Conflicts of interest based on prior employment: law, ethics and some interesting cases

Within the world of conflicts, those arising from prior employment relationships occupy a particularly significant territory.  (Indeed, one of the most notable COI cases of this – still young – year concerns the former head of a pension system helping a fund manager get business from the system.)    In today’s post, I briefly explore different aspects of this part of the COI map.

First, the most consequential forms of conflicts based on previous employment tend to involve public-to-private sector transitions (as in the above-mentioned pension case), and here the relevant standards are generally defined by law.  At least in the U.S., the rules for such transitions can be fairly restrictive, as reflected in this 2009 memorandum from the Gibson Dunn law firm relating to employees of the federal executive branch  and also in this discussion of relevant  state law on the UCLA web site.  Government employees and those who would hire them need to be very mindful of these rules and the latter should build into their hiring processes rigorous means for ensuring compliance.

Second, in terms of purely private sector employment transitions, restrictions of the above  sort are less universal – and tend to be the domain of internal policy, rather than law.  Here (on page 24) is a good example of one such approach  from the Verizon Wireless code.  Based on what I’ve seen over the years, this is an area where many companies have room to improve.

Finally, there are other  less common  COI-related employment transitions for which the  inquiry goes beyond law or internal policy to something else –  an ethical concern, with an element of public policy, perhaps.  While difficult to define using current COI categories, these cases tend to be among the most interesting of the lot.

For instance, late last month, as reported in the Guardian,  a report issued by the public accounts committee of the House of Commons in the UK charged that Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers “are using knowledge gained from staff seconded to the Treasury to help wealthy clients avoid paying UK taxes… [the firms provided] the government with expert accountants to draw up tax laws [but]  went on to advise multinationals and individuals on how to exploit loopholes around legislation they had helped to write… Margaret Hodge, the [committee’s] chair, said the actions of the accountancy firms were tantamount to a scam and represented a ‘ridiculous conflict of interest’ which must be stopped.” Note that for various reasons (some of which are laid out in the Guardian piece) this doesn’t sound like a black-and-white issue to me, but it is indeed worrisome.  And given the importance – not just in the UK, but pretty much everywhere –  of enhancing the fairness and efficiency of tax systems, I imagine that it is the sort of issue that we’ll be hearing about more in the years ahead.

Finally, there is the story from earlier this year about Treasury Secretary Jack Lew having received a $685,000 severance payment when he left an administrative post at NYU for one at Citibank, which he subsequently left to return to government work  – at which time he also got a bonus from Citibank.  While the latter payment was contractually mandated, the former one was not and, as noted in this article,  was “considered unusual by outside experts in benefits and raises questions about why a tax-exempt university would give a large exit bonus to an executive who was departing voluntarily.”

In light of the chronology, Lew was presumably not being paid by NYU to influence his exercise of specific duties as a government employee  – and so this cannot be called a COI in the traditional sense.   But it is also hard to see the severance as the school simply rewarding an employee for a job well done  – especially since, in addition to a large salary, he also received a loan forgiveness valued at about $440,000. Moreover, given the path of his career  (most of which was spent in public service, including holding some powerful posts)  it doubtless seemed likely at the time he left NYU that he would at some point return to government in a high ranking position.

So in terms of where the Lew matter fits on our “map,” it may be most accurate to say that it has the spirit – if not the actual form – of a conflict of interest (although perhaps it could be called a COI “on spec”).   But – along with other such cases – it may suggest a need to look at the adequacy of our current understanding of what a COI is, and consider redrawing the boundaries of what is out of bounds along the lines of common ethical sense.




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