds short position, then "downgrades" the security or spreads negative rumors to push the price down.
Other improper acts that are sometimes classified as conflicts of
interests may have better classification. For example, accepting bribes can be classified as corruption, use of government or corporate property or assets for personal use is fraud, and unauthorized distribution of confidential information is a security breach. For these improper acts, there is no inherent conflict.
COI is sometimes termed competition of interest rather than "conflict", emphasizing a connotation of natural competition
between valid interests—rather than the classical definition of
conflict, which would include by definition including a victim and
unfair aggression. Nevertheless, this denotation of conflict of interest is not generally seen.
Examples
Environmental hazards and human health
Baker summarized 176 studies of the potential impact of Bisphenol A on human health as follows:
| Funding | Harm | No Harm |
|---|---|---|
| Industry | 0 | 13 (100%) |
| Independent (e.g., government) | 152 (86%) | 11 (14%) |
Lessig
noted that this does not mean that the funding source influenced the
results. However, it does raise questions about the validity of the
industry-funded studies specifically, because the researchers conducting
those studies have a conflict of interest; they are subject at minimum
to a natural human inclination to please the people who paid for their
work. Lessig provided a similar summary of 326 studies of the potential
harm from cell phone usage with results that were similar but not as
stark.
Self-regulation
Self-regulation
of any group may also be a conflict of interest. If an entity, such as a
corporation or government bureaucracy, is asked to eliminate unethical
behavior within their own group, it may be in their interest in the
short run to eliminate the appearance of unethical behavior, rather than
the behavior itself, by keeping any ethical breaches hidden, instead of
exposing and correcting them. An exception occurs when the ethical
breach is already known by the public. In that case, it could be in the
group's interest to end the ethical problem to which the public has
knowledge, but keep remaining breaches hidden.
Insurance claims adjusters
Insurance companies retain claims adjusters
to represent their interest in adjusting claims. It is in the best
interest of the insurance companies that the very smallest settlement is
reached with its claimants. Based on the adjuster's experience and
knowledge of the insurance policy it is very easy for the adjuster to
convince an unknowing claimant to settle for less than what they may
otherwise be entitled which could be a larger settlement. There is
always a very good chance of a conflict of interest to exist when one
adjuster tries to represent both sides of a financial transaction such
as an insurance claim. This problem is exacerbated when the claimant is
told, or believes, the insurance company's claims adjuster
is fair and impartial enough to satisfy both theirs and the insurance
company's interests. These types of conflicts could easily be avoided by
the use of a third party platform that is independent of the insurers
and is agreed to, and named in the policy.
Purchasing agents and sales personnel
A
person working as the equipment purchaser for a company may get a bonus
proportionate to the amount he's under budget by year end. However,
this becomes an incentive for him to purchase inexpensive, substandard
equipment. Therefore, this is counter to the interests of those in his
company who must actually use the equipment. W. Edwards Deming listed "purchasing on price alone" as number 4 of his famous 14 points, and he often said things to the effect that "He who purchases on price alone deserves to get rooked."
Government officials
Conflict
of interest in legislation; the interests of the poor and the interests
of the rich. A personification of corrupt legislation weighs a bag of
money and denies an appeal of poverty.
Regulating conflict of interest in government is one of the aims of political ethics.
Public officials are expected to put service to the public and their
constituents ahead of their personal interests. Conflict of interest
rules are intended to prevent officials from making decisions in
circumstances that could reasonably be perceived as violating this duty
of office. Rules in the executive branch tend to be stricter and easier
to enforce than in the legislative branch. Two problems make legislative ethics of conflicts difficult and distinctive.
First, as James Madison wrote, legislators should share a "communion of
interests" with their constituents. Legislators cannot adequately
represent the interests of constituents without also representing some
of their own. As Senator Robert S. Kerr once said, "I represent the
farmers of Oklahoma, although I have large farm interests. I represent
the oil business in Oklahoma...and I am in the oil business...They don't
want to send a man here who has no community of interest with them,
because he wouldn't be worth a nickel to them."
The problem is to distinguish special interests from the general
interests of all constituents. Second, the "political interests" of
legislatures include campaign contributions which they need to get
elected, and which are generally not illegal and not the same as a
bribe. But under many circumstances they can have the same effect. The
problem here is how to keep the secondary interest in raising campaign
funds from overwhelming what should be their primary interest—fulfilling
the duties of office.
Politics in the United States is dominated in many ways by political campaign contributions.
Candidates are often not considered "credible" unless they have a
campaign budget far beyond what could reasonably be raised from citizens
of ordinary means. The impact of this money can be found in many
places, most notably in studies of how campaign contributions affect
legislative behavior. For example, the price of sugar in the United
States has been roughly double the international price for over half a
century. In the 1980s, this added $3 billion to the annual budget of
U.S. consumers, according to Stern, who provided the following summary of one part of how this happens:
| Contributions from the sugar lobby, 1983–1986 | Percent voting in 1985 against gradually reducing sugar subsidies |
|---|---|
| > $5,000 | 100% |
| $2,500–5,000 | 97% |
| $1,000–2,500 | 68% |
| $1–1,000 | 45% |
| $0 | 20% |
This $3 billion translates into $41 per household per year. This is in essence a tax
collected by a nongovernmental agency: It is a cost imposed on
consumers by governmental decisions, but never considered in any of the
standard data on tax collections.
Stern notes that sugar interests contributed $2.6 million to
political campaigns, representing well over $1,000 return for each $1
contributed to political campaigns. This, however, does not include the
cost of lobbying. Lessig cites six different studies that consider the
cost of lobbying with campaign contributions on a variety of issues considered in Washington, D.C.
These studies produced estimates of the anticipated return on each $1
invested in lobbying and political campaigns that ranged from $6 to
$220. Lessig notes that clients who pay tens of millions of dollars to
lobbyists typically receive billions.
Lessig insists that this does not mean that any legislator has sold his or her vote.
One of several possible explanations Lessig gives for this phenomenon
is that the money helped elect candidates more supportive of the issues
pushed by the big money spent on lobbying and political campaigns. He
notes that if any money perverts democracy, it is the large
contributions beyond the budgets of citizens of ordinary means; small
contributions from common citizens have long been considered supporting
of democracy.
When such large sums become virtually essential to a politician's
future, it generates a substantive conflict of interest contributing to
a fairly well documented distortion on the nation's priorities and
policies.
Beyond this, governmental officials, whether elected or not,
often leave public service to work for companies affected by legislation
they helped enact or companies they used to regulate or companies
affected by legislation they helped enact. This practice is called the "revolving door".
Former legislators and regulators are accused of (a) using inside
information for their new employers or (b) compromising laws and
regulations in hopes of securing lucrative employment in the private
sector. This possibility creates a conflict of interest for all public
officials whose future may depend on the revolving door.
Finance industry and elected officials
Conflicts
of interest among elected officials is part of the story behind the
increase in the percent of US corporate domestic profits captured by the
finance industry depicted in that accompanying figure.
Finance as a percent of US Domestic Corporate Profits
Finance includes banks, securities and insurance. In 1932-1933, the
total U.S. domestic corporate profit was negative. However, the
financial sector made a profit in those years, which made its percentage
negative, below 0 and off the scale in this plot.
From 1934 through 1985, the finance industry averaged 13.8% of U.S.
domestic corporate profit. Between 1986 and 1999, it averaged 23.5%.
From 2000 through 2010, it averaged 32.6%. Some of this increase is
doubtless due to increased efficiency from banking consolidation and
innovations in new financial products that benefit consumers. However,
if most consumers had refused to accept financial products they did not
understand, e.g., negative amortization loans, the finance industry would not have been as profitable as it has been, and the Late-2000s recession might have been avoided or postponed. Stiglitz argued that the Late-2000s recession
was created in part because, "Bankers acted greedily because they had
incentives and opportunities to do so". They did this in part by
innovating to make consumer financial products like retail banking
services and home mortgages as complicated as possible to make it easy
for them to charge higher fees. Consumers who shop carefully for
financial services typically find better options than the primary
offerings of the major banks. However, few consumers think to do that.
This explains part of this increase in financial industry profits.
(Note, however, that Stiglitz has been accused of a conflict of
interests and violation of Columbia University
transparency policies for failing to disclose his status as a paid
consultant to government of Argentina at the same time he was writing
articles in defense of Argentina's planned default of over $1billion in
bond debt during the 1998–2002 Argentine great depression,
and for failing to disclose his paid consultancy to the government of
Greece at the same time he was downplaying the risk of Greece defaulting
on their debt during the Greek government-debt crisis of 2009.)
However, it is argued that a major portion of this increase and a driving force behind Late-2000s recession
has been the corrosive effect of money in politics, giving legislators
and the President of the U.S. a conflict of interest, because if they
protect the public, they will offend the finance industry, which
contributed $1.7 billion to political campaigns and spent $3.4 billion
($5.1 billion total) on lobbying from 1998 to 2008.
To be conservative, suppose we
attribute only the increase from 23.5% of 1986 through 1999 to the
recent 32.6% average to governmental actions subject to conflicts of
interest created by the $1.7 billion in campaign contributions. That's
9% of the $3 trillion in profits claimed by the finance industry during
that period or $270 billion. This represents a return of over $50 for
each $1 invested in political campaigns and lobbying for that industry.
(This $270 billion represents almost $1,000 for every man, woman and
child in the United States.) There is hardly any place outside politics
with such a high return on investment in such a short time.
Finance industry and economists
Economists
(unlike other professions such as sociologists) do not formally
subscribe to a professional ethical code. Close to 300 economists have
signed a letter urging the American Economic Association (the discipline's foremost professional body), to adopt such a code. The signatories include George Akerlof, a Nobel laureate, and Christina Romer, who headed Barack Obama's Council of Economic Advisers.
This call for a code of ethics was supported by the public attention the documentary Inside Job (winner of an Academy Award) drew to the consulting relationships of several influential economists.
This documentary focused on conflicts that may arise when economists
publish results or provide public recommendation on topics that affect
industries or companies with which they have financial links. Critics of
the profession argue, for example, that it is no coincidence that
financial economists, many of whom were engaged as consultants by Wall
Street firms, were opposed to regulating the financial sector.
In response to criticism that the profession not only failed to predict the financial crisis of 2007–2008 but may actually have helped create it, the American Economic Association
has adopted new rules in 2012: economists will have to disclose
financial ties and other potential conflicts of interest in papers
published in academic journals.
Backers argue such disclosures will help restore faith in the
profession by increasing transparency which will help in assessing
economists' advice.
Stockbrokers
A conflict of interest is a manifestation of moral hazard,
particularly when a financial institution provides multiple services
and the potentially competing interests of those services may lead to a
concealment of information or dissemination of misleading information. A
conflict of interest exists when a party to a transaction could
potentially make a gain from taking actions that are detrimental to the
other party in the transaction.
There are many types of conflicts of interest such as a pump and dump
by stockbrokers. This is when a stockbroker who owns a security
artificially inflates the price by upgrading it or spreading rumors, and
then sells the security and adds short position. They will then
downgrade the security or spread negative rumors to push the price back
down. This is an example of stock fraud. It is a conflict of interest
because the stockbrokers are concealing and manipulating information to
make it misleading for the buyers. The broker may claim to have the
"inside" information about impending news and will urge buyers to buy
the stock quickly. Investors will buy the stock, which creates a high
demand and raises the prices. This rise in prices can entice more people
to believe the hype and then buy shares as well. The stockbrokers will
then sell their shares and stop promoting, the price will drop, and
other investors are left holding stock that is worth nothing compared to
what they paid for it. In this way, brokers use their knowledge and
position to gain personally at the expense of others.
The Enron scandal
is a major example of pump and dump. Executives participated in an
elaborate scheme, falsely reporting profits, thus inflating its stock
prices, and covered up the real numbers with questionable accounting; 29 executives sold overvalued stock for more than a billion dollars before the company went bankrupt.
Media
Any media
organization has a conflict of interest in discussing anything that may
impact its ability to communicate as it wants with its audience. Most
media, when reporting a story which involves a parent company or a subsidiary,
will explicitly report this fact as part of the story, in order to
alert the audience that their reporting has the potential for bias due
to the possibility of a conflict of interest.
The business model of commercial media organizations (i.e., any
that accept advertising) is selling behavior change in their audience to
advertisers. However, few in their audience are aware of the conflict of interest between the profit motive and the altruistic desire to serve the public and "give the audience what it wants".
Many major advertisers test their ads in various ways to measure the return on investment in advertising. Advertising rates are set as a function of the size and spending habits of the audience as measured by the Nielsen Ratings. Media action expressing this conflict of interest is evident in the reaction of Rupert Murdoch, Chairman of News Corporation, owner of Fox,
to changes in data collection methodology adopted in 2004 by the
Nielsen Company to more accurately measure viewing habits. The results
corrected a previous overestimate of the market share of Fox. Murdoch
reacted by getting leading politicians to denounce the Nielsen Ratings as racists. Susan Whiting,
president and CEO of Nielsen Media Research, responded by quietly
sharing Nielsen's data with her leading critics. The criticism
disappeared, and Fox paid Nielsen's fees. Murdoch had a conflict of interest between the reality of his market and his finances.
Commercial media organizations lose money if they provide content
that offends either their audience or their advertisers. The
substantial media consolidation that occurred since the 1980s has
reduced the alternatives available to the audience, thereby making it
easier for the ever-larger companies in this increasingly oligopolistic
industry to hide news and entertainment potentially offensive to
advertisers without losing audience. If the media provide too much
information on how congress spends its time, a major advertiser could be
offended and could reduce their advertising expenditures with the
offending media company; indeed, this is one of the ways the market
system has determined which companies won and which either went out of
business or were purchased by others in this media consolidation.
(Advertisers don't like to feed the mouth that bites them, and often
don't. Similarly, commercial media organizations are not eager to bite
the hand that feeds them.) Advertisers have been known to fund media
organizations with editorial policies they find offensive if that media
outlet provides access to a sufficiently attractive audience segment
they cannot efficiently reach otherwise.
Election years are a major boon to commercial broadcasters,
because virtually all political advertising is purchased with minimal
advance planning, paying therefore the highest rates. The commercial
media have a conflict of interest in anything that could make it easier
for candidates to get elected with less money.
Accompanying this trend in media consolidation has been a substantial reduction in investigative journalism,
reflecting this conflict of interest between the business objectives of
the commercial media and the public's need to know what government is
doing in their name. This change has been tied to substantial changes in
law and culture in the United States. To cite only one example,
researchers have tied this decline in investigative journalism to an
increased coverage of the "police blotter". This has further been tied to the fact that the United States has the highest incarceration rate in the world.
Beyond this, virtually all commercial media companies own
substantial quantities of copyrighted material. This gives them an
inherent conflict of interest in any public policy issue affecting
copyrights. McChesney noted that the commercial media have lobbied
successfully for changes in copyright law that have led "to higher
prices and a shrinking of the marketplace of ideas", increasing the
power and profits of the large media corporations at public expense. One
result of this is that "the people cease to have a means of clarifying
social priorities and organizing social reform".
A free market has a mechanism for controlling abuses of power by media
corporations: If their censorship becomes too egregious, they lose
audience, which in turn reduces their advertising rates. However, the
effectiveness of this mechanism has been substantially reduced over the
past quarter century by "the changes in the concentration and
integration of the media." Would the Anti-Counterfeiting Trade Agreement have advanced to the point of generating substantial protests
without the secrecy behind which that agreement was negotiated—and
would the government attempts to sustain that secrecy have been as
successful if the commercial media had not been a primary beneficiary
and had not had a conflict of interest in suppressing discussion
thereof?
Mitigation
Removal
Sometimes, people who may be perceived to have a conflict of interest
resign from a position or sell a shareholding in a venture, to
eliminate the conflict of interest going forward. For example, Lord Evans of Weardale resigned as a non-executive director of the UK National Crime Agency after a tax-avoidance-related controversy about HSBC,
where Lord Evans was also a non-executive director. This resignation
was stated to have taken place in order to avoid the appearance of
conflict of interest.
"Blind trust"
Blind trusts
can perhaps mitigate conflicts of interest scenarios by giving an
independent trustee control of a beneficiary's assets. The independent
trustee must have the power to sell or transfer interests without
knowledge of the beneficiary. Thus, the beneficiary becomes "blind" to
the impact of official actions on private interests held in trust.
As an example, a politician who owns shares in a company that may
be affected by government policy may put those shares in a blind trust
with themselves or their family as the beneficiary. It is disputed
whether this really removes the conflict of interest, however.
Blind trusts may in fact obscure conflicts of interest, and for
this reason it is illegal to fund political parties in the UK via a
blind trust if the identity of the real donor is concealed.
Disclosure
Commonly,
politicians and high-ranking government officials are required to
disclose financial information—assets such as stock, debts such as loans, and/or corporate positions held, typically annually.
To protect privacy (to some extent), financial figures are often
disclosed in ranges such as "$100,000 to $500,000" and "over
$2,000,000". Certain professionals are required either by rules related
to their professional organization, or by statute,
to disclose any actual or potential conflicts of interest. In some
instances, the failure to provide full disclosure is a crime.
However, there is limited evidence regarding the effect of conflict of interest disclosure despite its widespread acceptance. A 2012 study published in the Journal of the American Medical Association
showed that routine disclosure of conflicts of interest by American
medical school educators to pre-clinical medical students were
associated with an increased desire among students for limitations in
some industry relationships.
However, there were no changes in the perceptions of students about the
value of disclosure, the influence of industry relationships on
educational content, or the instruction by faculty with relevant
conflicts of interest.
And, an increasing line of research suggests that disclosure can
have "perverse effects" or, at least, is not the panacea regulators
often take it to be.
Recusal
Those with a conflict of interest are expected to recuse
themselves from (i.e., abstain from) decisions where such a conflict
exists. The imperative for recusal varies depending upon the
circumstance and profession, either as common sense ethics, codified
ethics, or by statute.
For example, if the governing board of a government agency is
considering hiring a consulting firm for some task, and one firm being
considered has, as a partner, a close relative of one of the board's
members, then that board member should not vote on which firm is to be
selected. In fact, to minimize any conflict, the board member should not
participate in any way in the decision, including discussions.
Judges
are supposed to recuse themselves from cases when personal conflicts of
interest may arise. For example, if a judge has participated in a case
previously in some other judicial role he/she is not allowed to try that
case. Recusal is also expected when one of the lawyers in a case might
be a close personal friend, or when the outcome of the case might affect
the judge directly, such as whether a car maker is obliged to recall a
model that a judge drives. This is required by law under Continental civil law systems and by the Rome Statute, organic law of the International Criminal Court.
Third-party evaluations
Consider a situation where the owner of a majority of a public
companies decides to buy out the minority shareholders and take the
corporation private. What is a fair price? Obviously it is improper
(and, typically, illegal) for the majority owner to simply state a price
and then have the (majority-controlled) board of directors
approve that price. What is typically done is to hire an independent
firm (a third party), well-qualified to evaluate such matters, to
calculate a "fair price", which is then voted on by the minority
shareholders.
Third-party evaluations may also be used as proof that transactions were, in fact, fair ("arm's-length"). For example, a corporation that leases an office building that is owned by the CEO
might get an independent evaluation showing what the market rate is for
such leases in the locale, to address the conflict of interest that
exists between the fiduciary
duty of the CEO (to the stockholders, by getting the lowest rent
possible) and the personal interest of that CEO (to maximize the income
that the CEO gets from owning that office building by getting the
highest rent possible).
A January 2018 report by the Public Citizen
non-profit describes dozens of foreign governments, special interest
groups and GOP congressional campaign committees that spent hundreds of
thousands of dollars at President Donald Trump's
properties during his first year in office. The study said that these
groups clearly intended to win over the president by helping his
commercial business empire profit while he held the office.
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