A conflict of interest (COI) is a situation in which a person
is involved in multiple interests
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.
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.
[''Model Rules of Prof'l Conduct r. 1.9 (Am. Bar Ass'n 1983).'']
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.
[Sisk, et al, §4-7.1 at 357-58.]
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:
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.
[''California State Bar Ethics Opinion 1989-108.'']
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.
[California State Bar Ethics Opinion 1989-113.]
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.
[''California State Bar Ethics Opinion 1989-113.'']
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:
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.
[District of Columbia Bar Association Ethics Opinion 309.]
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:
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,
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:
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.
[Richard C. Solomon, ''Successive representation: A conflicts trap for the unwary,'' California State Bar (March 2017).]
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.
, 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.
[Lessig 2011, pp. 29-32]
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.
Generally (unrelated to the practice of law)
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
A few examples of conflict of interest are:
* When a member of the commissioners of a state highway commission owns a piece of property where the state will have to condemn it. The conflict of interest comes in because the commission will want to acquire the property at the lowest possible price (subject to it being at least fair market value) while as the property owner, they are going to want the highest possible price they can get.
* When an officer or director of a corporation owns a patent or copyright which either was developed before they were involved with the corporation (which means it cannot be subject to a contractual right of assignment or work for hire) or that it was developed for a type of product not related to the scope of their employment. As an author or inventor, they are going to want a large license fee or royalty, while as an officer of the corporation they are expected to offer as little as possible.
* A judge deciding a bench trial or arbitrator in binding arbitration must not decide a case where a relative, acquaintance, or business partner is a party. Because they may give overly favorable terms to that party, or where they might impose excessively harsh terms (such as a judge having their estranged child, parent, or ex-spouse as a criminal defendant being sentenced before them.)
Conflict of interest in UN Security Council
Conflict of Interest exists even in UN (United Nations Security Council
) regarding United Nations Security Council veto power
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.
The following are the most common forms of conflicts of interests:
, 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.
, 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 bribe
s 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.
Environmental hazards and human health
Baker summarized 176 studies of the potential impact of Bisphenol A
on human health as follows:
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.
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 adjuster
s 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."
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. This is visible through one study which highlights how Members of Congress who have specific stock investments may vote on regulatory and interventionist legislation.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:
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
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.
[Lessig 2011, pp. 43–52, 117]
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.
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
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 journal
s. Backers argue such disclosures will help restore faith in the profession by increasing transparency which will help in assessing economists' advice.
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.
A financial institution with a conflict of interest may also be charged with market manipulation. Stockbrokers that act as market makers have a duty to establish bona fide. A conflict of interest serves against that regulation. Stockbrokers have to prove that their trading interests and transacting interests do not interfere with serving the interests of investors at brokerages
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.