Conflicts of Interest: Balancing Appearances, Intentions and Values

December 31, 2002
Document

Ethics Resource Center 2002
Stuart C. Gilman, Ph.D., with Joshua Joseph and Cheryl L. Raven

Introduction

Corruption - in both politics and business - is one of the premiere policy issues of the 21st Century. Issues of corruption are particularly salient in government contracting, where the interests of politics and business intersect. In recent years, a number of forces have intensified the focus on corruption as a worldwide issue. These include: the pace of globalization, commitments to democracy, varied and uneven infusion of development funds. One of the most important issues in the fight against corruption is the need to clearly define the conceptual elements that are generally agreed to comprise it. Central among these conceptual elements is the notion of conflict of interest.

Democracies and free markets absolutely rely on the integrity of their systems for the free flow of information and objective decision-making. Conflicts of interest act as a cancer that eats away at those institutions. Any society that cannot effectively address or prevent conflicts of interest will soon find its democracy and its free markets in states of collapse.

This paper attempts to refine the conflict of interest concept by looking at its various facets - contextual, historical, legal, perceptual and societal - and highlighting some of the challenges in its application to pragmatic, day-to-day activities. In addition to identifying and reviewing relevant issues, this paper provides concrete examples throughout the discussion. Although not intended as a scholarly article, I believe the arguments made here can be supported by the literature in this area.

A Definition of Conflicts of Interest

Although it might seem obvious, one has to have at least two interests to have a conflict of interest. In an often-used example, one might have an investment which conflicts with his/her job. But what does that really mean? How large a financial investment is enough? Often times, absent a legal definition, any investment is potentially conflicting with one's job. The question then comes down to some implicit notions surrounding employment; e.g. obligations of due diligence; the idea of bias of interests toward the job, etc.

Additionally, conflicts of interest are sometimes viewed by those in public administration as solely the province of government. But in fact, conflicts can occur in any setting. To draw on a current example, an accounting firm with a financial interest in the company or organization it is auditing will have difficulty giving a truly impartial and objective reckoning of the client's books. However, it is also true that public servants, especially in democracies, are generally held to higher standards than their private sector counterparts.

Admittedly, cultural considerations can affect how people perceive conflicts of interest. Where in some societies family obligations are paramount - it is not uncommon in the Middle East for individuals to take government jobs to benefit their families - in many others there are actually criminal restrictions on nepotism. However, the global push of modern economies are driving toward common views on the inappropriateness of bias for a family or a tribe, over a employment on behalf of some sort of public interest.

There are also certain conflicts of interest that are typically ignored or overlooked. For example, the salary one receives for a job actually entails a potential conflict of interest. If, as an employee, you make a decision that "enhances" your value to your organization - are you making the decision to benefit the organization or yourself? Although this seems a bit strange, this issue has worried philosophers for thousands of years.

Classical Ideals

Perhaps the earliest and most famous extended treatment of conflicts of interest can be found in Plato's Republic. In Plato's classic attempt to describe the "ideal" republic he creates several fictitious classes of citizens - which he describes in the myth of the metals. The average citizen was made of copper, a guardian - the bureaucratic equivalent of a citizen(1) - was to be of silver, and the Philosopher-King would be made of gold.

In his efforts to eliminate the potential of conflicts of interest in the Republic, Plato first argues that both men and women are capable of being guardians - both logically, and to eliminate any potential that men will act in a biased manor to protect women. Second, Plato argues that the guardians must be "lied to" and convinced that they are above the need to own private property. Instead they will live together in barracks provided by the city-state. Having men and women live together will produce children, and - again to eliminate conflict of interest - Plato has the children taken away from their parents and raised by the state. The education of the guardian class will be carefully regulated so that "they are gentle to their own people, and dangerous to enemies, not unlike well bred dogs."(2)

This idealized vision of a society illustrates the inherent dilemmas in trying to eliminate all conflicts of interest - political, economic, familial, etc. If we try to do so, we find that such conflicts are dynamic in nature and continue on indefinitely. For example, I had the opportunity to work with the Argentine government as they developed their ethics program. The first draft of the code detailed literally 101 different provisions, the first of which required employees to resign if they knew themselves to be incompetent. Such a requirement is on its face impossible to imagine, much less enforce.

Of course, there will never be public servants like Plato's guardians, willing to sacrifice all individual freedoms. On the other hand, without some controls conflicts multiple, making it difficult for decision-makers to remain objective and for observers to trust them. This is why modern societies struggle to regulate conflicts; and have such a difficult time in striking a reasonable balance.

Systemic Issues

The structure and dynamics of organizations can also affect the prevalence of conflicts of interest. For example, in Britain and France, there are relatively few civil service positions that change with governmental election cycles. By maintaining continuity among employees, these systems seek to emphasize the professionalism, dependability and independence of their civil service. In contrast, the U.S. has far greater potential for conflicts of interest. This is due both to the immense size of its politically appointed bureaucracy and to the relative frequency of its election cycles. Every presidential election results in literally tens of thousands of government positions turning over at the federal, state and local levels. Edmund Beard has argued that this is the Faustian bargain the U.S. has made in order to have greater democratic accountability.(3) The cost of maintaining oversight for conflicts of interest in such a large system would give many less wealthy nations pause.

We also need to recognize that each unique system may require a tailored approached. Several years ago I was in South Africa helping to draft financial disclosure legislation. My South African colleagues were as truly warm and amicable, but our work seemed to be stalling. Finally over dinner one night I asked them to level with me. "You don't understand," one explained. "I am the leader of my tribe. When a couple is married they will give me a chicken. When a baby is born I will get a goat. It is humiliating for me and disrespectful to them to keep track of and publicly list these gifts." The answer was simple, we decided not to include livestock on the financial disclosure form. For that society, there was no conflict of interest for receiving such nominal gifts.

The Legal Context

The most basic conflicts of interest are often times articulated in law. The act of bribery is usually considered illegal because it falls under a legal definition of "conflict of interest." In the U.S. - at the federal level - conflicts of interest statutes are categorized as subcategories or special cases of bribery. However, it could also be argued that bribery is simply a special case of conflicts of interest. Taking a bribe implies that one is accepting financial or other benefit in exchange for an official act. In such cases, bribes create incentives for civil servants to act in the interests of private parties rather than in the best interests of the government and the citizens it represents. Other subcategories of conflicts of interest include civil servants who: represent private parties (with or without compensation), receive pay from two different sources that conflict, or take actions upon leaving a position that could be perceived as exploiting their former positions.

Although some of these conflicts of interest subcategories carry greater burdens of proof than others, each attempts to describe a "bright line" of inappropriateness. And while it is also true that the applicability of each of these prohibitions may expand or contract with future judicial opinions, their central concepts remain constant.

Because democracies hold government officials to higher standards, it is often the case that conflicts of interest are subject to criminal proceedings and are supplemented through either civil remedies or administrative penalties. These conflicts generally deal with specific actions that are deemed inappropriate, e.g. gifts between employees or misuse of one's public position. In some countries this guidance can be incredibly detailed resembling a type of casuistry, an explanation of explanations, while in countries like Great Britain there is far greater reliance on general principles.(4) The irony is that although these rules purport to deal with discrete issues, the vast majority can be understood as belonging to the general class of conflict of interest.

Within the private sector there has also been a growth of conflict of interest concerns, expressed as company policy.(5) Although not having the weight of government administrative rules, or their complex interpretations, the private sector has had a great deal of success in disciplining employees for what some have considered "abstract" violations, such as sexual harassment, taking the company car on a cross-country personal road trip or expecting one's secretary to baby-sit.

Some of these developments are no doubt due to the lack of private-sector protections that are common within civil service rules. But a more positive interpretation is that private sector employees are typically expected to be able to interpret common sense application of corporate policies. Company codes in industries as varied as the pharmaceutical manufacturer, Merck & Company, Inc., the petroleum producing, Royal Dutch Shell, and the aerospace and defense giant, Lockheed Martin Corporation, have been very successful in articulating clear standards and enforcing them through a variety of disciplinary actions. These private sector disciplinary actions have generally been upheld in most courts in OECD countries.

Administrative Challenges

The ability to identify conflicts of interest does not necessarily insure that one can deal with them effectively. Actions to address conflicts of interest may entail ridding employees of the interest (divestiture), excusing the interest (waiver) or ensuring that individuals are not asked to make decisions that could be influenced by personal interests (recusal). Many of these actions require complex administrative systems to make them work effectively. However, in some cases particular courses of action may either be unworkable or may place an incredible burden on the individual or the organization.

For example, consider a situation in which the spouse of a government official works for a private firm that does business with the official's agency (a similar problem could exist for spouses who work for competing companies). If the official's agency issues a tender that the spouse's firm decides to bid on, a variety of real and/or perceived conflicts of interest may arise. These include access to insider information, possible undue influence on the decision makers who will award the contract and the like.

This scenario has become an increasingly common problem. One remedy might be to reassign either the agency official or the corporate employee to a non-volatile position, removed from the potential conflicts. However, if the individual's expertise is needed or the agency simply cannot afford to do this there may be no easy solution.

Similar problems exist for the actions of recusal and waiver. The interest may be so pervasive that recusing oneself prevents them from doing their job at all. Or the interest may be so deeply buried, for example owning stock in a holding company, that no obvious problem presents itself. In the case of waiver, the question revolves around what standards one uses and the independence of the individual making the decision. The corporate ethics or compliance officer can play this role more effectively than most government officers, because in the private sector revealing the conflict to an objective third party who can take action if they deem appropriate is generally viewed as "enough".

Transparency

While sometimes difficult to institutionalize, transparency is simply a commitment in theory and practice to openness in administrative and organizational processes. By exposing such processes, corruption becomes at once harder to hide and easier to detect. For example, if the bids are made public in a tender process, and the award goes to a company with one of the higher, rather than the lower bids, observers know to ask questions, and may find out for instance that a member of the selection committee had some interest in the winning company. Conversely, if the bids are public and the individuals on the selection committee and their interests are known the risk of discovery becomes much higher, encouraging individuals to base their decisions on the quality of the proposals. US Supreme Court Justice Brandeis put it succinctly, "Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman"(6)

This is the most basic level of transparency. And it is true that in some issues transparency is the only salutary action that can be taken. Most often transparency systems are used to prevent conflicts of interest beforehand, by identifying them and eliminating them as a problem. Even when no solution to a conflict exists, transparent practices can have a moderating impact.

As an example, when U.S. President Bill Clinton left office he had to declare all of the gifts he wanted to take with him on his financial disclosure form. In the U.S. the President and Vice President are exempt from the administrative limitations on gifts. You may have heard stories about the thousands of dollars worth of gifts the Clintons took with them as they left the White House in 2001. As the Director of the Office of Government Ethics recently explained "because the press had access to the financial disclosure forms, they could write articles about what they viewed as his excesses." The result was that the majority of the gifts were returned, including at least one gift President Clinton had brought into the White House with him!

But transparency, too, can be taken to an extreme. An American consultant trying to help foster transparency in Ukraine once suggested that financial disclosure forms should not only be completed by elected and appointed government officials, but also by their wives, their children, their parents and their siblings. With this much transparency no one could see where the real conflicts were. Everyone appeared conflicted beyond remedy.

Conflicts: No Harm, No Foul

There are few absolutes in life and conflict of interest is not among them. In fact, conflicts of interests are not always cause for concern. A sports analogy helps to make the point. Basketball is considered a "non-contact" sport. This means that intentional contact with other players is not allowed and may lead to a penalty. Yet, in actual play, it is sometimes surprising how much jostling and physical contact actually takes place. This is because the rules and logistics of the game make at least some contact unavoidable. Referees are therefore allowed to exercise judgment as to whether physical contact with another ballplayer conflicts or interferes with normal play. If the contact does not interfere with play, it is viewed as incidental rather than a cause for penalty. This rule of thumb is therefore, no harm, no foul.

In much the same way, there are many potential conflicts of interest that have no consequence and should not be considered corruption. For example, it is clear that private gain from public office seems, on its face, to be a fair definition of corruption. Yet as Jane Ley, of the U.S. Office of Government Ethics, likes to remind me, when an employee accepts payment for doing their government job they are privately gaining from their public office. Suddenly, what was first perceived to be a profound evil, is actually benign in its purest form.

As Dennis Thompson has written: "What exactly the principle [against using private gain for public office] prohibits is not so clear, and its ambiguities are the source of many of the problems in implementing ethics in our time."(7) This problem extends to the very heart of the notion of conflict of interest. Andrew Stark in a complex analysis of this problem actually contends that

"pure private gain from public office… takes place in a realm beyond even the twilight zone of quid pro quo, where the official is neither capable of affecting the interests of the concerned nor beholden to them, and where the official's in-role judgment is thus in no way compromised." (8)

Therefore, issues that are general policy matters are not considered conflicting by Stark because they affect an entire class of people, e.g. tax increases. So a policy maker who would be affected by taxes would not be "conflicted" in providing expert testimony either for or against a tax increase. Another example in the United States is the part-time legislator at the state level who votes on a policy issue involving his profession. So a part-time legislator, who also is a practicing lawyer, would not be conflicted if she scuttled a bill in committee that would have limited legal fees in liability cases.

The Public as Referee: We (the People) think it is a foul

The dilemma with this approach is that the line between policy making and decision making can often blur. This can result in the actual movement of ethical standards to include behaviors that might have been considered proper before a catalytic event. Dennis Thompson argues that this is mediated corruption:

…. [M]ediated corruption differs from conventional corruption with respect to ….these three elements: (1) the gain that the politician receives is political, not personal and is not illegitimate in itself, as in conventional corruption; (2) how the public official provides the benefit is improper, not necessarily the benefit itself, or the fact that the particular citizen receives the benefit; (3) the connection between the gain and the benefit is improper because it damages the democratic process, not because the public official provides the benefit with a corrupt motive.(9)

Thompson uses the example of the Keating Five Case, which involved the apparent improper use of the influence of United States Senators to protect someone involved in the Savings and Loan scandals in the late 1980s. Another recent example might be of former President Bill Clinton's pardons at the end of his presidency. A further example - with apologies to my Canadian colleagues - would be the accusation against the Canadian Prime Minister for improper use of position affecting a golf course.

The major point in using these examples is not their potential illegality, but the public perception of the acts. Often in looking at conflicts of interest, and ethics issues more generally, we dwell on whether the act was legal or not. I believe that this is only part of the equation. Conflict of interest issues must not only focus on preventing criminal or administrative wrongdoing, but also on the impact of certain actions on the confidence of a people in their government. The most important product of government ethics programs is not putting people in jail, but maintaining the confidence of citizens in their government. Parenthetically, the main purpose of private sector ethics programs should be to maintain the confidence of stakeholders, stockholders and employees in the integrity of the corporation.

Appearance: The Litmus Test for Behavior

Implicit in many Codes of Conduct is the requirement to avoid conflicts of interest: for example, the Nolan Committee's Principles of Public Service and the rules promulgated by the civil service of Chile. In the United States, the Federal Executive Branch explicitly requires that civil servants avoid the appearance of a conflict of interest and actually promulgates a regulation by which employees can judge their behavior.

Appearance is a difficult standard. Former Senator Cranston (accused in the Keating Five Case) claimed that no matter what the perception was only he "knew what was in his heart." In fact, most democracies hold their public officials to much higher standards than the average citizen, what philosophers call supererogatory standards. Elected and appointed government officials are expected to serve the people, not only their supervisor or agency. In addition to the prohibition against private gain, they are expected to remain impartial in all decisions.

Recent research by the Ethics Resource Center suggests that corporate leaders are held to high standards by their own peers and subordinates. The study suggests that it is not enough for leaders to be good, moral individuals privately.(10) In order to be considered an ethical leader, one must be proactive about communicating their ethical values, decision-making criteria and expectations of employees. Managers must talk about ethics as much as they do about financial goals if they expect employees to make their numbers honestly.

(A study of the US Office of Government Ethics which is posted on their website www.usoge.gov suggests that government employees hold their superiors to the same high standards. In fact, the ERC's 2000 National Business Ethics Survey, which included employees from government, corporations and nonprofits, showed no difference in expectations or perceptions of ethics from one sector to another.(11))

Conclusion: Law, Values and Ethics

This essay is meant only as an exploration of the difficulties in defining conflicts of interest. Often conflicts of interest are viewed as purely legal in nature. In most cases, legal issues are merely the beginning of a discussion of conflicts. Discussions that stop with the law often become confused when applying law to specific situations. For this reason, it is often the issue of appearance that ultimately determines the content. Distinctions between conflicts of interest based on policy matters versus personal benefit evaporate when applied to specific cases.

I believe the reason for this is that we are uncomfortable examining the values that underpin conflicts of interest. Values seem to be so "soft" and non-specific that we avoid them. Yet to effectively understand the application of conflicts of interest to specific situations one must ultimately - implicitly or explicitly - discuss the values that are at the foundation of what we think is wrong with conflicts of interest. The three fundamental values in play are trust, integrity and fairness. Admittedly, these are not as concrete as most policy makers would like. But, they are at base the fundamental concepts that inform the instrumental value - e.g. avoiding conflicts of interest.

When constructing conflict of interest rules and laws to operationalize these values, most governments and organizations expect is individuals to behave as if no conflicts of interest are ever justified. What is not usually written into these rules is the recognition that some conflicts might be justified if higher principles are involved.(12) The key to the success of such a project is providing individuals with the tools to effectively weigh and evaluate the principles involved. Effective training on ethics and the use of these tools is critical in modern governments and corporations.

The recognition that problems of conflict of interest exist both in law and in a larger social context is critical to our discussion here. As former U.S. Chief Justice Earl Warren said:

"In civilized life law floats in a sea of ethics. Society would come to grief without ethics which is unenforceable in the courts and cannot be made part of law. If there were no sense of love and family, if there were no sense of loyalty, if friendship meant nothing, if we all, or any large potion of us, were motivated only by avarice and greed society would collapse almost as assuredly as though it lacked law.

"There is thus a law beyond the law, as binding on those of us who love our institutions as the law itself, although there is no human power to enforce it. In the law beyond the law, which calls upon each of us to be fair, each of us necessarily is his own Chief Justice. In fact, he is the whole Supreme Court from which there lies no appeal." (13)

 

1. It is important to note that there was no meaningful distinction between the public and private sectors in ancient Greece. The Greek polis expected citizens to have both public and private roles. (See John Wild, Plato's Modern Enemies and the Theory of Natural Law. University of Chicago Press, 1953)

2. Plato, The Republic, Book II

3. Edmund Beard, "Conflict of Interest and Public Service" Public Affairs, 500.

4. For an example of the former, one can review the more than 1,000 informal advisory opinions from the U.S. Office of Government Ethics (www.usoge.gov ) and an example of the latter can be found in the Nolan Commission Principles in Great Britain.

5. For almost two decades the classic way of defining conflicts of interest was to distinguish between the economic and political spheres. This is not only overly simplistic but actually avoids the obvious problem of personal conflicts, and the possibility of conflicts of interest between private sector entities. For an example of this argument see: Andrew Kneier, "ethics in Government Service" in Ivan Hill (ed.) The Ethical Basis of Economic Freedom (1976).

6. Dauplanter vs. US (606 R. 2d 654, Nov. 19, 1979)

7. Dennis Thompson, Congressional Ethics: From Individual to Institutional Corruption, Washington, DC, Brookings, 1995, p.49.

8. Andrew Stark, "Beyond Quid Pro Quo: What is wrong with private gain from public office," American Political Science Review, March, 1997, Vol. 91, no. 1.

9. Dennis F. Thompson, "Mediated Corruption: The Case of the Keating Five," American Political Science Review, June, 1993, p. 369.

10. Linda Trevino, Moral Person, Moral Manager. ERC Fellows Program, 2000

11. Joshua Joseph, 2000 National Business Ethics Survey Volume I: How Employees Perceive Ethics at Work. Ethics Resource Center, Washington, D.C. 2000.

12. Such as an individual life or health. This is parallel to the notion used by Sissela Bok in her book Lying; Moral Choice In Public And Private Life, NY: Random House, 1978, pp. 243.

13. Earl Warren, Speech, 1962, New Haven, Connecticut.