Why conflicts of interest matter – it is both the incentives and disincentives

Yesterday Paul Krugman had a great piece in the NY Times on Why Corruption Matters. With the COI Blog about to have its five-year anniversary, and with COIs in the news as never before (thanks to the President Elect), it seems worth asking the same question of conflicts of interest. After all, corruption can be seen as one type of COI (albeit a particularly sinister type).

Krugman’s central point is that the harm of a corrupt act cannot be measured solely by calculating the benefit to the wrongdoer. Rather, he notes: “It’s not the money, it’s the incentives. True, we could be talking about a lot of money — think billions, not millions, to Mr. Trump alone (which is why his promise not to take his salary is a sick joke). But America is a very rich country, whose government spends more than $4 trillion a year, so even large-scale looting amounts to rounding error. What’s important is not the money that sticks to the fingers of the inner circle, but what they do to get that money, and the bad policy that results.”

I agree with Krugman, but – at least as far as COIs are concerned – would offer a friendly amendment that the harm is not only in the incentives but also in the disincentives. What I mean by that is explained in one of the earliest posts in this blog (which looked at COIs broadly – not just those arising from government service):

How much does it matter that organizations, individuals and governments pay close attention to identifying and mitigating conflicts of interest? One way to answer this question is to consider – as I ask students in my business school ethics class to do – what the world would look like without such focus and sensitivity. Below are some of the observations that I have heard from them over the years.

In “Conflict of Interest World,”

– Individuals might be reluctant to take the medicines that their doctors recommend for fear that those recommendations are motivated more by the doctors’ financial relationships with pharma companies than by the patients’ well-being.

– Individuals and organizations might not use financial advisors for fear that the advice they receive is driven by hidden, adverse interests – and would instead devote otherwise productive time to trying to become their own financial experts, resulting in a significant misallocation of capital as well as time.

– Organizations could hesitate to take a wide range of everyday actions for which they need to trust their employees and agents to do what’s right by the organizations – or would proceed only with highly intrusive and costly surveillance-like measures in place.

In short, Conflict of Interest World is a place of needlessly diminished lives, resources and opportunities.

Additionally, from the perspective of “normative compliance” – an important concept in the C&E field which will be addressed in future postings – in Conflict of Interest World legal and ethical standards beyond those that are COI-related would be weakened, too.

 Bottom line: a short visit to this unhappy imaginary world – a place of “all against all” – is reminder of the vital role that sufficient attention to COIs play in our very real world.

Five years later the importance of trust to our society and the threat that COIs present to it are – to my mind – greater than ever before. While each type of COI – including those facing the President Elect – must be identified and dealt with appropriately,  I view the need for upping our COI game generally as being larger than the sum of the relevant parts. The goal is a society where individuals can trust others – both leaders and fellow citizens – to act in ways that are motivated by the common good and not individual or parochial interests.

One can identify many areas for which having such trust can be essential for success. Most prominently, dealing effectively with climate change will require millions of people around the world to trust one another in the design and execution of solutions to this grave peril. That may be the greatest reason of all to care about conflicts of interest.