More on “reverse conflicts of interest”

In a post several years back I discussed what could be called “reverse conflicts of interest,” starting with an example from my work:

A company enters into a complex business arrangement where one of its managers has a relationship with the other entity.  The relationship is fully disclosed and approved pursuant to company policy on COI waivers.  After time, the arrangement runs into business difficulties.  Although the company has lived up to its contractual obligations, the other entity seems to feel that the company should have done more to make the arrangement work.  Based partly on that, some employees of the company question whether that entity had been promised more than was disclosed by the manager, causing the employees to take various defensive measures which put further strain on the arrangement. Ultimately, the arrangement collapses.

As a general matter, if properly disclosed and approved, some COIs can be waived (although some should not be permitted under any circumstances).  Such approvals can be either a true “green light” or subject to being managed on an ongoing basis, i.e., a “yellow light.”

Like many C&E-related determinations, this type of decision tends to be made based on a balancing of costs versus benefits (hopefully, with a reasonably high burden of showing that the latter outweigh the former).

The case above illustrates what I believe is a factor that should generally be considered by companies deciding whether to grant a COI waiver: whether there will be reasonable possibility of overcompensating for the COI in ways that are harmful to the company.  The potential for such “reverse COIs” could turn on many factors – perhaps most significantly, on the extent to which the contemplated relationship must rely on trust.  (That is, the greater the need for trust, the greater the possibility of suspicion – at least as a general matter.)

Historically, reverse COIs may not have been common.  But as sensitivity to COIs has grown dramatically over the past few years …they seem more likely to occur than ever before, and should be on a company’s radar in making COI waiver determinations.

In the many years since that post I cannot say that I have seen many reverse COIs. But I did find notable the following discussion from the recently published  “Conflict of Interest Disclosure With High Quality Advice: The Disclosure Penalty and the Altruistic Signal” by Sunita Sah of the Johnson Graduate School of Management, Cornell University and Daniel Feiler of the Tuck School of Business at Dartmouth: “In this paper, we explore whether laws requiring conflict of interest disclosure damage the advisor-advisee relationship more than is intended. Across six experiments (N = 1,766), we examine situations in which advisors give high quality advice but still must disclose a conflict of interest. As predicted, such disclosures yield negative attributions regarding the advisor’s character, even when advice is of high quality (and advisees have full information to judge advice quality), and even when the advisor’s professional responsibility and self-interest are aligned, or the advice runs counter to the advisor’s self-interest. This disclosure penalty decreases trust in honest advisors…” (emphasis added).

In short, a reverse COI experiment, of sorts.

Finally, given the extent to which President Trump’s extraordinary COIs have garnered widespread attention, it will interesting to see if over time the reverse COI phenomenon has a widespread effect on how we view COIs in the government realm generally.