What is a ‘conflict of interest’?

The financial crisis is awash in so many specialised terms that their sheer number seems to rival the amount of bail-out money being doled out to shore up the faltering economy.

One word that is constantly being bounced around, from the Bundestag to the White House, from Wall Street to High Street, is ‘conflict of interest’. It has been used to describe everything from company boards setting their own salaries to a decision by the US Federal Reserve Bank to hire asset management companies to manage the government’s bailout funds.

But what is a ‘conflict of interest’? Is it something that only happens in companies or does it also occur in government? The components of the phrase can be easily broken down and defined, but when seen as a whole… that’s where the trouble begins. What does the term mean in practice?

For Transparency International (TI), ‘conflict of interest’ is defined as:

A “situation where an individual or the entity for which they work, whether a government, business, media outlet or civil society organisation, is confronted with choosing between the duties and demands of their position and their own private interests.”

For TI, this dilemma can occur both in the public and private sector. An example from the public sector is that of Bosnia Herzegovina. The country passed a conflict of interest law that restricts elected officials, executives, and advisors in government institutions from certain activities, including promising employment, granting privileges based on party affiliation, giving gifts, and providing privileged information on state activities.

‘The Anti-Corruption Plain Language Guide’

plain_language_guideTI has tried to make this and other key terms easier for everyone to understand by producing ‘The Anti-Corruption Plain Language Guide‘. The guide is the result of discussions within the TI movement and consultations in six countries – Bangladesh, Kenya, Lebanon, Romania, South Korea and Zambia – that included stakeholders from government, business, civil society and the media. Drawing from these contributions, a list of 45 terms was compiled accompanied by definitions and practical examples. Each term has been chosen for its influential role in defining and shaping the work of TI, and is open to continued debate and revision.

So what does conflict of interest mean to you?

Do you agree with the TI definition? How should the definition be changed to capture the problems we have witnessed in the public and private sectors?

Every two weeks, TI will be posting another new term on the blog and you are invited to contribute your ideas to the discussion. Help us improve our understanding of the words used to describe what’s happening in our world.

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Craig Fagan

About Craig Fagan

Craig Fagan is Senior Policy Coordinator at Transparency International.

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4 Responses to What is a ‘conflict of interest’?

  1. Geo-Sung Kim 1 August 2009 at 3:00 am #

    One typical feature of the discussion on conflict of interest is the inclusion of avoidance of ‘apparent conflict of interest’ as well as real conflict of interest. Those codes of ethics/conducts are not restricted to providing concrete guidelines to avoid ‘real conflict of interest’. At the same time, they are concerned more about avoidance of any similar ‘appearance’ of the conflicting situation that will also undermine their credibility and reputation.

    The OECD has also emphasised that any ‘apparent’ conflict of interest should be avoided. It introduced the case of US government’s Executive Order 12674, Principles of Ethical Conduct for Government Officers and Employees with its 14 principles. The last, but probably not the least, of them is as follows:

    Employees shall endeavour to avoid any actions creating the appearance that they are violating the law or the ethical standards set forth in this part. Whether particular circumstances create an appearance that the law or these standards have been violated shall be determined from the perspective of a reasonable person with knowledge of the relevant facts.

    In accordance with US principles, many ethics codes for public officers incorporated this principle. For example, the Code of Conduct for United States Judges (effective July 1, 2009) reads “A judge should avoid impropriety and the appearance of impropriety in all activities” in Canon 2. Commentary to this canon is as follows:

    An appearance of impropriety occurs when reasonable minds, with knowledge of all the relevant circumstances disclosed by a reasonable inquiry, would conclude that the judge’s honesty, integrity, impartiality, temperament, or fitness to serve as a judge is impaired. Public confidence in the judiciary is eroded by irresponsible or improper conduct by judges. A judge must avoid all impropriety and appearance of impropriety. This prohibition applies to both professional and personal conduct. A judge must expect to be the subject of constant public scrutiny and accept freely and willingly restrictions that might be viewed as burdensome by the ordinary citizen. Because it is not practicable to list all prohibited acts, the prohibition is necessarily cast in general terms that extend to conduct by judges that is harmful although not specifically mentioned in the Code. Actual improprieties under this standard include violations of law, court rules, or other specific provisions of this Code.

    Another example of the implementation of the OECD’s policy is found in a toolkit, Managing Conflicts of Interest, that was published jointly by the Independent Commission Against Corruption of New South Wales and the Crime and Misconduct Commission of Queensland in Australia. The toolkit describes the term ‘apparent conflict of interest’ as follows:

    An apparent conflict of interest exists where it appears that a public official’s private interests could improperly influence the performance of their duties – whether or not this is in fact the case.

    Thus, this juxtaposition of the real ‘impropriety’ with ‘the appearance of impropriety’ in the revised code shows the importance of managing appearance and its inclusion in the ethics code.

    However, this topic of conflict of interest should not be underscored just as a matter of mere ethical issue. It is because more serious problems can also arise in the area of conflict of interest. As Tim Lankester pointed out, “political patronage remains more widespread” in the United States “than in most Western democracies” . The problem, here, is that this patronage is ‘accepted’ as an old tradition. He introduced some examples:

    […] ambassadors are routinely chosen on the basis of a connection with the President—friendship or financial support for his election. And thousands of other senior officials in the federal government are appointed on the basis of their political affiliation. Furthermore, conflicts of interest are not adequately controlled, especially in the area of public procurement, and public spending more generally.

    He added some more examples of private businesses’ “influence on how the rules are formed and implemented”.

    Similarly, there are legal forms of favouritism. In some countries, appointment of closely related people to certain public positions is a legally bestowed right of high level officers, including the President. Sometimes, they use the privilege for private concerns that may, or may not be related with any direct or indirect gains from those beneficiaries. Public policies and national strategies can be distorted by the concerns over the benefit of the inner circle of high level officers.

  2. Casey Kelso 11 August 2009 at 9:46 am #

    I think Geo-sung Kim makes an excellent point about the “appearance of impropriety”. Another smart commentator who made a similar point was Kathleen Moktan, who is the Asian Development Bank’s Director of the Public Management, Governance and Participation Division.

    She says ethics — avoiding a conflict of interest — is about self restraint, meaning that one decides not to act in a certain way just because its allowed, or there isn’t a rule explicitly banning it, or because you can get away with it.

    There is also a big difference between what you have the right to do and what is right to do. Earlier this summer, Kathleen told a meeting of some 20 TI Asia-Pacific chpaters that: “As a director, with 20 staff reporting to me, I have the right to evaluate performance of my staff but would it be right to promote and reward those staff who agree with me?”

    She says that in many ways, avoiding a conflict of interest is about choosing to do more than the law requires and less than the law allows.

    There may be times when even though a policy allows one to accept small gifts, you may say no, “when you know that the intent is to compromise you, or when you do feel comfortable with the individuals offering the gift and/or the perception that receiving it could give.”

  3. Lidy 24 August 2009 at 11:52 am #

    As a weapon in the fight against corruption in business, I advise you to register in http://www.company-info.biz where companies from all around the world are trying to create a more transparent B2B environment by ranking each other according to their liability, respect for payments, common business experiences, and so on.
    I think it’s a good way to promote fair companies and unmask bad payers, and make your business known at the same time.

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