A conflict of interest (COI) is a situation in which a person or organization is involved in multiple interests, financial or otherwise, one of which could possibly corrupt the motivation or decision-making of that individual or organization.
The presence of a conflict of interest is independent of the occurrence of impropriety. 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.
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 legal profession, 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 the United States, a law firm usually cannot represent a client if its interests conflict with those of another client, even if they have 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.
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.
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:
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.
|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 of any group is also a conflict of interest. If any organization, 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 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 disclosures.
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. 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|
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.
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 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.
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 2007-2008 financial crisis 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.
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.
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?
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.
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.
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.
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.
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).
cited from Lessig 2011, p. 25