case study about conflict of interest

7 Best Case Studies on Corporate Conflict of Interest

The exploration of corporate conflict of interest reveals significant challenges and implications through seven key case studies. For instance, XYZ Corporation utilized conflict mapping to identify stakeholder interests while ABC Industries faced reputational damage due to undisclosed board member interests. DEF Enterprises highlighted procurement integrity issues linked to undisclosed executive relationships. GHI Holdings' crisis prompted an immediate governance overhaul. Additionally, JKL Group established transparency through rigorous disclosure requirements. These cases stress the importance of clear policies, ongoing training, and independent oversight. Insights from these studies can aid organizations in effectively navigating conflict challenges and enhancing governance practices.

Table of Contents

Overview of Conflict of Interest

What constitutes a conflict of interest, and why is it a critical concern in corporate governance? A conflict of interest arises when an individual or organization has competing interests or loyalties that could potentially influence their decision-making processes. In the context of corporate governance, this concern is heightened due to the fiduciary duties that directors and executives owe to shareholders and stakeholders. When personal interests conflict with professional responsibilities, the integrity of decision-making can be compromised, leading to adverse outcomes for the organization and its shareholders.

To mitigate conflicts of interest, corporations must implement robust transparency measures and adhere to strict ethical guidelines. Transparency measures involve disclosing potential conflicts to stakeholders, thereby fostering an environment of trust and accountability. This includes requiring board members and executives to declare any personal or financial interests that may intersect with their corporate roles. Ethical guidelines serve to delineate acceptable behaviors and decision-making processes, ensuring that individuals act in the best interest of the corporation rather than pursuing personal gains.

Furthermore, organizations must establish clear frameworks for identifying, managing, and resolving conflicts of interest. This can involve regular training for employees and leadership on recognizing potential conflicts, as well as the establishment of a reporting mechanism for suspected violations. By promoting a culture of transparency and ethical conduct, corporations can safeguard against the detrimental effects of conflicts of interest, ultimately enhancing stakeholder confidence and contributing to long-term sustainability.

Case Study: XYZ Corporation

The case of XYZ Corporation highlights the importance of conflict identification techniques in managing corporate governance. By systematically analyzing potential conflicts, stakeholders can better understand the implications on their interests and the overall operational integrity of the organization. This examination provides valuable insights into how conflicts of interest can affect decision-making processes and stakeholder relationships.

Conflict Identification Techniques

In the context of corporate governance, identifying conflicts of interest is essential for maintaining ethical standards and ensuring transparency. XYZ Corporation employed several techniques to effectively identify potential conflicts within its operations. Primarily, the organization utilized conflict mapping to visualize relationships and interactions among stakeholders, enabling a clearer understanding of potential conflicts.

Additionally, XYZ Corporation conducted thorough stakeholder analysis to identify the varying interests and influences of different parties involved. This approach helped the company recognize overlapping interests that might lead to conflicts.

Key techniques used in conflict identification included:

• Surveys and Questionnaires : Engaging employees and stakeholders to gather honest feedback on perceived conflicts.
• Interviews : Conducting one-on-one discussions to uncover hidden conflicts and concerns.
• Regular Audits : Implementing systematic reviews of decision-making processes to detect any inconsistencies or biases.
• Scenario Planning : Anticipating potential future conflicts through hypothetical situations and assessing their impacts.

Impact on Stakeholders

Identifying conflicts of interest is only the first step; understanding their impact on stakeholders is equally vital for effective corporate governance. In the case of XYZ Corporation, the emergence of conflicts of interest led to significant reputational damage, undermining stakeholder trust. As stakeholders, including employees and shareholders, perceived transparency issues, the company faced governance challenges that complicated decision-making processes.

The financial repercussions were considerable, with a decline in stock prices reflecting investor sentiment and increased shareholder activism demanding accountability. Employees, witnessing the erosion of ethical standards, experienced lower morale, which further affected productivity and retention rates.

Moreover, XYZ Corporation struggled with regulatory compliance, as oversight bodies began scrutinizing their practices following public outcry. The lack of transparent communication exacerbated concerns, leading to a loss of confidence among clients and partners.

Ultimately, the impact on stakeholders was profound, illustrating that conflicts of interest extend beyond immediate ethical dilemmas to influence broader corporate health. Addressing these issues requires not only conflict identification but also a commitment to restoring stakeholder trust through transparency and ethical governance practices.

Case Study: ABC Industries

ABC Industries serves as a compelling case study in the examination of corporate conflict of interest, illustrating the complexities that arise when personal interests intersect with professional responsibilities. The company faced significant scrutiny when it was revealed that several board members had undisclosed financial interests in a competing firm. This situation not only raised questions about corporate ethics but also highlighted the need for robust governance frameworks to mitigate such risks.

To understand the ramifications of this conflict, it's crucial to consider the following emotional impacts on stakeholders:

• Trust Erosion : Stakeholders felt betrayed, leading to a decline in confidence in the company's leadership.
• Financial Implications : Investors faced potential losses due to misinformed decision-making processes.
• Employee Morale : Employees were disheartened, feeling that their hard work was undermined by unethical behavior at the top.
• Reputation Damage : The company's brand reputation suffered, impacting customer loyalty and public perception.

ABC Industries' situation emphasizes the importance of conflict resolution strategies and transparency measures to restore stakeholder trust. Effective risk management and regulatory compliance are vital to prevent future occurrences. Furthermore, ethical leadership must guide decision-making processes to ensure that personal interests do not overshadow corporate responsibilities. By undertaking a comprehensive stakeholder analysis, ABC Industries can develop more effective governance frameworks that prioritize ethical practices and foster a culture of accountability.

Case Study: DEF Enterprises

DEF Enterprises presents another instructive example of corporate conflict of interest, as it faced serious allegations regarding the undisclosed relationships between its senior executives and external vendors. These allegations surfaced during a routine audit, which revealed that several high-ranking officials had established personal connections with vendors awarded lucrative contracts , raising significant ethical dilemmas.

The crux of the issue lay in the lack of transparency surrounding these relationships. Investigations indicated that senior executives failed to disclose their connections, potentially compromising the integrity of the procurement process. Such undisclosed affiliations not only undermine fair competition but also erode stakeholder trust, leading to potential legal implications for DEF Enterprises.

Moreover, the situation prompted questions about the company's internal governance policies. The absence of stringent conflict-of-interest policies and the failure to enforce existing ones illuminated a critical gap in corporate ethics. DEF Enterprises' leadership faced intense scrutiny as stakeholders demanded accountability and reform to prevent future occurrences.

In response to the scandal, DEF Enterprises initiated a comprehensive review of its ethical standards and implemented training programs designed to educate employees about recognizing and reporting potential conflicts of interest. This case underscores the necessity for robust internal controls and transparency in corporate governance to mitigate ethical dilemmas that may arise from personal relationships intertwined with business dealings.

Ultimately, the DEF Enterprises case serves as a cautionary tale, highlighting the need for organizations to prioritize ethical practices and transparency to sustain trust and integrity within their operational framework.

Case Study: GHI Holdings

Navigating the complexities of corporate governance, GHI Holdings encountered a significant conflict of interest crisis that tested its ethical framework and operational integrity. The situation arose when a senior executive was found to have undisclosed financial interests in a competitor, raising serious questions about the decision-making processes and transparency within the organization.

The implications of this conflict of interest were profound, impacting various stakeholders, including employees, shareholders, and clients. The fallout from the executive's actions underscored the vital need for robust corporate governance frameworks. GHI Holdings was compelled to take decisive actions, including:

• Immediate Investigation : Initiating a thorough investigation to assess the extent of the conflict and its repercussions.
• Policy Overhaul : Revising corporate governance policies to enhance transparency and accountability measures, ensuring that conflicts of interest are identified and mitigated effectively.
• Stakeholder Communication : Implementing a transparent communication strategy to inform stakeholders of the situation and the steps being taken to rectify it.
• Training Programs : Developing comprehensive training programs aimed at educating employees about conflict of interest policies and ethical conduct.

GHI Holdings emerged from this crisis with a renewed focus on corporate governance, emphasizing the importance of ethical practices in maintaining trust. This case serves as a vital reminder of the vulnerabilities in corporate structures and the necessity for vigilant oversight in preventing conflicts of interest.

Case Study: JKL Group

The JKL Group presents a compelling case study for examining conflict identification strategies within corporate governance frameworks. This analysis will explore the ethical implications arising from identified conflicts, highlighting both the challenges and responsibilities faced by the organization. Understanding these dynamics is crucial for developing robust policies that mitigate conflicts of interest while upholding corporate integrity.

Conflict Identification Strategies

Although conflicts of interest are often subtle and multifaceted, effective identification strategies are crucial for organizations like JKL Group to mitigate potential risks. The complexity of corporate environments necessitates a proactive approach to uncover and address conflicts that may arise. Four key strategies can be employed:

• Implementing Disclosure Requirements : Establishing clear disclosure protocols encourages transparency among employees and stakeholders, ensuring potential conflicts are reported promptly.
• Conducting Regular Audits : Routine assessments of business practices help identify hidden conflicts, revealing areas where interests may diverge from organizational goals.
• Engaging Stakeholders : Active involvement of stakeholders in discussions around potential conflicts fosters an environment of openness, allowing for diverse perspectives and insights to be shared.
• Training and Education : Providing ongoing training on conflict identification equips employees with the knowledge to recognize potential issues before they escalate, reinforcing a culture of integrity within the organization.

Ethical Implications Explored

Understanding the ethical implications of conflicts of interest is vital for organizations like JKL Group, particularly in light of the identification strategies previously discussed. The presence of ethical dilemmas arising from conflicting interests can undermine stakeholder trust and damage an organization's reputation. For JKL Group, recognizing these dilemmas is fundamental to navigate complex decision-making processes where personal gain may conflict with corporate responsibilities.

Transparency practices play a significant role in mitigating these ethical challenges. By fostering an environment of openness, JKL Group can ensure that potential conflicts are disclosed and managed effectively. This includes establishing clear guidelines for identifying, reporting, and addressing conflicts of interest at all organizational levels.

Moreover, implementing a robust framework for ethical decision-making can aid JKL Group in evaluating situations where conflicts may arise. Training employees to recognize potential ethical dilemmas and equipping them with the tools to address these issues proactively enhances the organization's ethical culture. Ultimately, prioritizing transparency and ethical accountability not only safeguards JKL Group's integrity but also reinforces its commitment to responsible business practices, thereby fostering long-term stakeholder relationships.

Lessons Learned From Cases

Examining various corporate conflict of interest cases reveals critical insights that can guide organizations in navigating similar challenges. These lessons emphasize the importance of implementing robust transparency practices and governance frameworks to mitigate risks and uphold ethical standards.

• Prioritize Transparency : Organizations must foster an environment where transparency is not merely encouraged but ingrained in their culture. This commitment helps to build trust among stakeholders and reduce the potential for conflicts.
• Establish Clear Policies : Developing comprehensive policies that define acceptable behavior and outline procedures for disclosure can prevent misunderstandings and mismanagement of conflicts.
• Regular Training and Awareness : Continuous education on the implications of conflicts of interest ensures that employees and management are aware of their responsibilities, promoting accountability and ethical conduct throughout the organization.
• Independent Oversight : Implementing independent oversight mechanisms, such as an ethics committee or external audits, can provide an unbiased perspective on potential conflicts and enhance the credibility of the organization's governance frameworks.

Frequently Asked Questions

How can employees report suspected conflicts of interest anonymously.

Employees can report suspected conflicts of interest anonymously through established reporting mechanisms, ensuring compliance with whistleblower protections. These systems facilitate confidential communication, promoting transparency while safeguarding individuals from retaliation for disclosing potential ethical breaches within the organization.

What Legal Consequences Can Arise From a Conflict of Interest?

Conflicts of interest can lead to significant legal ramifications, including regulatory fines and litigation . Additionally, ethical implications may damage corporate reputation and stakeholder trust, underscoring the necessity for robust governance and transparent reporting mechanisms.

Are There Specific Industries More Prone to Conflicts of Interest?

Certain industries, such as financial services, healthcare, legal profession, and real estate, exhibit higher susceptibility to conflicts of interest due to inherent dual roles, regulatory complexities, and the potential for profit-driven motives to overshadow ethical considerations.

What Role Does Corporate Governance Play in Preventing Conflicts?

Corporate governance plays an essential role in preventing conflicts of interest by promoting stakeholder transparency and fostering ethical leadership. Effective governance frameworks ensure accountability, mitigating risks and enhancing trust among stakeholders while aligning organizational objectives with ethical standards.

How Often Should Companies Review Their Conflict of Interest Policies?

Companies should conduct frequency assessments of their conflict of interest policies at least annually. Regular policy updates, informed by emerging regulations and industry practices, ensure effective governance, mitigate risks, and uphold organizational integrity and transparency.

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Another potential conflict can come in the form of conscience. An individual might suffer a conflict of conscience if, for example, the mission or expectations of the institution are incompatible with his or her personal values.

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Stelfox et al. (1998) reviewed the literature in 1995 and 1996 for reports on the safety of calcium channel antagonists. They classified reports as being supportive, neutral, or critical of these drugs. For reports supportive of calcium channel antagonists, virtually all authors had financial relationships with drug companies. However, only 43% of the authors of reports critical of the drugs had such connections with drug companies. Many different hypotheses might explain this trend, but it seems clear that it would be valuable to know if a published study was supported by industry.

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Conflicts of interest do not necessarily amount to research misconduct. However, if the potential for personal gain is great, then principles that guide responsible conduct in research may be compromised. In an extreme case, it is conceivable that someone could knowingly compromise principles of good scientific practice in pursuit of a particular research finding our outcome.

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Disclosure of conflicts.

In a survey of 789 scientific papers published by Massachusetts scientists in the leading journals of cell and molecular biology, 34% of the articles had at least one author with a significant financial interest. Despite this high rate of financial interests, only about 0.5% of over 61,000 comparable papers included disclosure statements.

Perceptions may outweigh even the best of practices

When large sums of money are involved, it may be difficult for the public, legislators, the judicial system, and even colleagues to be convinced that results were not biased for personal gain. Perceived impropriety can result in consequences as damaging as if intentional misconduct had been committed. With increased media, governmental, and public scrutiny , a researcher's reputation, research funding, and employment can depend as much on perceptions of integrity as on integrity itself.

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Institute of Medicine (US) Committee on Conflict of Interest in Medical Research, Education, and Practice; Lo B, Field MJ, editors. Conflict of Interest in Medical Research, Education, and Practice. Washington (DC): National Academies Press (US); 2009.

Conflict of Interest in Medical Research, Education, and Practice.

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4 Conflicts of Interest in Biomedical Research

Biomedical research provides discoveries that may lead to new or better tests and treatments that improve individual and public health. Patients, patients’ families, physicians, other researchers, and policy makers need to trust that the design, conduct, and reporting of such research are unbiased and that the time and effort that they contribute to research will be used to advance science. Participants in clinical trials need to trust that they are not exposed to unnecessary risk. Conflict of interest policies should not only address concerns that financial relationships with industry may lead to bias or a loss of trust but should also consider the potential benefits of such relationships in specific situations.

Research partnerships among industry, academia, and government are essential to the discovery and development of new medications and medical devices that provide improved means for the prevention, diagnosis, and treatment of health problems. Historically, the federal government has taken the lead in supporting discoveries in basic science, whereas commercial firms have focused on the discovery of specific medicines and then their development through clinical trials to the regulatory approval of marketable products. (As discussed below, the development pathway for medical devices often differs from the pathway for pharmaceuticals.) Before 1980, the federal government held the patents resulting from publicly funded basic research, but very few patents were licensed for commercial development. In 1980, the U.S. Congress passed the Patent and Trademark Amendments of 1980 (P.L. 96-517, commonly known as the Bayh-Dole Act, after its sponsors). The law allowed institutions to patent discoveries resulting from federally funded research and to grant licenses for others to develop those discoveries. Universities may retain licensing and royalty fees, which they generally share with their scientists who developed the patented discovery. Since the law’s passage, patent licensing and other financial relationships linking medical researchers and research institutions with industry have expanded substantially ( Schacht, 2008 ). Some scholars, however, have pointed to factors in addition to the legislation that may be associated with the historical increase in the numbers of patents, including a broadening of the criteria that allow materials to be patentable (particularly for life forms) and advances in biomedical research (see, e.g., Mowery et al. [2001 , 2004 ] and Sampat [2006] ; see also Diamond v. Chakrabarty , 447 U.S. 303 [1980]).

This chapter starts with a brief overview of some dimensions of university-industry collaborations in biomedical research and then summarizes data on the extent of the relationships between pharmaceutical, device, and biotechnology companies and academic research institutions and individual researchers. The next sections review concerns about these relationships and responses to those concerns. ( Appendix E provides an additional discussion of the nature and importance of academic-industry collaboration in medical research.) Because many conflicts of interest at the institutional level emerge from research discoveries, the discussion of these conflicts and the responses to them presented in Chapter 8 is also relevant. The final section of this chapter offers recommendations.

• COLLABORATION AND DISCOVERY IN BIOMEDICINE

The path from a scientific discovery to the marketing of a new drug, device, or biological product is typically long and complex and involves a diversity of expertise and resources. For example, basic researchers, often at academic medical centers and other research institutions, can identify new potential targets for therapies and new strategies for treatment, suggest additional diseases that may be able to be treated by existing and newly developed compounds, and suggest both how to target therapies to the patients who are the most likely to benefit and how to avoid particular treatments for patients at high risk for adverse events from those treatments. Scientists at the National Institutes of Health (NIH) also contribute to the discovery process, and important clinical research is undertaken at the NIH Clinical Center. In addition, basic scientists at biotechnology and pharmaceutical companies have made fundamental discoveries that have led to new therapies.

Scientists at pharmaceutical companies can help identify or develop drugs that may be active against new biological targets that have been identified by individuals who conduct basic research. These companies also have the critical ability to use good manufacturing practices to produce a candidate drug in sufficient quantities for clinical trials and then for large-scale commercial distribution, if the product is approved for marketing. Furthermore, they have experience with the Food and Drug Administration (FDA) drug approval process, which includes extensive requirements for preclinical and clinical testing and for manufacturing. Finally, pharmaceutical companies also supply or raise the capital needed to fund the lengthy process of bringing a product to market. Medical device companies and biotechnology companies play analogous roles in translating discoveries made through basic research into products or services for medical and public health practice, although the specific details differ from those involved with the drug approval process. ( Appendix E provides a more detailed discussion of the discovery and development process.)

The committee heard testimony that collaboration between academic and industry researchers in the drug discovery process can be mutually beneficial ( Benet, 2008 ; Cassell, 2008 ). When a new disease mechanism is discovered, academic and industry scientists can work together to identify promising therapeutic targets and treatment approaches. Furthermore, academic researchers can inform industry when they identify potential new targets for chemical intervention. Drug companies can then quickly scan their chemical libraries to search for compounds with potential biological activity and describe what problems they have encountered as they have tried to identify the specific targets of those compounds. This begins the long process of applied chemistry, which is needed to identify a candidate drug.

Many examples illustrate that academic collaboration with pharmaceutical and biotechnology companies can lead to dramatic therapeutic advances that save lives and improve the quality of life. Particularly dramatic are those related to therapies for human immunodeficiency virus (HIV) infection. Collaborations contributed to delineation of the pathophysiology of the disease and the development of successive new classes of drugs, including reverse transcriptase inhibitors, protease inhibitors, and entry inhibitors ( Braunwald et al., 2001 ). These advances have transformed a uniformly fatal illness into a chronic disease that people are now generally able to survive for decades. A few other examples include the following:

• an anticoagulant (abciximab), which is a monoclonal antibody against the platelet glycoprotein IIb/IIIa, that has been shown to prevent thrombotic complications of coronary angioplasty (EPIC Investigators, 1994 ; Tcheng et al., 2003 );
• pulmonary surfactant, which improves survival in neonates with respiratory distress syndrome and which was developed by a number of academic researchers at different universities working in close collaboration with several pharmaceutical companies (personal communication, Jeffrey A. Whitsett, Chief, Section of Neonatology, Perinatal and Pulmonary Biology, Cincinnati Children’s Hospital Medical Center, December 9, 2008);
• rituximab, a monoclonal antibody against the CD20 marker on B cells, which is effective in patients with certain types of lymphoma and leukemia, rheumatoid arthritis, and multiple sclerosis and in preventing the rejection of transplanted organs ( Maloney et al., 1997 ; Edwards et al., 2004 ; Hauser et al., 2008 );
• bortezomib, a proteasome inhibitor, which improves survival in patients with multiple myeloma ( San Miguel et al., 2008 ); and
• imatinib, a tyrosine kinase inhibitor, which has greatly prolonged the survival of patients with chronic myelogenous leukemia ( Druker et al., 2006 ).

Compared with the drug development process, the development of complex medical devices tends to be a more continuous process of innovation and refinement that involves frequent alterations in device design, materials, manufacturing processes, or other characteristics. Examples of medical devices that have been developed as a result of close academic industry collaborations include implanted defibrillators ( Jeffrey, 2001 ), prosthetic heart values ( Gott et al., 2003 ), and mechanical ventilators ( Keszler and Durand, 2001 ). Advances in many technologies, such as pulse oximetry for the monitoring of anesthesia and phototherapy for the treatment of disease, highlight the results that may accrue from a combination of research collaboration and communication with senior clinicians about their experiences ( Mike et al., 1996 ; Dicken et al., 2000 ; McDonagh, 2001 ; Severinghaus, 2007 ; Vreman et al., 2008 ).

Nevertheless, advances in medical devices may result in conflicts of interest. For example, the process of device refinement (particularly when the refinements are minor or are not associated with well-designed clinical studies) is at the center of controversies over whether some consulting arrangements between orthopedic surgeons and the manufacturers of orthopedic devices represent fair payments for technical services or are inducements for the surgeons to use the device.

To promote further progress in moving discoveries from basic science into successful products, NIH has developed major initiatives to strengthen early translational research, which focuses on transforming specific discoveries into clinically useful products or services (see, e.g., NIH [2008d] and CTSA [2009] ). At academic centers, this research may involve populations of individuals with rare diseases or biological agents that do not have obvious commercial potential. Such research may, nonetheless, lay the foundation for companies to develop successful products or at least for company licensing of compounds or agents for which university research has provided proof-of-concept data but for which companies must take the next steps.

• INDUSTRY FUNDING AND RELATIONSHIPS IN BIOMEDICAL RESEARCH

Growth and Magnitude of Industry Funding

Industry funding for biomedical research has been growing in recent decades and is now the largest source of funding for such research in the United States. Between 1977 and 1989, the proportion of the total funding for clinical and nonclinical research supplied by industry grew from 29 to 45 percent ( Read and Campbell, 1988 ; Read and Lee, 1994 ). Between 1995 and 2003, the yearly figures (which are based on sources of information somewhat different from those for 1977 to 1985) ranged from 57 to 61 percent ( Moses et al., 2005 ; see also Hampson et al. [2008] ). This funding supports work in the laboratories of pharmaceutical, device, and biotechnology companies; contracts for research conducted by universities and other nonprofit research institutions; and contracts with commercial contract research organizations that carry out clinical trials in academic and private practice settings.

Extent of Academic-Industry Relationships

Industry relationships with academic biomedical researchers are extensive. A 2006 national survey of department chairs in medical schools and large independent teaching hospitals found that 67 percent of academic departments (as administrative units) had relationships with industry ( Campbell et al., 2007b ). In addition, 27 percent of nonclinical departments and 16 percent of clinical departments received income from intellectual property licensing. Among the department chairs, 60 percent had relationships with industry, including serving as a consultant (27 percent), a member of a scientific advisory board (27 percent), a paid speaker (14 percent), an officer (7 percent), a founder (9 percent), or a board member (11 percent) for a company. In some universities, companies fund individual departments, multidisciplinary research centers, or campuswide research programs ( Bero, 2008 ).

For individual academic researchers, studies from the 1990s show that they have widespread relationships with industry. In a 1996 survey, 28 percent of life sciences faculty who conducted research received support from industry sources ( Blumenthal et al., 1996a , b ). The prevalence of support was greater for researchers in clinical departments (36 percent) than for those in nonclinical departments (21 percent). In a 1998 study, 43 percent of academic scientists in the 50 most research intensive universities reported receiving research-related gifts (independent of a research grant or contract) during the preceding 3 years ( Campbell et al., 1998 ). The most widely reported gifts received from industry were biomaterials used in research (24 percent), 1 discretionary funds (15 percent), research equipment (11 percent), and trips to professional meetings (11 percent). Among those receiving gifts, 66 percent viewed them as important to their research.

A study of disclosures at the University of California at San Francisco found that by 1999, approximately 8 percent of principal investigators at the institution reported personal financial ties to the sponsor of a particular research project ( Boyd and Bero, 2000 ). Thirty-four percent of these involved temporary speaking engagements, 33 percent involved consulting relationships, 32 percent involved paid positions on a scientific advisory board or board of directors, and 14 percent involved equity in a firm (more than one type of involvement for a single research project was possible).

Although evidence is limited and not recent, some research suggests that faculty members who have research relationships with industry are more productive in certain respects than faculty who do not have such relationships. One study found that researchers in the former group are significantly more likely than researchers in the latter group to report that they are involved with a start-up company (14 versus 6 percent) or that they have applied for a patent (42 versus 24 percent), have had a patent granted (25 versus 13 percent), have a patent licensed (18 versus 9 percent), have a product under review (27 versus 5 percent), or have a product on the market (26 versus 11 percent) ( Blumenthal et al., 1996a ). That study also reported that these faculty reported that they had published significantly more articles in peer-reviewed journals in the previous 3 years than faculty without industry funding (15 versus 10 articles) ( Blumenthal et al., 1996a ). In general, a greater number of biomedical patents should benefit society, since patents are usually a key step in the development of new therapies or diagnostic tests. Likewise, greater publication productivity should, in general, advance scientific knowledge.

The associations reported above do not prove causality. Industry may fund scientists who are more productive or whose research has more commercial potential. Alternatively, industry may provide funding that allows scientists to be more successful commercially and academically, or such support may encourage funded scientists to be more active commercially.

• CONCERNS ABOUT RELATIONSHIPS WITH INDUSTRY

Despite their benefits, relationships with industry create conflicts of interest that can undermine the primary goals of medical research. Where there are conflicts, legitimate and serious concerns can be raised about the openness of research and potential bias in the design, conduct, and reporting of research (see, e.g., Gross [2007] ). Whether or not the conflicts actually lead to unwarranted secrecy or biased results in particular cases, they have the potential to threaten the reputation of the research enterprise if they are not avoided or identified and managed responsibly.

The review below does not cover marketing activities disguised as research, in particular, so-called seeding trials that companies design to change the prescribing habits of participating physicians rather than to gather scientifically valid information. These studies, which potentially expose study participants to risk without investigating scientifically significant questions, are discussed in Chapter 6 .

Industry Funding of Research and Reduced Openness in Science

A fundamental tenet of academic science is that information, data, and materials should be shared. Such sharing could be at risk in academic-industry collaborations. A 2003 National Research Council report identified “the commercial and other interests of authors in their research data and materials” as major obstacles to information sharing ( NRC, 2003 , p. 1).

A 1995 survey of life sciences faculty in the 50 most research intensive institutions found that 14 percent of those with funding from industry reported that trade secrets had resulted from their research, whereas 5 percent of those without funding from industry did so ( Blumenthal et al., 1996a ). Trade secrets were defined as information that is kept secret to protect its commercial value. In some cases, this finding may represent the normal and necessary protection of key information prior to the filing of a patent on intellectual property, with the resulting enhanced opportunity for successful commercialization. (Unlike trade secrets, patents require the disclosure of information but protect property interests in a discovery for a defined period.) A 1993 study of academic genetics research found that faculty with research funding from industry were significantly more likely to delay publication of their research results by more than 6 months to allow the commercialization of their research ( Blumenthal et al., 1997 ).

The situation may have changed since the 1993 study cited above because some basic science journals have adopted more stringent policies on data sharing and withholding (see, e.g., NRC [2003] , NPG [2007] , and Piwowar and Chapman [2008] ). In any case, not only journals but also the research institutions themselves could better maintain the integrity of research to the extent that they adopt more stringent policies on data sharing.

A related concern involves access to data. In some industry-supported research, the investigator lacks full access to the study data and depends almost entirely on company statisticians for analysis ( Bombardier et al., 2000 ; Silverstein et al., 2000 ; Curfman et al., 2005 ). The conflict in such situations raises reasonable concerns about the integrity of the data. To address this problem, some journals have recently decided not to publish the results of studies funded by industry unless there is full access to the data and independent repetition of the data analyses by academicians or government employees not affiliated with the sponsor ( DeAngelis et al., 2001 ). In addition, many universities have recently added a requirement for access to study data to the terms of their research contracts with industry.

Research Funding from Industry and Pro-Industry Findings in Published Research

Several systematic reviews and other studies provide substantial evidence that clinical trials with industry ties are more likely to have results that favor industry. One meta-analysis found that clinical trials in which a drug manufacturer sponsors clinical trials or the investigators have financial relationships with manufacturers are 3.6 times more likely to find that the drug tested was effective compared to studies without such ties ( Bekelman et al., 2003 ). 2 Another meta-analysis that included non-English-language studies found that studies that favored a drug were four times more likely to be funded by the maker of the drug than any other sponsor ( Lexchin et al., 2003 ). A more recent literature review found that 17 of 19 studies published since the preceding two meta-analyses reported “an association, typically a strong one, between industry support and published pro-industry results” ( Sismondo, 2008 , p. 112). Similarly, another review found that industry-funded studies were more likely than other studies to conclude that a drug was safe, even for studies that found a statistically significant increase in adverse events for the experimental drug ( Golder and Loke, 2008 ).

In addition, a study of materials submitted to the FDA in support of successful new drug applications found that clinical trials with statistically favorable results were almost twice as likely to be published as industry-funded studies that did not have favorable results ( Lee et al., 2008 ). Overall, the results of more than half of clinical trials submitted to the FDA in support of a new drug application remained unpublished more than 5 years after approval of the drug. Furthermore, comparisons of information submitted to regulatory agencies with information on the same trials published in the medical literature have found changes in the ways that the results of the trials were reported so that the published results appeared to be more favorable than the results reviewed by regulatory agencies. Such selective reporting of trial results includes additions of favorable outcomes, deletions of unfavorable outcomes, and changes in the statistical significance of the outcomes reported ( Hemminki, 1980 ; Melander et al., 2003 ; Chan et al., 2004a ; Rising et al., 2008 ; Turner et al., 2008 ). Recent requirements for web-based reporting of clinical trial results are described below.

Other studies have found that research funded by industry was more likely to report conclusions that favored the sponsor’s drug, even if the results did not in fact support such conclusions. For example, studies that have examined clinical trials involving specific clinical specialties or particular clinical problems have found an association between industry sponsorship and results that favor industry. Examples include clinical trials of statins for the treatment of elevated cholesterol levels ( Bero et al., 2007 ), breast cancer studies ( Peppercorn et al., 2007 ), clinical trials of new antipsychotic drugs ( Heres et al., 2006 ), and various nutrition-related studies ( Lesser et al., 2007 ; see also Perlis et al. [2005] ).

Several possible explanations can be offered for the association between industry support and results that are favorable to the sponsor. First, pharmaceutical and biotechnology companies seek to invest in products that will be shown to be effective and safe; hence, compounds that enter clinical trials have been selected as being likely to succeed. (That is, for-profit companies may be more risk adverse than nonprofit sponsors and fund mostly studies that seem likely to produce favorable results.) Second, investigators might have become persuaded by their own research that a drug is efficacious and, as a result, develop financial relationships with trial sponsors to help promote the future clinical development or use of the drug. Third, industry studies might be less rigorously designed or designed in a way that will bias the findings in favor of a drug, leading to false-positive conclusions that an intervention is effective, or they might be well designed but not actually conducted according to the protocol ( Bero and Rennie, 1996 ; Steinman et al., 2006 ). Fourth, sponsors may be more likely to fully publish the results of studies with favorable findings ( Rising et al., 2008 ).

The findings of three systematic reviews do not support the suggestion that industry-sponsored trials are poorly designed. They concluded that the quality of industry-sponsored trials is comparable to that of studies funded by other sources ( Bekelman et al., 2003 ; Lexchin et al., 2003 ; Hampson et al., 2008 ). The methodologies used in those assessments of the quality of trials did not, however, take into account such issues as the appropriateness of the control intervention, the clinical relevance of the research question, and whether the findings of the studies were fully published ( Lexchin et al., 2003 ; Hampson et al., 2008 ).

In addition, it is sometimes suggested that journals prefer to publish articles that report positive findings rather than equivocal or nonexistent relationships. Several studies, based on self-reports from the authors of unpublished studies, suggest instead that authors’ decisions to not submit manuscripts with the findings of their studies account for the majority of unpublished studies ( Dickersin et al., 1987 , 1992 ; Dickersin, 1990 ; Easterbrook et al., 1991 ). Similarly, a more recent study—based on inquiries to investigators about trial results that were not published—suggested that “studies were not published because they were not submitted” ( Rising et al., 2008 , p. 1568).

Box 4-1 summarizes several incidents that have added to concerns about bias in the reporting of industry-funded studies. Most involve an alleged failure to publish negative findings from industry-sponsored clinical trials or long delays in publication. These incidents involved a number of pharmaceutical companies and different types of drugs. Sometimes the information became known only after legal proceedings led to the disclosure of confidential internal industry documents.

Examples of Biased Reporting in Clinical Research. In a pivotal trial of celecoxib for treatment of arthritis, only data on outcomes at 6 months were presented, even though the original protocol called for the trial to be of a longer duration and the (more...)

In addition, systematic reviews that look at meta-analyses rather than individual clinical trials as the unit of analysis also find an association between industry funding and conclusions that favor the sponsor’s product. One study found that industry-supported reviews had more favorable conclusions, noted fewer reservations about the methodological limitations of the trials included, and were less transparent than reviews conducted by the Cochrane Collaboration. 3 All seven industry-sponsored reviews recommended the experimental drug without reservation, whereas none of the Cochrane Collaboration reviews did ( Jorgensen et al., 2006 ). Another study, a review of meta-analyses of clinical trials of treatments for hypertension, found that meta-analyses conducted by individuals with financial ties to a single drug company were not more likely than meta-analyses conducted by individuals who received funding from other sources to have results that favored the sponsor’s drug. Financial ties to a single company were, however, associated with favorable conclusions by the authors of the meta-analyses. Among meta-analyses conducted by individuals with financial ties to one drug company, 27 of 49 (55 percent) reported favorable results from the meta-analysis, but 45 of 49 (92 percent) reported favorable conclusions . The authors of the review suggested that there was a “discordance between the data that underlie the results and the interpretation of these data in the conclusions” ( Yank et al., 2007 , p. 1204).

Thus, although there is little direct evidence that industry sponsorship has led to deliberate skewing of the results or reporting, there are multiple cases in which industry sponsors have withheld important study results and in which the conclusions presented in the reports appear to overstate the study findings. The risk of undue influence in research exists. The risk is particularly relevant in clinical trials, when the prospect of direct harm to patients (as well as research participants) is a more immediate concern than is the case for most nonclinical research. In this case, conflict of interest policies may help prevent an erosion in public confidence beyond that which may result from research that documents bias or the withholding of data.

Ghostwritten research articles also raise concerns about bias as well as the ethics of author attribution. A conflict of interest is inherent in this practice when the industry sponsor has more control over the article than the nominal authors. Chapter 5 discusses ghostwriting and also participation on speakers bureaus and recommends that academic medical centers forbid faculty from accepting the authorship of ghostwritten articles and participation in speakers bureaus.

Terms of Research Contracts

Some academic health centers allow provisions in research contracts that give industry sponsors important control over the reporting of research findings. In a 2004 survey involving academic medical centers, 7 percent of respondents reported that their institution would allow industry sponsors to revise manuscripts or decide whether results should be published, and more than 5 percent reported that they were unsure about the answers to both questions ( Mello et al., 2005a ). Half allowed the sponsor to draft the manuscript, whereas only 40 percent prohibited that practice. Seventeen percent of the responding institutions reported disputes over control or access to the data from research. Such disputes also figured in some of the incidents cited in Box 4-1 (see, e.g., Rennie [1997] and Kahn et al. [2000] ).

Funding arrangements with contract research organizations have also raised concerns about inappropriate control by industry sponsors ( Bodenheimer, 2000 ; Mirowski and Van Horn, 2005 ; Shuchman, 2007 ; Lenzer, 2008 ). For example, the International Committee of Medical Journal Editors (ICMJE) has expressed concern about the role of contract research organizations that conduct the majority of industry-funded trials, often without the protections that many university research contracts require, including rights of access to the source data and rights to publica tion ( Davidoff et al., 2001 ). Although the committee found no systematic assessments or comparisons of bias in research conducted by these organizations, any lack of such controls over unilateral industry influence raises concerns.

Issues Involving Research Participants or Students

As Chapter 3 discussed, academic medical centers vary in their policies on disclosure to research participants of investigator’s conflicts of interest. It also noted that several surveys suggest that participants in clinical trials currently are not highly concerned about investigators’ financial conflicts of interest. Most respondents report that their decision to enroll in a clinical trial would not be greatly affected by learning that the researcher had a financial relationship with the sponsor. Some respondents even believed that “a greater financial interest would make the investigator do a better job” ( Weinfurt et al., 2006a , p. 903).

It is not clear, however, whether participants in clinical trials understand how conflicts of interest could potentially compromise study designs and the protection of research subjects or how they could contribute to bias in the reporting of the results—with the possible consequence being harm to future patients. Furthermore, it is not clear that it is reasonable to expect the average participant to understand these issues. In any case, even if research subjects are not worried about conflicts of interest, other important members of the public may be concerned. As noted in earlier chapters, the political and economic support of the research enterprise depends critically on the confidence of the opinion leaders in government, the media, and academia. When they have doubts about the integrity of the enterprise, that essential support may begin to erode.

Concerns have also been raised about how researcher conflicts of interest might affect their advice about or supervision of the research of medical students, residents, fellows, and junior faculty ( AAMC, 2008b ; AAMC-AAU, 2008 ). For example, in their recent report on conflict of interest policies in human subjects research, the American Association of Medical Colleges (AAMC) and the Association of American Universities (AAU) noted the potential for the exploitation of these individuals by conflicted senior investigators or advisers. Such exploitation is unethical and also has the potential to bias the design, conduct, and findings of research. Areas that may raise problems with undue influence include decisions about an individual’s inclusion or exclusion from a research project; the focus, design, and conduct of a study; the publication of research findings (including the suppression of publication); and the treatment of intellectual property interests.

• RESPONSES TO CONCERNS ABOUT CONFLICTS OF INTEREST IN RESEARCH

Limits on Conduct of Research by Investigators with Conflicts of Interest

As discussed in Chapter 1 , much of the impetus for conflict of interest policies in universities stems from concerns about industry-funded biomedical research and investigators who have financial stakes in the outcomes of their research. In 1995, the U.S. Public Health Services (PHS) issued regulations that require institutions receiving PHS research funding to develop conflict of interest policies that require the disclosure and management of certain financial relationships between researchers and industry (see Appendix B ). Chapter 3 noted reviews by NIH and others that questioned the adequacy of policy adoption and the implementation of the PHS regulations by research institutions, which in turn, raised additional concerns about the adequacy of government oversight of institutional compliance.

Because the PHS regulations were not specific on many issues and because some studies indicated shortfalls in their implementation, AAMC issued a report in 2001 with recommendations to help academic medical centers develop sound conflict of interest policies for research involving human subjects ( AAMC, 2001 ). 4 A key policy recommendation called for institutions to establish a “rebuttable presumption” that researchers may not conduct research involving human participants when they have a financial stake in its outcome. This presumption can be rebutted when compelling circumstances justify the researchers’ involvement. 5

A 2003 AAMC survey indicated that only 61 percent of medical schools had adopted the rebuttable presumption in their policies ( Ehringhaus and Korn, 2004 ). In addition, only a minority of the medical schools with such a policy had defined the compelling circumstances that would support an exception.

To further promote the adoption of conflict of interest policies governing research involving human participants, AAMC joined with AAU to issue a second report that offered additional guidance and support for policy development and implementation ( AAMC-AAU, 2008 ). The report reemphasized the importance of the rebuttable presumption. It also presented informative case studies and a template for analyzing these cases to illustrate how different situations can be evaluated for the existence of a conflict of interest, the risks presented by the conflict, the options for eliminating or managing a conflict, and the compelling circumstances that might justify the participation of an investigator with a conflict of interest in research with human participants. Among the examples of risks cited in the template is the extent to which the reputation of the researcher with a conflict of interest or his or her institution could be damaged, even if a plan for managing the conflict is created and implemented.

Unlike the PHS regulations that cover both clinical and nonclinical research, the 2008 AAMC-AAU recommendations focused on clinical research. One recommendation did, however, call for medical center conflict of interest committees to review investigator conflicts of interests in certain nonclinical studies. Examples include those that can be “reasonably anticipated … to progress to research involving human subjects within the coming 12 months” (p. 9).

The committee found much less information and analysis about conflict of interest policies affecting nonclinical biomedical research than about policies affecting clinical research. Universities and medical schools may have different policies for different kinds of research or may apply different criteria to evaluate conflicts of interest in research that does not involve humans (as reported in Chapter 3 ). One university, however, recently adopted a conflict of interest policy that explicitly states that “[t]o protect against the risks that may accompany relationships with Interested Businesses, it is not ordinarily allowable for an Individual who has a Significant Financial Interest in an Interested Business to Conduct Research involving that Interested Business” ( Columbia University, 2009 ).

Although an immediate risk to research participants does not exist in basic research, the potential for bias in basic research does exist. The result could be the initiation of clinical trials based on flawed basic science. In general, a weighing of risks against expected benefits should allow conflict of interest committees to apply policies while taking into account differences in clinical and nonclinical research, including differences in what constitutes a reasonable justification for researchers to be involved in research in which they have a financial stake.

Terms for Research Contracts

AAMC has not proposed comprehensive formal recommendations on the terms of research contracts with industry, but it has issued two reports with suggestions and recommendations that respond to concerns about the integrity of clinical trials ( Ehringhaus and Korn, 2004 , 2006 ). The first report provides a checklist of topics, including publication rights and intellectual property, to be covered in research contracts. Among other elements, one or both reports call for contracts to explicitly grant researchers free access to study data, to include no restrictions on publication (except for a slight delay for sponsor review and possible filing of a patent application), and to require a good faith and timely effort to publish the results of research in a peer-reviewed journal.

Requirements to Register and Report on Clinical Trials

Congressional, journal editor, and other requirements for the registration of clinical trials are, in part, a response to concerns about conflict of interest in industry-sponsored research and research reporting. The registration of clinical trials and the provision of key details about the trial protocol and the data analysis plan ensure that basic methods for the conduct and analysis of the findings of a study as well as the primary clinical end points to be assessed and reported are specified before the trial begins and before data are analyzed. The substitution of ad hoc or secondary end points for primary end points and other important departures from the protocol can thus be detected in reports of the findings of a trial. Clinical trials registries also allow others to determine whether the results from a trial have not been presented or reported at all. Researchers carrying out critical literature reviews can then contact the investigators to try to obtain unpublished results. After ICMJE stated that clinical trial registration should be considered a prerequisite for the publication of research articles, the numbers of trials registered increased substantially ( Zarin et al., 2005 ).

In 2007, the U.S. Congress expanded the types of clinical trials of drugs, biologics, and devices—and the kinds of information about these trials—that must be registered (P.L. 110-85). To further address the problem of withholding negative findings, it also required the creation of a link from the ClinicalTrials.gov registry to a database of reports of basic results for applicable trials. 6 The reported results are to include basic demographic and baseline information, findings for primary and secondary outcomes, and a point of contact.

Study Methodology, Data Analysis, and Research Reporting

To the extent that the design of clinical trials is standardized and publicized, the implementation of conflict of interest policies is also assisted. Abuses and patterns of abuses can be more readily detected, which may make more evident the need for changes or reforms in the policies. Efforts to improve the design of clinical trials and other types of research stretch back decades and include a range of techniques, including the random assignment of subjects to intervention and control groups and the blinding of investigators and participants to treatment assignment. In addition, NIH has supported programs to train physician investigators to conduct rigorous clinical research. Experts in research methodology, statistics, and evidence-based medicine have developed techniques to limit bias in research and have codified standards and checklists for reporting research findings. These standards and checklists cover various types of studies, including clinical trials (see, e.g., Moher et al. [2001] ), evaluations of clinical tests ( Bossuyt et al., 2003 ), epidemiological studies (see, e.g., von Elm et al. [2007] , but see also the comments of the editors of Epidemiology [ Editors, 2007 ]), and meta-analyses (see, e.g., Moher et al. [1999] and Stroup et al. [2000] ).

ICMJE now specifies a format for the reporting of results and refers authors to the CONSORT checklist for the reporting of the findings of randomized clinical trials (see, e.g., Moher et al. [2001] , CONSORT Group [2007] , and von Elm et al. [2007] ) ( Table 4-1 ). Standards for the reporting of methods and results help editors, reviewers, and readers assess the validity of a research paper. Studies suggest that these standards also improve the design and conduct of the research itself (see, e.g., Plint et al. [2005] ).

Checklist for Reporting Clinical Trials from CONSORT 2001 Statement.

In addition to these standards for the conduct and reporting of the results of clinical trials, the FDA has suggested that it is desirable for the data-monitoring committees for clinical trials to have statistical reports prepared by statisticians who are independent of the trial sponsors and clinical investigators ( FDA, 2001 ). For industry-funded clinical trials “in which the data analysis is conducted only by statisticians employed by a company sponsoring the research,” the Journal of the American Medical Association requires that a statistical analysis also be conducted by an independent statistician at an academic institution, such as a medical school, academic medical center, or government research institute, that has oversight over the person conducting the analysis and that is independent of the commercial sponsor ( Fontanarosa and DeAngelis, 2008 , p. 95; see also a review of opinions about this requirement in Rockhold and Snapinn [2007] ).

Peer Review and Journal Policies on Disclosure

Peer review is a key step used to detect and reduce bias in publications and improve the quality of research reporting. Effective review depends on independent reviewers who are not biased by their own financial relationships with industry. As described in Chapter 3 , journals vary in the extent to which they apply conflict of interest policies to reviewers. Meaningful peer review is also assisted by the previously described standards for the reporting of methods and data in manuscripts.

In response to concerns about the reporting of research results described earlier in this chapter, medical journals have moved toward increasingly specific requirements for disclosure of authors’ financial interests (see ICMJE [2008] and WAME [2008] for the statements of two associations of medical journal editors). Still, as described in Chapter 3 , journal policies remain variable. The completeness and accuracy of disclosures are continuing issues for medical journals as well as for academic medical centers and other institutions. These concerns have led to action in some states and recommendations for the federal government to establish a policy that requires companies to report payments to physicians, researchers, and institutions, as outlined in the preceding chapter. Chapter 3 includes a committee recommendation supporting such a program.

Issues Involving Research Participants and Students

As described in Chapter 3 , AAMC recommended in 2001 and again in 2008 policies that require some form of disclosure of investigator conflicts of interest to research subjects, and many medical schools have adopted those policies. Chapter 3 also reviewed some of the findings from a set of coordinated research projects and activities to investigate the views of research participants and ways of informing them. This research is itself a major response to concerns about practical and ethical issues in managing conflicts of interest in research, for example, balancing the disclosure of information with the design of an informed consent form and process that does not overwhelm research participants.

AAMC has also recommended the disclosure of investigator conflicts of interests to other members of the research team. It also advised that schools prohibit “agreements with sponsors or financially interested companies that place restrictions on the activities of students or trainees or that bind students or trainees to non-disclosure provisions” ( AAMC, 2001 , p. 20). In a later statement about the responsibilities of biomedical graduate students and their advisers, AAMC states that advisers should “recognize the possibility of conflicts between the interests of externally funded research programs and those of the graduate student” and should commit that those conflicts will not be allowed to interfere with the student’s thesis or dissertation research ( AAMC, 2008b . 6). The research adviser also agrees to discuss authorship policies and intellectual property policies related to disclosure, patent rights, and publication. In addition, in a series of questions that should be asked when assessing the risks of allowing an investigator with a conflict of interest to conduct research with human participants and the possibility that a conflict can be appropriately managed, the AAMC-AAU report includes questions about whether the “the roles of students, trainees, and junior faculty and staff [are] appropriate and free from exploitation” and whether special protections are needed for “vulnerable members” of the research team ( AAMC-AAU, 2008 , pp. 25 and 28, respectively). One protection might be to provide such individuals with access to independent senior faculty members for independent review and guidance when questions and concerns arise.

• RECOMMENDATIONS

Relationships between industry and research institutions and researchers are common and are often mutually beneficial. They also serve society by generating valuable preventive, diagnostic, and therapeutic products. At the same time, these individual and institutional relationships have risks that could jeopardize the integrity of scientific research and conflict with the ethical conditions for the conduct of research with humans. Analyses indicate that they are associated with decreased openness in sharing data and findings, and cases in which negative findings are not published in a timely fashion or at all raise concerns. Some studies also suggest that meta-analyses sponsored by a single company tend to present conclusions favorable to industry sponsors even when the actual findings of the analyses are not favorable. Moreover, when investigators themselves have a financial stake in the outcomes of their research, it creates conflicts of interest, which may lead to bias and the erosion of confidence in the research enterprise.

Chapter 2 discussed why conflicts of interest matter even if they do not actually lead to undue influence or bias in a particular case. Correlations or associations in studies such as those reported here are enough to support concerns over potential conflicts of interest. The purpose of conflict of interest policies is preventive: the policies are intended to remove or reduce relationships that create a risk of undue influence or erosion of confidence in the research enterprise.

As described in this chapter and in Chapter 3 , research institutions vary in their conflict of interest policies, including the extent to which they have adopted and implemented PHS conflict of interest regulations and policies recommended by AAMC and AAU. Government and press investigations and payment data reported by companies have revealed failures of individual researchers to fully and accurately disclose their financial relationships with industry, as required by institutional or government policies.

The preceding section of this chapter provided an overview of recommendations for action that should be taken by research institutions, research sponsors, investigators, and medical journals to protect the integrity of biomedical research, safeguard research participants, and preserve public trust. The recommendation below focuses on one specific concern: the conduct of research with human participants by investigators with a financial interest in the outcome of that research. The discussion of the recommendation is followed by a review of standards for nonclinical research and a suggestion that NIH take a lead role in further examination of the involvement of conflicted investigators in this kind of research.

Clinical Research

It is critical that the public trust that research institutions are protecting the integrity of the medical research on which clinical practice and education depend. Such protection is especially important in clinical research because bias in the design, conduct, or reporting of the findings of such research may expose human participants to risks without the prospect of gaining valid, generalizable knowledge and may ultimately expose much larger numbers of patients to ineffective or unsafe clinical care.

Recommendation 4.1 calls for research institutions to allow researchers with a conflict of interest to conduct research involving human participants only when a researcher’s participation is truly essential and is also managed to limit risk. This recommendation is similar to the AAMC “rebuttable presumption” described earlier in this chapter.

RECOMMENDATION 4.1 Academic medical centers and other research institutions should establish a policy that individuals generally may not conduct research with human participants if they have a significant financial interest in an existing or potential product or a company that could be affected by the outcome of the research. Exceptions to the policy should be made public and should be permitted only if the conflict of interest committee (a) determines that an individual’s participation is essential for the conduct of the research and (b) establishes an effective mechanism for managing the conflict and protecting the integrity of the research.

This recommendation covers principal investigators and others who share substantial responsibility for the design, conduct, or reporting of the findings of clinical studies. Relevant financial interests often involve stock or other ownership in a company making a product that could be affected by the results of a study, including not only a product under study but also a product that is an alternative to the intervention under study. (Although AAMC recommended no minimum threshold for the initial disclosure of financial interests, it suggested that “significant interest” should generally be defined as a financial interest of $10,000 or more.)

In exceptional cases, a clinical investigator may be judged to be essential if his or her participation is determined—after careful assessment—to be necessary for the safety, reliability, or validity of the research, circumstances that AAMC described as compelling. Often cited as examples are situations in which inventors of a medical device or investigators responsible for certain kinds of breakthrough scientific discoveries are crucial to research, especially early-phase studies, because of their “insights, knowledge, perseverance, laboratory resources” or access to “special patient populations” ( AAMC-AAU, 2008 , p. 6; see also Witkin [1997] and Citron [2008] ).

A specific example of a compelling situation might involve the participation in a pilot study of the inventor of an implanted medical device that requires a complex, new surgical procedure that has not been mastered by others. The reasons for allowing a researcher with a conflict of interest to participate in a pilot or early-phase study or other investigation in a particular situation should be persuasive to others who are presented with the facts of the case. In most cases of a conflict of interest, no compelling argument that the investigator’s participation is essential can be made. Even if the investigator’s participation is essential, the elimination of the conflict of interest (e.g., through the sale of stock) is the preferred step. If an exception is granted, it should be made public.

If an exception is made for an investigator with a conflict of interest, the next step is for the conflict of interest committee to establish a strategy for managing the conflict and a plan for monitoring the strategy’s implementation during the course of the research. For instance, the plan might specify that the researcher with the conflict of interest not serve as the principal investigator. It might also restrict the researcher recruiting subjects; obtaining informed consent; assessing the clinical end points; analyzing data; or writing the results, conclusions, and abstracts for publications reporting the findings of the study. The plan might, however, allow the researcher to participate in aspects of study design, fund raising, and manuscript review.

Nonclinical Research

Most of the discussion of conflicts of interest in research has focused on clinical research. This emphasis reflects concerns that research participants might be harmed or that bias might contribute to the making of incorrect decisions about approving new drugs and devices or changing clinical practice. Because conflicts of interest in various kinds of nonclinical research have been little investigated, the committee found it difficult to evaluate arguments about the extent and the consequences (or the lack of consequences) of investigator and institutional conflicts of interest in this sphere of research. It thus did not make a formal recommendation about conflicts of interest in nonclinical research. The committee did, however, hear testimony that new models of academia-industry collaboration are needed to promote basic scientific discoveries and the development of new therapies while also addressing concerns about conflicts of interest ( Moses, 2008 ; see also Moses and Martin [2001] ).

No matter the type or stage of research, certain fundamentals still apply. All researchers should be subject to an institution’s disclosure policies, as described in Chapter 3 , and the institution’s conflict of interest committee or its equivalent should be notified when investigators have financial stakes in the outcomes of their research. Similarly, following the conceptual framework presented in Chapter 2 , once a financial relationship or interest has been disclosed, it should be evaluated for determination of the likelihood that it will have an undue influence that will lead to bias or a loss of trust. If a risk is judged to exist, a conflict of interest committee might conclude that the implementation of safeguards is necessary. Such safeguards could consist of a management plan that includes the involvement of a researcher without a conflict of interest in certain aspects of the research and disclosure of the conflict to coinvestigators and in presentations and publications.

Additional studies on the extent of financial relationships in nonclinical research and their consequences, as well as the consequences of conflict of interest policies, are needed to establish a sounder base of evidence for future policies. Given its extensive and direct relationships with basic scientists, NIH could play a central role in gathering such evidence. As discussed in Chapter 9 , NIH could fund research on conflicts of interest in nonclinical scientific research. Furthermore, NIH could convene working groups and public meetings to promote a fuller understanding—empirical, conceptual, and practical—of conflicts of interest in nonclinical research and propose responses. Such meetings might identify good practices in developing academia-industry relationships in nonclinical research and suggest how such relationships might be developed in ways that promote constructive collaboration while appropriately addressing concerns about conflicts of interest. The development of illustrative case studies might help institutions better understand and manage conflicts of interest in nonclinical research.

Other Relevant Recommendations in This Report

The adoption of the recommendations made elsewhere in this report would also affect researchers, research institutions, and companies. These recommendations call for standardization of the procedures used to disclose conflicts of interest to harmonize the requirements of different institutions and reduce the disclosure burdens on individuals (Recommendation 3.3), implementation of methods for the easier verification of certain financial disclosures (Recommendation 3.4), limitations on certain relationships with industry (e.g., acceptance of gifts and participation in promotional activities) for academic medical center personnel (Recommendation 5.1), and promotion of reforms in industry policies on consulting and research grants (Recommendation 6.2).

Chapter 8 includes a recommendation that responsibility for the oversight of institutional conflicts of interest be lodged in the governing boards of institutions (Recommendation 8.1). Many conflicts of interest at the institutional level involve research or proposed research in which a university or medical school has a financial stake related to its interests in patents or start-up companies.

In addition, the committee recommends that other public and private organizations create incentives to support the adoption of the recommendations made in this report (Recommendation 9.1). As one example, NIH could expand its recent efforts to provide more guidance and oversight to grantee institutions covered by the PHS regulations, issue regulations directing grantees to adopt institutional conflict of interest policies (Recommendation 8.2), and take a lead role in the development of a research agenda on conflict of interest (Recommendation 9.2). NIH could also consider requiring investigators funded by NIH awards to be trained on conflict of interest principles and policies. (NIH has a new training module on conflict of interest that could be tailored for investigators.) Other public agencies that support academic biomedical research, for example, the U.S. Department of Defense, could also provide guidance compatible with that presented in this report.

Taken together, the changes recommended here should not burden socially valuable collaborations between academic researchers and industry. Rather, they should help justify and maintain public trust in their integrity.

One reviewer of the report observed that companies view the provision of these proprietary materials as a service to the academic community and that they may, in any case, not have a mechanism for charging for them.

“A study was included if it met the following criteria: (1) its stated primary or secondary purpose was to assess the extent, impact, or management of financial relationships among industry, investigators, or academic institutions; (2) it contained a section describing study methods; (3) it was written in English; and (4) it was published following the passage of the Bayh-Dole Act of 1989” ( Bekelman et al., 2003 , p. 455). “The main outcomes were the prevalence of specific types of industry relationships, the relation between industry sponsorship and study outcome or investigator behavior, and the process for disclosure, review, and management of financial conflicts of interest” (p. 454).

The Cochrane Collaboration describes itself as “an independent, nonprofit, international organization that develops and disseminates systematic reviews of health care interventions and promotes the creation and use of evidence to guide clinical and policy decisions” (see http://www ​.cochrane.org/docs/descrip.htm ). It relies primarily on volunteers who conduct reviews according to specific standards. It has policies intended to limit bias and restrict financial conflicts of interest in its activities.

As noted in Chapter 1 , this report generally follows the practice of recent Institute of Medicine reports in referring to research participants rather than to research subjects.

In the words of the AAMC report, the rebuttable presumption means that an “institution will presume, in order to assure that all potentially problematic circumstances are reviewed, that a financially interested individual may not conduct the human subjects research in question” ( AAMC, 2001 , p. 12). The report goes on to say that the “rule is not intended to be absolute: a financially interested individual may rebut the presumption by demonstrating facts that, in the opinion of the COI [conflict of interest] committee, constitute compelling circumstances … [and] would then be allowed to conduct the research under conditions specified by the COI committee and approved by the responsible IRB [institutional review board]” (p. 12).

In addition, the Pharmaceutical Research and Manufacturers of America has coordinated the creation of a voluntary online resource to provide information to physicians about the results of clinical trials (see http://www ​.clinicalstudyresults.org/ ).

• Cite this Page Institute of Medicine (US) Committee on Conflict of Interest in Medical Research, Education, and Practice; Lo B, Field MJ, editors. Conflict of Interest in Medical Research, Education, and Practice. Washington (DC): National Academies Press (US); 2009. 4, Conflicts of Interest in Biomedical Research.
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The Law Dictionary for Everyone

Conflict of Interest

The term “conflict of interest” in the legal world refers to a situation wherein an individual is in a position to exploit his professional capacity for his own benefit. For example, a conflict of interest would arise if one law firm tried to represent both parties in a divorce case. This problem is typically found in the medical and political worlds, in addition to the legal world. To explore this concept, consider the following conflict of interest definition.

Definition of Conflict of interest

• A situation that arises wherein a professional, be it an attorney or a judge , is put in a position where he can leverage his professional capacity to his own benefit.

Attorney Conflict of Interest

An attorney conflict of interest arises when an attorney takes on a new client who has interests that are adverse to the interests of someone the attorney is currently representing or has represented in the past. For example, a conflict of interest in this regard would come up if an attorney tried to represent both the husband and wife in a divorce case. Each party wants the exact opposite of what the other person wants, so how could the attorney effectively and successfully represent their interests? He couldn’t.

An attorney conflict of interest could arise if the attorney did not do his homework to see whether a new client he is taking on is, in some way, related to another client of his and has adverse interests to that client. However, a more devious attorney may levy his professional standing as a way to make more money. For example, a conflict of interest would arise if he represented Company A in a past case against Company B, and later Company B wanted to use him to sue Company A. The attorney could then rightfully be penalized for agreeing to take on the latter case.

Conflict of Interest Disclosure

If a lawyer realizes he may be embroiled in a potential conflict of interest, then he has a duty to disclose it for review. In many cases, he may be able to submit a conflict of interest disclosure statement. In a conflict of interest disclosure statement, the individual can detail the situation that has arisen and why he believes it may be an issue. The judge can then decide whether the lawyer should stay on as his client’s attorney, or if he should be relieved from the case, and his client ordered to hire someone new.

It should be noted, too, that judges can also become entangled in a conflict of interest. For instance, if a judge and an attorney were close friends while the judge was still an attorney and before the judge was elected as a judge, the attorney may be required to withdraw from the case. Failing that, the judge can recuse himself to avoid any potential conflicts of interest if the judge feels he is unable to remain impartial to the parties involved.

Conflict of Interest Policy

Some companies create what are called “conflict of interest policies.” A conflict of interest policy explains the types of situations wherein an employee’s personal interests may conflict with the interests of the company he works for. Typically, a conflict of interest policy focuses on the opportunities that an employee may be able to use to his advantage to the detriment of the company.

A conflict of interest policy should contain a clear explanation of what to do in the event that a conflict of interest arises. It should also include information that helps an individual identify a conflict of interest when it arises, as well as who is responsible – and how – for addressing and resolving any potential conflicts. Some conflict of interest policies are not clear on punishments for those caught pursuing a conflict of interest type of situation, however others clearly note that the penalty for such a violation is discipline or flat-out termination.

Conflict of Interest Waiver

A conflict of interest waiver differs based on the situation it pertains to. A conflict of interest waiver is drafted up by a professional, in this case the attorney, after the attorney has explained the kind of situation that may present a conflict of interest to his client. If his client chooses to “waive” the potential conflict of interest and have the attorney represent him anyway, then the attorney will draft a conflict of interest waiver for him to review and sign off on.

However, this does not fix every situation wherein a conflict of interest may present itself. Simply put, some conflicts of interest are simply not waivable. It is only waivable if the attorney is sure he can provide fair and adequate representation to his client and will not be influenced whatsoever by whatever is causing the potential conflict. Using the example provided earlier, there is no way an attorney could promise to represent both of his clients fairly if he chose to represent both parties to a contested divorce action. It’s simply not possible.

The kind of information that would be included in a conflict of interest waiver should include:

• A detailed account of the conflict in question
• The attorney’s explanation for how he believes he could work around this problem and still provide fair representation
• The benefits to the client of waiving a conflict of interest, such as not having to start fresh with a new attorney
• The downsides of the waiver, such as the attorney still being influenced by his personal interests despite his best efforts not to be

No matter what, a conflict of interest waiver should always be in writing. This issue is too important to simply take someone’s word for it, as then there would be no proof to illustrate that the individual did, in fact, know about a potential conflict of interest and waived it anyway.

Conflict of Interest Example Involving a Murder Conviction

An example of a conflict of interest being brought before the Court can be found in the matter of Mickens v. Taylor, Warden , which was decided in 2002 by the U.S Supreme Court. Here, Walter Mickens, Jr. was convicted of the murder of Timothy Hall and was sentenced to the death penalty. Mickens filed a petition in response, claiming that one of his attorneys had a conflict of interest during the trial and, as a result, he was not provided with effective legal assistance in accordance with the Sixth Amendment .

Mickens’ complaint was against attorney Bryan Saunders, who had previously represented Hall on assault and concealed weapons charges. The same judge who had dismissed those charges assigned Saunders to represent Mickens in his murder case. Notably, Saunders failed to inform the court, the other attorney, or even Mickens that he had represented Hall in the past. Mickens argued that the judge failed to inquire as to whether a potential conflict existed and so, as a result, his conviction should be automatically reversed or, failing that, that Mickens should be relieved of having the burden of proving that the alleged conflict of interest did exist.

The District Court denied Mickens’ claim, and after Mickens took his complaint up on appeal , the Fourth Circuit affirmed the District Court’s decision. Their reasoning was that no adverse effect was shown in Mickens’ case, even if a conflict of interest did exist, and so the conviction should stand. The case eventually made its way up to the U.S. Supreme Court, and the Court ultimately agreed with the lower Court’s decision, citing that it is the defendant ’s responsibility to prove that an alleged conflict of interest affected his attorney’s ability to adequately represent him.

Said the Court:

“A defendant alleging ineffective assistance generally must demonstrate a reasonable probability that, but for counsel’s unprofessional errors, the result of the proceeding would have been different. ( Citation omitted). An exception to this general rule presumes a probable effect upon the outcome where assistance of counsel has been denied entirely or during a critical stage of the proceeding. The Court has held in several cases that “circumstances of that magnitude,” (citation omitted), may also arise when the defendant’s attorney actively represented conflicting interests. In Holloway v. Arkansas, (citation omitted), the Court created an automatic reversal rule where counsel is forced to represent codefendants over his timely objection , unless the trial court has determined that there is no conflict. In Cuyler v. Sullivan, (citation omitted), the Court declined to extend Holloway and held that, absent objection, a defendant must demonstrate that a conflict of interest actually affected the adequacy of his representation, (citation omitted), the Court granted certiorari to consider an equal-protection violation, but then remanded for the trial court to determine whether a conflict of interest that the record strongly suggested actually existed (citation omitted).”

Related Legal Terms and Issues

• Recuse – The act of a judge’s excusing himself from a case on the belief that there either exists a possible conflict of interest or an inability to remain impartial.

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15 Conflicts of Interest

Wayne Norman is Chair of Research in Business Ethics at the University of Montreal. He taught previously at the Universities of British Columbia, Ottawa, and Western Ontario, and has held visiting positions at Stanford University, the Universitat Pompeu Fabra, Universite de Paris, the Universite Catholique de Louvain, and at the London School of Economics, where he did his Ph.D. in Philosophy. He has written extensively on multiculturalism, nationalism, federalism, and secession, and co-edited (with Will Kymlicka) Citizenship in Diverse Societies(2000) and (with Ronald Beiner) Canadian Political Philosophy (2001). His next book is tentatively entitled Thinking through Nationalism.

Chris MacDonald, Department of Philosophy, St. Mary's University

• Published: 02 January 2010
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This article highlights the importance of the concept of conflict of interest to our ethical thinking about business. It describes the progress made on settling various disputes regarding this concept and suggests that the next state in the development of our understanding of conflicts of interest should merge micro- and macrolevel studies with a middle realm. It outlines an agenda of empirical and normative questions that deserve attention in future research.

Professional ethics can no longer be adequately studied or effectively practiced by attending only to individuals or to associations of individuals, even professional associations. The principles of professional ethics must take seriously the special circumstances of institutional life. That does not mean that institutional ethics rests on different moral foundations, or that the problems it poses are of a completely different kind from ordinary ethics. But if we take the institutional context seriously, we ask some questions that we might not otherwise ask and consider some answers that we might otherwise neglect. The agenda of the study of professional ethics will then turn in a more fruitful direction and address problems that are more relevant for the practice of professionals today. 1

Conflicts of interests have become a pervasive ethical concern in our professional, organizational, and political life. Rules and principles concerning conflicts of interests hold a central place in all professional, and most corporate, codes of ethics, as well as in legislation regulating the conduct of public officials and civil servants. They are a core element of the Sarbanes‐Oxley Act (2002), and of other state and federal corporate‐governance statutes. And they figure prominently in the basic legislation guiding national regulatory agencies such as the Securities and Exchange Commission (SEC) and the Food and Drug Administration (FDA) in the United States. For this reason, many will be surprised to learn that the concept, as we know it, is barely half‐a‐century old. Aristotle, Kant, and J. S. Mill, three prominent sources of our contemporary thinking in business ethics, seem not to have pondered anything like our contemporary concerns about conflicts of interest. This curious combination of facts—that we cannot now think through the ethical stakes in commercial and professional life without the concept of conflict of interest, even though our greatest ethical thinkers thought they could—is in need of explanation. Exploring this puzzle leads quickly to the conclusion that the concept of conflict of interest is in many ways quite unlike other ethical concepts, and also that it has appeared in response to features in our world and in our political cultures that are much more prominent than they were before the middle of the twentieth century.

People are often confident that they can recognize a conflict of interest, as they can a good work of art, when they see one. This is true even though in most cases they will find it exceedingly difficult to give a concise and comprehensive definition of the concept. We will examine some definitions in a moment, but first consider the following list of potential conflicts of interest that might arise within a single (hypothetical but not atypical) corporation—the ABC Corporation, a large aeronautics firm and defense contractor:

A board member owns shares in a major producer of aluminum that routinely bids for contracts from ABC.

The CEO's husband is an executive in an airline that already owns a fleet of ABC's jetliners.

The senior vice president of Business Development and Strategy is a retired air force general who is often perceived to favor military over civil‐aviation projects.

The accounting department makes a vague job offer to a junior member of the audit team from the accounting firm that does ABC's audits.

A junior executive in the purchasing department has a spouse who works for a large copying‐services firm with which his department regularly deals (in fact, the executive in question may have managed to get a better price for ABC for some services).

A senior member of ABC's legal department leaves to take a job at a competing firm.

A senior engineer leaves to take a job at the Defense Department.

A junior engineer in the IT department has a part‐time consulting business that sells IT security services.

A respected aeronautical engineering professor from a leading university, who also advises several government agencies on purchasing decisions, is paid a handsome fee to speak at an annual training event for ABC's sales force.

A retired general is paid by ABC to talk on the combat uses of unmanned drones (of which ABC is one manufacturer) at a major defense conference.

ABC receives a contract from the navy to assess the combat status of its current fleet of carrier‐born fighter jets, many of which were made by ABC's rival and could potentially be replaced by an ABC model already in the testing phase.

A manager has to choose among several well‐qualified subordinates—one of whom happens to be her lover—for a promotion.

A senior executive (whose remuneration is based in part on the value of the company's stock) “leaks” misleading information about the company's product pipeline to the media, in hopes of pushing stock prices higher.

The idea here is not that these are all touchstone examples of conflicts of interest, but that they all now raise red flags. In some cases we would need more information to be sure. Situations of these sorts typically do qualify as conflicts of interest according to the most widely respected theories in the business ethics literature. This kind of list could be rapidly expanded with examples of conflicts of interest that might arise in or around a corporation like ABC. The list would only proliferate when we consider the vast range of conflicts of interest endemic to firms in specialized sectors such as financial services, management consulting, the pharmaceutical industry, and health care.

In this chapter we will not defend any particular formula for identifying precisely which situations do and do not qualify as conflicts of interest, though we will try to give a sense of the range of debates over such a formula. Our aim is to take stock of the substantial progress toward settling many conceptual disputes over the last couple of decades and to sketch out an agenda of both empirical and substantive normative questions that deserve more attention. This agenda is in the spirit of the “institutional turn” in professional ethics advocated by Dennis Thompson in the quote at the head of this chapter. Thompson is concerned about how both theoretical and applied ethics have tended to focus on questions at micro ‐ and macro ‐levels, but neglected “ethics at the mid ‐ level —the vast range of institutions that operate between the world of families, friends, and neighbors, on the one side, and the realm of governments, on the other—institutions such as hospitals, schools, corporations, and the mass media.” 2 The concept of conflict of interest is so morally peculiar and so relatively novel in part because it thrives in this neglected realm. In one way or another all theorists who study conflicts of interest recognize this fact. Their analyses are illustrated by complex dilemmas in professional and quasi‐professional settings. Much of the literature nevertheless seems to rely on a more traditional “microlevel” methodology, one that begins and sometimes ends with sorting out the moral obligations and interests of the lonely individual at the center of a typical conflict of interest situation. This “micro” perspective is essential for a normative theory of conflict of interest, and much progress has been made by clarifying it. We will argue that the next stage, already well underway, is to try to merge the best of these “micro” analyses with a more properly “mid‐level” theory of institutional design for corporations and a “macro” theory for the design and regulation of markets in a democratic society.

The Concept of Conflict of Interest

In his influential study “Conflict of Interest as a Moral Category,” Neil Luebke found “no use of the term ‘conflict of interest’ prior to the 1930s, nor any occurrence in a court decision prior to 1949.” 3 Luebke noted that it was absent from the 1971 Oxford English Dictionary and did not appear in the Random House Dictionary of the English Language until 1971, albeit with a definition “that emphasizes the governmental use of the term to the virtual exclusion of the private sector.” Similarly, among “standard law dictionaries it does not appear in the exhaustive American and English Encyclopedia of Law of 1887, in John Bouvier's Law Dictionary and Concise Encyclopedia of 1914, or in any edition of Black's Law Dictionary until 1979.” Its appearance and analysis in the philosophical literature is more recent still.

Of course, we can find the words “conflict,” “of,” and “interest” conjoined in political philosophy texts prior to this, but in any examples we have found, this expression refers simply to the existences of what we might call “clashing interests,” for example, where you and I both want something but cannot both have it. 4 Conversely, there is no question that some of the core elements of the contemporary concept of conflict of interest—including special duties for trustees, fiduciaries, judges, and professionals, as well as worries about the temptations of corruption—have been around for centuries, even if we did not use those three words to pick them out. One can surely not understand why a sultan would have insisted on having his harem attendants castrated without imagining him being keenly aware of the mostly unsupervised attendants' potential conflict of interest.

Still, there are genuinely novel features of our contemporary concept and of the ways we use it in our evaluations of individuals and the institutions within which they work. In order to begin to examine these features, let us turn now to recent scholarly attempts to define or clarify the concept. Our aim here will be both to explain the nature of conflicts of interest by way of the best of these analyses and to highlight points of consensus and of continuing dispute. Our interim conclusion will be that this project of conceptually analyzing “conflict of interest” has reached a stage of sufficient sophistication, clarity, and consensus that the community of business ethics scholars can now devote most of its energy to more substantive normative and empirical questions, which we ourselves will turn to later in this chapter.

Contemporary philosophical debates over the definition of “conflict of interest” in business ethics can be traced to a 1982 article by Michael Davis, titled simply “Conflict of Interest.” 5 Davis worked to reconcile legal analysis of conflict of interest extant at the time with the one theoretically significant article he is able to cite from outside of the legal literature, namely Joseph Margolis's “Conflict of Interest and Conflicting Interests.” 6 Building on the foundations of the American Bar Association's understanding of the concept and employing the methods and style of conceptual analysis current among “Anglo‐American” philosophers at the time, Davis produced both a “rough formulation” and a full‐blown conceptual definition with five necessary and jointly sufficient conditions for when a given person has a conflict of interest within a given role. Since this initial article, Davis has continued to work mainly with the same “rough formulation”:

On the standard view, person X has a conflict of interest if, and only if (1) X is in a relationship with another requiring X to exercise judgment in the other's, Y's, behalf and (2) X has a (special) interest tending to interfere with the proper exercise of judgment in that relationship. 7

As Davis points out, the crucial terms here are relationship, judgment, interest , and proper exercise . His concise clarification of each of these crucial terms provides a model overview, in just three pages, of the basic issues at stake in most conceptual discussions about conflict of interest. 8 We can trace most variations in the way different scholars or institutions understand the concept of conflict of interest to different ways they interpret notions like “interest” or “relationship,” or to the emphasis they place on “exercising judgment” or “fulfilling a duty.”

Davis did not end all debates about the proper definition of conflict of interest in 1982 . Many subsequent analyses of the concept were framed explicitly in reaction to Davis's proposed definition. For example, John Boatright argues that conflict of interest should be defined not in terms of judgment , but in terms of acting in another's interest :

A conflict of interest occurs when a personal or institutional interest interferes with the ability of an individual or institution to act in the interest of another party, when the individual or institution has an ethical or legal obligation to act in that other party's interest. 9

Another philosopher, Thomas Carson, deemphasizes the role of “interfering with the exercise of judgment” (which Davis finds so important)—and, like Boatright, stresses the centrality of fulfilling a duty. He presents what he takes to be the necessary conditions for a conflict of interest to obtain:

In order for there to be a conflict of interest, the following conditions must be met: (1) there must be an individual X who has duties to another party Y in virtue of holding an office or a position; (2) X must be impeded or compromised in fulfilling her duties to Y; (3) the reason for X's being impeded or compromised in fulfilling her duties to Y must be that X has interests that are incompatible (or seem to her to be incompatible) with fulfilling her duties to Y. 10

In a similar vein that is not in explicit opposition to Davis, Andrew Stark maintains that a conflict of interest “arises when a professional… possesses an interest that could impair her in executing her professional, fiduciary obligations to the principal.” 11 Stark clarifies this definition by adding that he is not using the term “fiduciary” in its narrow legalistic sense, but rather to refer to the kind of heightened responsibility that typically accompanies professional roles.

It is not our intention to heap one more paper on a pile of attempts to definitively clarify the concept of conflict of interest. Instead, we will give a rough indication of the progress these conceptual discussions have made, and of how much more conceptual work is necessary for the sake of the substantive ethical and policy issues arising from conflicts of interest. In highlighting the “core idea” here, we also hope to make clearer just how novel, or at least peculiar, “conflict of interest” is as a normative concept.

The Core Idea?

So what is that core idea of a “conflict of interest”? The academic literature began with concerns arising within professions—although it must be emphasized that you do not have to be a member of a profession to have a conflict of interest. The archetypical example concerns a professional, like a lawyer or a physician, who has an obligation to serve her client's interests, but who is confronted with an option that would serve one of her own interests to the detriment of the client's. For example, the client trusts her to serve his interests, has good reason to trust her, and pays her based on the mutually reinforced assumption that she will indeed be dedicated to serve his interests. However, the professional herself is presented with an opportunity to serve some other interest she cares about in addition to, or instead of, serving the client's interest.

There is a lot more to be said before we can derive something like a definition, let alone a normative theory, from this kind of example. For one thing, there is a tremendous amount of normative and institutional baggage carried by the idea of a profession and a professional obligation. We will unpack some of this baggage later in the chapter. For now we note that there is generally assumed to be a difference between a true “conflict of interest situation” and a generic “principal‐agent” problem. It may be that most conflicts of interest can be conceived of as involving at least one agent (e.g., the professional or expert in the example above) and at least one principal (e.g., the client). 12 But nobody who takes the concept of “conflict of interest” seriously will want to conflate the conflicts of interest and generic principal‐agent problems. 13 In other words, there are plenty of principal‐agent problems that we would not want to analyze in terms of conflict of interest: e.g., the standard situation of a manual laborer (the agent) who has been hired to do a relatively unsupervised job by an employer (the principal) and who has an interest in being lazy and doing as little work as he can get away with (“shirking”). It is perfectly true that there is a conflict between the employer's interest in getting as much productivity out of the worker as possible and the employee's interest in not working too hard, but this is not the kind of conflict that we are trying to get at with the specialized term of art “conflict of interest.” People have always recognized the existence of this kind of “conflict.” Something more conceptually and normatively interesting occurs in the kinds of situations in which professionals, executives, experts, and public servants (among others) find themselves.

Most careful definitions place a primacy on picking out a particular kind of situation . 14 A person has a conflict of interest because of the kind of situation she finds herself in, not simply because of the actual state of her own desires, interests, motives, and so on. This is what distinguishes the conflicted professional from the generic shirking or corrupt employee. Even cases in which the professional is morally and psychologically committed to serving her client's interests to the best of her abilities, and even when she could not conceive of being tempted or influenced by some personal interest that is in conflict with her client's, we still may say that she is in a conflict of interest situation and that because she is in such a situation she has a conflict of interest (not merely a potential conflict of interest). Most theorists would agree with Davis that “[O]ne can have a conflict of interest without being in the wrong. To have a conflict of interest is merely to have a moral problem. What will be morally right or wrong… is how one responds to the problem.” 15 When we say that Aristotle or Kant did not think in terms of conflicts of interest in the contemporary sense, this is primarily what we are referring to. They understood the idea of trusted physicians, or politicians, or magistrates, or civil servants being tempted to enrich themselves rather than fulfilling their duties to their “principals” or to the public. But roughly speaking, for earlier thinkers, the moral analysis of such a situation would focus on the “professional” in question having (or failing to have) the courage to do the right and honorable thing and to resist the temptations of corruption. As long as this person has remained virtuous and fulfilled his primary duties, nothing morally wrong has happened. Indeed, a contemporary virtue theorist inspired by Aristotle might take the same position, 16 as would purveyors of the “everything you need to know about business ethics you learned at your mother's knee” approach. 17 There are two problems with this virtue‐centric approach. First, it places too much confidence in the ability of conflicted individuals to know if their judgment is being corrupted. Second, it does not take into account the fact that the organization they work for can be harmed merely by the suspicion that the employees are being presented with “unsupervised” opportunities for corruption. We will discuss both of these issues at length later in the chapter.

We can contrast the “noble morality” of old with the “professional morality” of today, which recognizes the ethical salience of the concept of conflict of interest. Consider the case of a conflicted contemporary professional or pubic servant who decides not, for example, to disclose the conflict, but instead to follow the classical advice and simply not allow the conflicting interest to influence her decisions. Even if she made a perfectly reasonable judgment she might well be disciplined, fired, or suspended from her professional association. As the legal scholar Bayless Manning put it, as long ago as 1964, “subjective intent is not important [in conflict of interest law]… If the wrong kind of outside interest is held, no amount of leaning over backward or purity of soul will satisfy [a confirmation] Committee or the statutes.” 18 We now find a similar primacy of the “objective” situation in conflict of interest rules in professions and firms. A person is judged to have a conflict of interest on the basis of being in a conflicted situation, whether or not that person thinks he or she is capable of resisting the temptation or corrupting influence of the interest that could interfere with her judgment. This does not mean that we are cynical about the motives or abilities of professionals or experts in this kind of situation. It is simply that we now think that finding oneself in such a situation requires that the person do more than simply resist temptation. At the end of the day, an employee or professional may be expected to exercise moral restraint to prevent her own interest from clouding her judgment, but before then she will generally be expected to take concrete steps to escape the conflict, disclose it, have it managed , or as a last resort manage it. 19 We will discuss strategies of each of these types a little later.

Different Kinds of Conflicts of Interest

There is a proliferation of types of conflicts of interest in our contemporary world. The “real world” of professional life typically now diverges from the context of what we might call the “small‐town lawyer” or “country doctor” envisaged by the archetypical case of the lone professional facing a single client and having an interest that might interfere with the professional's duty to look after the client's interest. A typical lawyer or doctor now is more likely to work for a large law firm or hospital, or perhaps for a large corporation in, say, investment banking or the pharmaceutical industry. In these settings they may have competing principals and duties, many of which are in perpetual tension if not outright conflict. For example, a doctor may have to manage conflicting duties to two principals, patients and HMOs, several times a day. 20 Another factor in the proliferation of potential conflicts of interest is the steady emergence of new categories of professionals or quasi‐professionals, also typically working in corporate settings—from practitioners of emerging services in health care, “wellness” therapies, and counseling, to experts specializing in any one of dozens of new financial services, or to consultants for just about anything. There is also an increasing professionalization of management in ways that are relevant to a concern about conflicts of interest. It is not so much that business schools have consciously taken on the trappings of professional schools, training their MBA graduates to be autonomous responsible “professionals.” It is rather that modern corporations routinely place individual managers in situations where they are expected to exercise judgment in matters that require considerable expertise , including expertise that both their superiors and clients may find difficult to evaluate . Such managers will typically not be members of a bona fide profession (like law or accounting) with its own code of ethics, but their employers will be just as concerned as a professional association would be about ways the private interests of these managers might compromise their expert judgment or expose the firm to accusations of corruption, favoritism, or “unprofessionalism.”

It is worth making clear that although we typically discuss the concept of conflict of interest with examples involving professionals, one does not have to be a bona fide professional to have a conflict of interest. The ideas of professionalism and conflict of interest are linked primarily because (for reasons we will explore later) all professions explicitly make the management of conflict of interest a central feature of their professional codes of ethics. But many organizations and groups need to minimize the chance that their members or employees will be involved in conflicts of interest and will thereby invite scandal, among other things. It is likely that public servants in many countries have lived with conflict‐of‐interest strictures for as long or longer than have members of many professions.

And again, such strictures have become a standard feature of most corporate codes of ethics or “conduct.” Many senior managers or “officers” are treated in the law very much like professionals, with very explicit fiduciary obligations to serve others' interests ahead of their own. 21 The fiduciary obligations of senior managers were reinforced in the United States by the Sarbanes‐Oxley Act of 2002 (especially Titles 3 and 4), which was prompted by the perceived lack of accountability of top management during the “Enron Era.” Sarbanes‐Oxley also includes provisions for another category of conflicts of interest we have barely touched upon so far, namely, conflicts that arise between different practices or services offered by the same firm. In other words, firms themselves—and not simply the individuals working for them—can be in a conflict‐of‐interest situation. One part of the firm, for example, may have fiduciary obligations to serve the interests of a particular principal (e.g., a client, but also perhaps the public, as in the case of auditors or engineers), but another part of the firm has an interest in selling services to that client that may not be in its (or the public's) best interests. Consequently, section 201 of Title 2 of Sarbanes‐Oxley restricts firms in charge of audits from offering other consulting services to the same clients. The legitimate fear is that the judgment of the audit team may be “influenced” by the interest of their firm in maintaining good relations with the senior managers who are in a position to offer the consulting contracts—bearing in mind that the fiduciary obligations of the auditors are not to the senior managers but to the shareholders and the investing public. Title 5 of Sarbanes‐Oxley, “Analyst Conflicts of Interest,” focuses on the inherent conflict of interest of analysts who are supposed to give an objective assessment of the prospects of a company that may also be securing financing or IPO services from the firm (say, an investment bank) the analyst works for. The evident conflict is that the analyst may implicitly or explicitly feel pressure to paint a more optimistic picture of the company and to not jeopardize potentially lucrative contracts with his or her own firm. 22

Does this proliferation of sites for conflicts of interest diminish our prospects for understanding both the concept and its normative stakes? Not necessarily. In his capstone article for an excellent collection on conflicts of interest in both established and emerging professions, Stark gives us some grounds for optimism. To begin with, we can usefully distinguish “out‐of‐role” and “in‐role” conflicts of interest. By and large, “conflicts of interest arising from out‐of‐role sources are all alike,” in that they involve conflicts between an individual's professional duties and his or her own outside private interests. The ethical problems with these kinds of conflicts are typically plain to see, and as such they tend to be less ethically and conceptually controversial (i.e., less open to debate) than what Stark calls “in‐role” conflicts, which involve a tension between two or more different professional duties an individual or firm may have. Stark argues convincingly that across a broad range of professional and quasi‐professional roles, we find a consistent pattern of two basic types of in‐role conflicts of interest: “one that arises when a professional occupies more than one role with respect to any given principal ; and the other, when the professional occupies the same role with respect to many principals .” 23 The classic example of the second, “many principals, one role,” type is a lawyer with concurrent adversarial clients. However, it could also include a broker who manages accounts for multiple clients but must choose between them when allocating a security in short supply; 24 or a corporate director dealing with competing minority and majority shareholders. 25 In‐role conflicts falling within Stark's first category—“many roles, one principal”—conflicts tend to emerge either (1) because “the professional simultaneously occupies a judging and an advocating role—an impartial and a partial role—in the work he does for the principal,” as when professors grade graduate students, and then agree to write letters of recommendation for them with a hope of landing them jobs; or (2) because of a “tension between the professional's diagnostic and service‐provision roles, his roles as both a buyer of services for, and a seller of services to, the principal,” as when a dentist examines your teeth and then offers to fix the problems she “discovered.” 26

In short, there are many alternative ways one could choose to analyze and categorize different kinds or categories of conflicts of interest. Some schemes will prove more useful than others, depending on one's purposes. We believe that the scholarly community is now reaching the end of a phase that concentrated largely on the analysis of the concept of conflict of interest and is moving on increasingly to address substantive normative and institutional issues. We will, accordingly, shift (in the next section) from this conceptual discussion to some reflections on the state of conceptual debates today and the nature of the substantive questions these debates are supposed to help us address.

From Conceptual Analysis to Normative Evaluation and Institutional Design

Debates between rival explications of the concept of conflict of interest in the business ethics community (broadly construed) have reached the stage where reasonable people can agree to disagree. There seems to be substantial agreement over the “core idea” of a conflict of interest, as articulated above, as well as over what kinds of situations count as conflicts of interest and why. There is a broad consensus, for example, on the primacy of identifying conditions under which someone is in a conflict of interest situation . There is also a good deal of agreement over the way the concept is bound up with the need for an agent to exercise judgment involving expertise that is difficult for the principal to evaluate. There is agreement over the significance of the special or fiduciary duties of an agent to one or more principals, and of the existence of other interests that might interfere, consciously or unconsciously, with the ability or willingness of the agent to make the appropriate judgment or to carry out her fiduciary duties. This broad consensus about the concept of conflict of interest can be regarded as a basic “gestalt” created from our earlier survey of rival definitions.

A closer look at those conceptual analyses shows lively disagreements as well. Some of the leading theorists—including Davis, Boatright, Carson, and Luebke—have gone through multiple iterations of debate, in print and at scholarly conferences, without coming much closer to resolution. Any definition of conflict of interest will involve concepts that are open to different interpretations and conditions, concepts such as “judgment,” “fiduciary,” “interest,” “relationship,” and so on. Various theorists will have different intuitions about which elements of a definition are more “essential” or “core” and which ones merely follow from the core but are not part of it. So, for example, all theorists will see conflicts of interest as situations where both the agent's judgment and ability to act in the interest of the principal are potentially compromised. Still, what is the more “essential” element being interfered with— the judgment or the ability to act in the other's interest or the ability to carry out one's duty ? This question invites related queries about which method is appropriate for settling these sorts of conceptual disputes. Many will find the answer to this question disappointing. There is no “truth” to be had in conceptual definition of this sort. There is no independently existing reality of conflicts of interest against which we can test our theories about what does and does not qualify as a conflict of interest. We cannot ask about the deep meaning of the term in ordinary language, because “conflict of interest” is a relatively recent term of art whose meaning in technical and everyday discourses is significantly vague and in flux. But as we noted at the outset, people do seem to be able to spot a conflict of interest. (There is a Farsi aphorism to the effect that one does not have to be a cook to smell when something is rotten in the kitchen.) So we can identify a fairly uncontroversial set of situations that we would expect a good definition of “conflict of interest” to pick out. We can also make some reasonable decisions about other kinds of situations that are adequately covered by other normative concepts (such as the general idea of a principal‐agent problem, or of selfishness) and which therefore do not need to be gathered under this particular rubric. The touchstone cases and illustrations we have used so far (i.e., both clear examples of conflicts of interest and also examples that are best called something other than “conflicts of interest”) would be identified correctly by any of the best of the current philosophical definitions of “conflict of interest.” In the end, the question of how exactly to tweak the definition of a concept like this is pragmatic. Which aspects of the world (e.g., which kinds of situations) are worth highlighting as conflicts of interest, given our various purposes? As several scholars have noted, the concept of conflict of interest as it is used in careful legal and philosophical discourse highlights a feature of the world that had been only dimly recognized through the ages. But does our recognition of these types of situations actually help us to better understand, to evaluate, to act fairly, and the like?

As we have hinted throughout, one can pose questions of this sort at each of the three levels of ethical analysis highlighted by Thompson (and others). We need, then, an analysis of “conflict of interest” to clarify our answers to the following sorts of concrete questions:

Microlevel: Which duties does a professional or expert owe to various parties, clients, employers, or the public? What rights does she have to pursue her own interests in the context of selling a service to a client? What should she do when she recognizes she is in, or could be perceived to be in, a conflict of interest situation? Mid‐level: How should a firm or some other kind of organization employing professionals and experts be structured so that the firm itself avoids or manages its conflicts of interest, as well as the conflicts its employees may find themselves in? What rules should it have about conflicts of interest among its employees? How should it teach, monitor, and enforce these rules? Also, what rules, training, and sanctions should professions themselves have concerning the conflicts of interest of their members? Macrolevel: Why should there be professions and when should putative professional bodies be granted a monopoly on rights to license (and to punish or expel) practitioners? Contrariwise, when should domains of experts simply be left to ply their trade in the marketplace? When are government regulations concerning conflicts of interest appropriate for the private sector? What conflict‐of‐interest rules and laws are appropriate for public servants, elected officials, judges, and so on?

These sample questions, albeit rather central ones, do not constitute a comprehensive list. Lying behind these relatively concrete issues are more abstract questions, such as “and what kinds of theories or principles are appropriate for justifying answers to this kind of issue?” Note that by “theories or principles” we do not want to imply that these are only ethical or even normative. Some may be prudential reasons of one sort or another. Both firms and professional bodies, for example, may decide to pay significant attention to conflicts of interest (and perceptions thereof) because doing so is the best way to secure trust from their customers and their government overseers. And trust pays.

When laid out in this way, it should be plain that the answers to the questions at different levels are linked. There is a tendency for microlevel questions to depend on answers at the mid‐level, and for mid‐level answers to depend on macro decisions. For example, in many cases an individual's duties in the face of a conflict of interest will depend crucially on whether or not she is a member of a bona fide profession or an employee of a firm with rules about these things. In other words, how she should answer her individualized microlevel questions depends on how the profession or firm has answered the mid‐level questions. These questions may depend in part on the status of government regulations. And these kinds of regulations will be based on more abstract principles of justice and perhaps also on economic theories (e.g., about market failures, or cost‐benefit analysis) and psychological theories (e.g., about the pernicious ways personal interests can unwittingly corrupt good judgments).

Over the rest of this chapter, we will illustrate how the study of conflict of interest could be advanced by thinking about the kinds of inputs that would be required to answer the relevant questions at the mid‐ and macrolevels. We examine next how research from the world of psychology might enrich mid‐level attempts by institutions to find effective approaches to the conflicts faced by their members. We will finish with some reflections on how political philosophy might shed light on various macrolevel questions of relevance to managing conflicts of interest.

Cognitive Bias and Mid‐Level Theory for Institutional Design

In the previous section, we sketched questions that might reasonably be asked about conflict of interest at each of the micro‐, mid‐, and macrolevels of ethical analysis. Key questions at the mid‐level were about how institutions (including professions) should be structured so that those institutions and their members successfully avoid or manage conflicts of interest. But answering such questions of institutional design requires a sophisticated understanding of the capacities of the individuals who populate institutions to recognize and resist bias in oneself and others. Knowledge of these capacities of individuals is also important, in principle at least, for microlevel analysis of conflict of interest. An understanding of one's own foibles should prove useful in guarding against improper bias. But as we shall explore below, there is reason to believe that individuals often cannot make good use of information about their own cognitive capacities and biases, even when such information can be made available. Institutions, however, have at their disposal a range of artifices—policies, procedures, incentives, and oversight mechanisms—that can effectively modify human behavior. Institutions are built precisely because of their power to take human intentions and tendencies as their raw material and turn them to constructive purposes. Accurate information about human psychology seems essential here. Folk understandings of what motivates and biases decision makers are often inaccurate and are surely a poor basis on which to structure important institutions. And the tools of analytic philosophy—which have given us such a good understanding of the core concept of conflict of interest—do little to illuminate empirical questions about the actual human capacities that play a significant role in institutional solutions. Michael Davis highlights this problem in a useful thought experiment about refereeing his son's soccer game:

I do not know whether I would be harder on him [his son] than an impartial referee would be, easier, or just the same. What I do know is that… I could not be as reliable as an (equally competent)… [referee] would be… The same would be true even if I refereed a game in which my son did not play but I had a strong dislike for several players on one team. Would I call more fouls against that team, fewer (because I was “bending over backwards to be fair”), or the same as a similarly qualified referee who did not share my dislike? Again, I do not know . 27

Presumably, these are just the sorts of questions that need to be answered by institutions seeking to institute any but the most alarmist of prophylactic measures. Reasonable estimates of the cognitive and motivational tendencies typically experienced by human beings are precisely the kind of data that must inform reasonably nuanced institutional policies. In order to put in place effective incentives and deterrents, for example, institutions need a reasonably accurate understanding of just what factors actually incentivize and deter people. So it is not surprising that successful entrepreneurs with “gut instincts” about these things will also, when the firm grows larger, come to rely on the expertise of human resource managers trained in behavioral sciences to design systems of incentives, promotion, compliance, and deterrence.

Fortunately, a recent trend in conflict‐of‐interest research has seen empirical research by psychologists and experimental economists applied to the issue in ways that are instructive. In particular, this research has brought experimental and statistical methods to bear on questions such as the range and force of psychological factors at play in conflicts of interest, and the likely effectiveness of various remedial strategies. This empirical research complements nicely the analytic work done by philosophers and political theorists like Davis, Boatright, and Stark. While philosophers were analyzing the concept of conflict of interest, debating its key features, and fleshing out arguments concerning why and when conflict of interests are morally problematic, psychologists and experimental economists have been exploring the workings of the minds of the human individuals who actually find themselves in such conflicts. They have tried to understand how an interest can interfere with a judgment or a motivation to serve one's client's interests (even in a person of good will and virtuous character). This is incredibly important for good institutional design because it points to a need not just to educate personnel about what the definition of conflict of interest is but also to structure institutions themselves so that judgment is effectively insulated from interests that might otherwise interfere.

This empirical work on conflict of interest is rooted in a voluminous literature elucidating the large number of cognitive and motivational biases to which humans are subject—psychological mechanisms influencing decision making in ways that are often invisible to the decision maker, and that are often surprising. The touchstone for this topic is the work of Daniel Kahneman, Paul Slovic, and Amos Tversky investigating the cognitive biases (patterned deviations of human cognition from the predictions of rational choice theory) and motivational biases (biases rooted in the tendency for judgment to be affected by the individual's own interests) to which humans are subject. 28 These biases have been demonstrated to affect perception and choice in an incredible range of ways, in everything from the way individuals evaluate the seriousness of various risks and the desirability of particular outcomes, to the way they perceive connections between cause and effect, as well as their ability to summon memories and even their own understandings of what motivates them to do the things they do.

A classic example of cognitive bias is the “framing effect,” which consists in the tendency for decision makers to be influenced by irrelevant factors such as the way in which a particular decision or risk is described, or framed. The exact same facts described in two different ways (e.g., listed in a different order) can result in different decisions. A highway safety initiative, for example, may be received differently by the public if it is framed in terms of “lives saved” rather than in terms of “deaths avoided,” even though both descriptions are mathematically identical. Examples of well‐documented biases more closely related to the study of conflict of interest include the consistency bias (the tendency to remember one's current behavior or decisions as being consistent with past behavior or decisions) 29 and in ‐ group bias (the preference given to people whom the decision maker sees—even for seemingly spurious reasons—as being part of his or her “group”). 30

The collective wisdom of this body of literature is that human judgment is consistently and persistently biased in ways that are often counterproductive, nearly invisible, and hard for individuals to compensate for . Recently, researchers in the field of cognitive and motivational bias have also found fertile ground for the application of their work in the study of conflict of interest. Fundamental to the notion of conflict of interest is that someone's judgment is being affected or stands to be affected. Unfortunately, some theories and definitions of conflict of interest are vague, and others are narrow, regarding just which biasing conditions and causal mechanisms may be at play. The literature on cognitive and motivational biases has stepped into this breach with a body of empirical and theoretical knowledge concerning which factors bias human judgment, to what extent, and under what circumstances. Mid‐level (e.g., organizational) attempts at recognizing and resolving conflicts of interest seem bound to be facilitated by a more well‐substantiated understanding of the psychological causal factors at play. What sorts of things actually do bias people's judgments? What sorts of incentives (if any) can institutions put in place that are likely to be effective at getting people to exercise judgment objectively? There is reason to think that the institutional level is the right level at which to use answers to such questions. If consistent and persistent biases are found at the level of the individual, it seems unlikely that effective solutions are going to be found through the self‐reflective practices of those consistently and persistently biased individuals.

Scholars have recently begun to draw on the literature on cognitive and motivational bias to shed light upon conflicts of interest that obtain in various professional and quasi‐professional fields. Key examples include studies of the conflicts faced by physicians, financial analysts, and auditors. We will now examine evidence from each of these briefly before moving to suggest a path towards an empirically grounded normative theory of conflict of interest.

Dana and Loewenstein studied the conflict of interest faced by physicians who accept gifts from the pharmaceutical industry. 31 They considered in particular the impact of the size of such gifts. Many institutions (corporations, hospitals, professions) permit the acceptance of small, “token” gifts, based on the commonsense assumption that such gifts could not plausibly be thought to influence a professional's judgment. However, these authors note that, according to the literature on bias, “small gifts may be surprisingly influential.” This casts doubt on the way in which the line between gifts that are permitted and those that are forbidden is so often drawn. Further, these authors point out that it is unhelpful, and likely inaccurate, to equate the claim that physicians accepting gifts are involved in a conflict of interest with the claim that such physicians are either corrupt or otherwise engaging in intentional impropriety: the literature on cognitive and motivational biases suggests that such biases typically affect judgment without the individuals involved being aware of it.

The psychological evidence concerning cognitive and motivational biases has also been applied to the investigation of conflict of interest in the field of financial analysis. Michaely and Womack, for example, point to the existence of cognitive biases as plausibly implying that analysts are often not just unwilling , but psychologically unable , “to accept the statistical reality that many of their IPOs will turn out to be average or below average.” 32 This suggests the possibility of a trenchant bias in financial analysis, the response to which is much more likely to be found in institutional design (including features imposed by government regulations of the sort we examined earlier from the Sarbanes‐Oxley Act) than in individual commitment. Scholars have paid even more attention to what is likely the most well‐publicized category of conflict of interest in recent years, namely, the conflict faced by accountants engaged to audit the books of publicly traded firms. Moore, Loewenstein, Tanlu, and Bazerman present experimental data suggesting that auditors may be unable to overcome biases in favor of their clients even when motivated financially to make their audits accurate, rather than favorable. 33 Nelson reviews an enormous amount of empirical literature on auditor conflict of interest, concluding that the “experimental literature generally provides evidence of consistent (and persistent) effects of auditors' incentives on their reporting decisions.” 34 This sort of evidence provides a key input to be used by those engaged in designing institutions in ways that will help avoid and mitigate conflicts of interest.

Toward an Empirically Informed Normative Theory

The study of cognitive and motivational biases is useful and important for several reasons relevant to mid‐level ethical analysis of conflict of interest. 35 It reveals, as we have seen, a range of factors that can, and commonly do, affect judgment, and against which institutions must guard in their efforts to design systems to assist in the avoidance and mitigation of conflict of interest. This range of factors stretches beyond the kind of material (primarily financial) interest to which conflict of interest policies typically attend. As Miller notes, the idea that one can remove all possibility of bias simply by divesting oneself of a financial interest is “psychologically naive.” After all, “divesting yourself financially from a concern does not ensure that you will have divested yourself emotionally from that concern.” 36 These results are consistent with the trend, which Stark has observed within U.S. public institutions, to adopt increasingly “subjective” interpretations of “conflictable” interests. The law increasingly considers not just “objective” pecuniary interests but an increasing array of “subjective” interests derived from “influences, loyalties, concerns, emotions, predispositions, prejudgments, animuses, biases, affiliations, experiences, relationships, attachments, moral constraints, [and] ideological agendas.” All of these, Stark argues, “at one time or another, have been viewed as every bit as encumbering of official judgment as pecuniary interest itself.” 37

This empirical literature sheds light on questions of how conflicts of interest should be handled and which policy options are likely to prove fruitful. Most of what it implies about the prospects for effectively countering conflict of interest does not warrant optimism. According to Tenbrunsel, “The investigation of psychological processes and their relationship to conflicts of interest and unethical behavior is important but depressing for it reveals innate barriers that seem impermeable.” 38 To see the significance of this psychological literature for mid‐level analysis, one need only glance at the range of responses typically offered in the face of conflict of interest. Boatright discusses a list of methods for managing conflict of interest, including:

Avoidance (Avoiding acquiring any interest that would jeopardize one's judgment.)

Alignment (The arrangement of incentives such that the decision‐maker's interests are aligned with those of the persons being served.)

Objectivity (A psychological commitment to the objective exercise of one's duties. This is, in effect, the “classical” virtue‐based prescription.)

Disclosure (Disclosing conflict of interest to those who would be affected.)

Independent Judgment (Seeking to obtain the judgment of an objective third party.)

Competition (Imposing competitive pressure on firms to incentivize them to eliminate conflict of interest where conflicts threaten efficiency.)

Rules and Policies (Including especially institutional remedies that prevent potential conflicts of interest from evolving into actual conflicts of interest.)

Structural Changes (Ways of arranging operations so as to make conflicts of interest less likely, such as separating the auditing and consulting functions of accounting firms). 39

This wide‐ranging list is useful, and many of the items on it are precisely the kind of mid‐level solution we have mentioned. They are strategies to be implemented or at least imposed by institutions. One reason this makes sense is because the empirical evidence suggests that individuals will typically be insufficiently self‐aware to implement even apparently simple strategies such as “Objectivity” and “Disclosure.” Many of these management strategies require certain psychological capacities on the part of individual institutional members. Institutional rules requiring avoidance , for example, will only work if the individuals involved are psychologically capable of reliably recognizing conflict‐of‐interest situations. Efforts to use incentives to align decision makers' interests with the interests of those whom they advise will only be effective if the individuals involved are susceptible to such incentives and not tempted to “game” them. 40 Whether disclosure will be effective depends on whether those to whom conflict is disclosed are willing to act upon such disclosure. The existence and strength of such capacities has heretofore been relegated to the realm of commonsense and folk psychology. Fortunately, as the literature on cognitive biases demonstrates, whether people in general, and professionals in particular, actually possess these capacities is something that can be investigated empirically.

A good example of the extent to which empirical research can illuminate institutional solutions relates to one of the standard remedial steps urged by almost all conflict of interest policies and theorists, namely disclosure. Interestingly, Cain et al. found evidence casting doubt on the usefulness of disclosure as a remedy. According to them, there is a substantial body of research suggesting (1) that clients are unlikely to be able to effectively use professional disclosures of conflict of interest to correctly discount advice they are given, and (2) that professionals making such disclosures may, in fact, give more biased advice than professionals who fail to make such disclosures. 41 In short: disclosure may be useless or even counterproductive. This is instructive regarding the sort of mid‐level analysis we are advocating, for it implies a serious worry about the efficacy of one standard microlevel remedial strategy. The empirical literature also provides insights regarding the usefulness of focusing on avoiding or disclosing specifically financial conflicts of interest. Despite the common assumption that financial interests are the ones that need to be watched most carefully, Moore et al. found that “the social ties between auditors and their clients may be more of a problem than their financial incentives per se .” 42

This empirical evidence, however useful it may be for mid‐level analysis and remediation of conflict of interest, has limitations and failings. One potential failing is its tendency to focus only on outcomes. This tendency is understandable. Empirical methods concentrate on measurable findings. But this focus on outcomes—consequences—may result in a neglect of other ethically important perspectives on conflict of interest. Research that finds that a particular kind of incentive is ineffective at changing behavior may too quickly lead to the conclusion that such incentives are useless, without considering other moral reasons favoring those incentives. For example, the useful finding by Cain et al. that disclosure is not likely to be effective at producing better decision making leaves unanswered the question of whether the clients or patients of conflicted professionals are nonetheless owed that information. 43 From a moral point of view, institutions of various kinds ought to be concerned with policies that result in those institutions and their members doing the right thing , not just with producing optimal measurable outcomes.

A second limitation of the empirical literature lies in its occasional tendency to focus on what is measurable, and in so doing to lose sight of the analytic and definitional rigor achieved by philosophers such as Davis and Boatright and political theorists like Stark. In some cases, this leads to an unhelpful blurring of the concept of conflict of interest. One example is a paper by Tom Tyler, featured prominently in an edited volume on empirical approaches to conflict of interest. Although the term “conflict of interest” occurs in Tyler's title, the paper is really about how people deal with “conflicts between self‐interest and social values.” 44 But conflict of interest is not about those generic interpersonal conflicts. Neither self‐interest nor social values is a necessary ingredient of conflict of interest. An institution implementing a conflict‐of‐interest policy aiming to remedy the much wider range of conflicts implied by Tyler's analysis might well end up with a policy that lacks focus, and that might indeed give bad advice. “Avoidance,” for example, might sometimes be a plausible management strategy for certain kinds of conflict of interest, but it is a very poor strategy for dealing with the much more pervasive conflicts between self‐interest and social values. Empirical research must stay clearly focused if it is to achieve its promised utility.

Despite these limitations, the empirical research discussed in this section will prove useful to those seeking to structure organizations in ways that stand a reasonable chance of dealing effectively with conflict of interest. We cannot stress enough the fact that these are still very early days for this cognitive‐bias research, and especially for its application to problems of conflict of interest and institutional design. All we hope to have provided here is a hint and a sketch of how potentially useful this kind of research could be for our understanding of conflicts of interest and their management.

Toward a Macrolevel Political Theory of Conflict of Interest

One aim in this chapter has been to take stock of the progress that has been made on understanding conflicts of interest in organizations and to look ahead to issues in greater need of exploration. Business ethics scholars have mostly moved on from the conceptual disputes that characterized the first three decades of work on conflicts of interest. The focus now must be on questions of the “management” and “regulation” of conflicts of interest, broadly construed. The minor revolution that took place in the latter half of the twentieth century was the recognition that responsibility for managing what we now call conflicts of interest cannot merely be left to the honor and courage of the professional or public official. It is not that professionals suddenly became dishonorable, cowardly, or corrupt. The cognitive bias literature confirms intuitive suspicions that “interests” really do interfere with the judgment of even honorable and courageous professionals. As we highlighted in the last section, the first place to look for oversight and management of conflict of interest situations is in the organizations, firms, or professional bodies within which the conflicted professionals and experts typically work. There is still a tremendous amount of work to do to grapple with the design challenges of conflict of interest policies and their normative justification. 45 Among the most comprehensive and philosophically adept works to try to make sense of the ethics, law, and politics of these mid‐level institutional solutions is Stark's Conflict of Interest in American Public Life . However, as the title makes clear, it is set within the institutions of government. Other important texts with a similar scope have been written for the management of conflicts of interest within specific professions, especially law and medicine. 46 But the agenda for a mid‐level ethics and institutional design for conflicts of interest in business is, as yet, vaguely formulated. This should not be surprising, given the often unique conflict‐of‐interest challenges that arise within so many different industry sectors. However, inasmuch as this chapter attempts to say something about the state of the art concerning the study of conflict of interest in business ethics, we cannot avoid the interim conclusion that the art is still in a rather primitive state.

If a mid ‐ level ethical focus on conflict of interest at the intersection of business and the professions is only just starting to be explored in detail, a macro ethical analysis of the issue is still very much on the horizon. Why should society or the state care about conflicts of interest that arise in the private sector and what should it do about them? Is there a special political or social dimension to conflicts of interest that is not already taken care of through choices in the marketplace (e.g., the choice to avoid untrustworthy “experts”) and normal avenues of recourse for shoddy or fraudulent service? In macrolevel questions about conflict of interest, the heart of the issue concerns the social, political, and legal status of professions and quasi‐professions (or expert‐centered services). If mid‐level ethical questions ask (among other things) how professions should try to regulate and manage the conflicts of interest of their members, macrolevel questions ask why the state should “privatize” this form of regulation to a putative professional body (or to the codes of ethics of individual organizations). As Allen Buchanan argues, “Professions are social constructs , not facts of nature. As such, they are appropriate subjects of critical appraisal. It makes sense to evaluate them and, indeed, to ask whether it is a good thing that they exist.” 47 Many of the long‐established professions like medicine, law, and accounting, are characterized by

special status for members of the group (public acknowledgment of worth, marks of prestige, etc.) and special privileges, including financial advantages (such as public subsidies for training and education and insulation from economic competition) and a significant sphere of autonomy, that is, substantial freedom from external regulation of the characteristic activity. 48

Professions, then, are “ socially constructed inequalities … and it is appropriate to ask: What is the justification for this unequal treatment? Why should some occupational groups (such as physicians) and not others (such as automobile mechanics or butchers) receive special status, reap exceptional financial rewards, and be accorded an exceptional degree of freedom from external regulation of their activities”—including, crucially, the way they choose to manage their conflicts of interest? 49 As Buchanan notes, neither “the identification of situations involving conflicts of interest, nor the development of policies to minimize these conflicts need involve the special expertise of [the members of the profession] to such an extent that external regulation is not feasible.” 50

Buchanan is not claiming that this status cannot be justified, and he is correct in implying that we do not often enough ask ourselves, either as citizens or political philosophers, what this status ought to be and why. In the early post‐Enron era, leading politicians, opinion makers, and even spokespeople at the SEC began to wonder aloud whether the long “experiment” with professional self‐regulation in the accounting industry had failed. As we saw earlier, the Sarbanes‐Oxley Act of 2002 was an attempt to bring regulation of conflicts of interest for auditing firms back within the ambit of the federal government (and also to reign in various nonprofessionals such as financial analysts). As this volume goes to press there are signs that a similar federal response—this time with respect to the regulation of less well‐established professions and quasi‐professions in financial services, bond‐rating, and mortgage brokering—is likely to follow the so‐called subprime mortgage collapse in 2008.

However, such examples of rolling back the autonomy of professions seem like exceptions that prove the rule. The more typical trend in recent decades is in the opposite direction: A trade association develops more of the trappings of a professional body and eventually succeeds in lobbying the state for some degree of licensing authority (which accords market power in the provision of some service) and self‐regulation. 51 Again, we do not want to imply that the granting of autonomy to professions—especially with respect to the regulation of their own conflicts of interest—is a bad thing; we want simply to note that it is a strategic political choice in need of (macrolevel ethical) justification. Typically, the granting of this autonomy is seen (or rationalized) as a social contract where the profession and its members are granted significant privileges in return for taking on significant social obligations. One reason for the state to “privatize” the regulation of conflicts of interest in this way is that it might be cost‐efficient with respect to many costs, including straightforward financial ones. As the experience of companies trying to comply with Sarbanes‐Oxley seems to have made clear to many observers, as if for the first time, regulating conflicts of interest can be expensive—costly enough that some would argue that it is better to risk allowing some conflicts of interest than to try to manage them all. 52 The point is that these macrolevel questions deserve much more discussion in the business ethics literature on conflict of interest, not to mention in debates about justice and political economy among political theorists.

Another way to think about the importance of the “macro” political dimensions of a theory of conflict of interest is to pose the question we introduced at the outset: Why did we not seem to need the concept of conflict of interest before the latter half of the twentieth century? How could it be that this moral category—which is now absolutely central to ethics in the professions, public service, and most corporate codes of conduct—was only vaguely and imperfectly understood before World War II? We have already given part of an answer: more traditional ethical schools of thought were inclined to think that the only morally relevant prescriptive advice in what we are now calling “conflict‐of‐interest situations” would be to instruct the “conflicted” individual to resist temptation, maintain objectivity, and carry out his or her duty. What we now recognize is that this response is naϯve: conflicted individuals can have their judgment interfered with even when they try their best to “correct” for the influence of the conflicting interest (think of Davis's soccer referee). In many cases, they may not even be aware of the influence some source of bias may have over them, as in the case of physicians influenced by the trinkets left by pharmaceutical representatives. But we believe that this response does not adequately explain the “discovery” of the concept of a conflict of interest or its dominance in our ethical thinking over the past half century. Such an explanation is still too focused on the microethical perspective to do the job.

Boatright and Davis both offer further, and complementary, explanations that begin to adopt a more mid‐level ethical perspective. Davis concedes that we still have “no authoritative answer” to the question of why “both the term and the concept [of conflict of interest] are as new as they seem to be.” 53 “The best explanation now available,” he continues,

seems to be the replacement of the enduring personal relationships of master and servant by the briefer encounters characteristic of the free market, big city, and big business. We are now much more dependent on the judgment of others, much less able to evaluate their judgment decision by decision, and indeed generally know much less about those individuals than we would have even fifty years ago.

But surely this cannot be the whole story. For one thing, it does not explain why the concept “appeared” and became so prominent only in the postwar years. The trends Davis is highlighting have been in play since the dawn of the industrial revolution. They have accelerated since the 1950s, but they are not novel. It also not clear who the “we” are who are less and less able to evaluate the judgments and decisions of professionals. The relatively uneducated agrarian and industrial workers in the nineteenth century were never in a particularly good position to evaluate the judgments of professionals, bureaucrats or, say, church leaders.

Boatright also thinks that the recent appearance and prominence of the concept of conflict of interest “invite speculation,” and his response to this speculation can be seen as fleshing out the one offered by Davis:

Society became much more dependent on fiduciaries and agents, especially those in the professions, while, at the same time, market forces have come to play a larger role in their activities. When the professions—most notably, medicine, law, accounting—began to be practiced more and more in a market economy based on financial incentives, both the benefits and the harms of this development were recognized. In order to enjoy the benefits, it was necessary to develop a concept that identified the source of the potential harms and to devise means for reducing the harmful consequences. 54

This seems more plausible, not least because of the way it begins to shift the focus away from the moral relations between an individual client and a professional service provider and to emphasize a larger‐scale issue of institutional design and regulation. In Boatright's explanation, the concept is not a way of better understanding the moral obligations of professionals to their clients, as Davis's explanation seems to have it, but rather as a way of legitimizing and regulating more effective, efficient, and fair ways of supplying goods and services in an advanced market economy.

But Boatright's speculative explanation is also incomplete. It implicitly overemphasizes the individual rights of the buyers of expert services. Consider his answer to the question, “what is wrong with conflict of interest?” which immediately follows the passage just quoted. The moral wrong, he says, “is simple: a person in a conflict of interest—a fiduciary, agent, or professional—has failed to fulfill an obligation, one for which he or she has accepted an engagement and, usually, compensation.” This is often true—though it need not be, since it is certainly possible to be in a conflict‐of‐interest situation and still faithfully fulfill one's duty to the principal in question. But it is not the whole story, and it is not the whole reason we now place such great emphasis on conflict of interest. The other half of the story is about why the professional body that agent is a member of, or the firm or government agency that agent works for, cares about conflicts of interest. They care not only because they fear individuals being harmed by their members but also because they rely crucially on a stock of trust from clients or the public at large. This stock of trust is what Alan Greenspan once usefully called “capitalized reputation”; it is literally part of the capital of a profession or an organization. In short, professions and organizations care about conflicts of interest in part because they care about, say, their clients, but also because they care about themselves and their ability to continue to operate effectively and efficiently. The very legitimacy of professions, governments, nongovernmental organizations, and many kinds of firms depends on trust. Without trust their status may be taken away from them, or their ability to effectively carry out their missions may be compromised. And conflicts of interest—even wrongly perceived or apparent conflicts of interest—corrode trust.

By focusing on how major social and political institutions come to see it in their interest to reduce and manage conflicts of interest, we get a fuller sense of why the concept arose when it did. Davis's and Boatright's basic explanations are silent about the simultaneous appearance and prominence of concerns for conflicts of interest in public institutions in the postwar world. This rise coincided with a massive expansion of the role and size of government and the number of facets of people's lives affected by large state institutions. It also coincided with the ever‐growing prominence of the mass media (aided now by the Internet) and its ability to uncover and publicize even a whiff of corruption or abuse of privilege. Along with both of these trends came a more democratic, and less deferential, expectation of citizens for propriety in large institutions in both the public and private sector. It is also the precise period when virtually every sector of the economy became heavily regulated, often for the first time. So businesses, NGOs, civil servants, and professions have all become keenly aware that if the public sees them abusing positions of trust or privilege, there is always a credible threat of renewed and tighter state regulation.

However much conflicts of interest may harm individual clients of businesses or professional services, we cannot fully appreciate either the recent appearance or the sudden prominence of this normative category without seeing the threat conflicts of interest pose to large‐scale social, political, and economic institutions. This is why a full understanding of the rationale and justification of regimes for regulating conflicts of interest much be part and parcel of the macrolevel political theories that guide our design and justification of these institutions. To date, our normative theories of conflict of interest have worked “upwards,” so to speak, from the classic situation of the small‐town lawyer and his client to ever more complicated relations between corporate lawyers and their bosses, clients, and other principals. It is time for significantly more investigation into the way we might elucidate the ethics of conflict of interest by working “downward” from our theories of justice and democratic legitimacy for the major social, political, and economic institutions that constitute what John Rawls called the basic structure of society. 55

By now we hope to have given some insight into the puzzle with which we began: why our contemporary concept of conflict of interest was only dimly appreciated before the second half of the twentieth century even though we cannot now think our way through the challenges of organizational and professional ethics without it. Of course, conquering the most overt manifestations of conflict‐of‐interest—from bribery and corruption to nepotism and the use of public office for private gain—has always been recognized as one of the great challenges for civilized societies. We now realize much more clearly, however, that conflict‐of‐interest situations pose a problem even when they are not exploited in these corrupt ways. This is in part because conflicting personal and even professional interests can impair the judgment of even the most dedicated and conscientious expert. We have had solid empirical evidence of this only in the past decade or two. We also worry about even “unexploited” conflicts of interest more now because of a heightened concern for the legitimacy of institutions as diverse as governments, state bureaucracies, businesses, NGOs, religious institutions, and professions. Many of these organizations rely for their survival, or at least their efficient operation, on a stock of trust from members, clients, or society at large. And this trust is imperiled if people even suspect that experts or officeholders, who are inherently difficult to monitor, might be in a position to improperly profit from their privileged status. For both of these reasons, the task of ethical theory cannot rest at what we have been calling the “microlevel” with exhortations for conflicted professionals to resist temptation. It must move decisively to mid‐level issues of institutional design and justification. How can institutions and associations best protect the interests of those they serve while also preserving the trust and support of these and other constituencies? Indeed, it is now only by answering these questions that we are in a position to appropriately dispense microlevel ethical advice to the individual expert or officeholder, and this advice will be much more complicated than exhortation to resist temptation (though that will certainly remain part of it). Finally, we have argued that a thorough understanding of the ethics of conflict of interest requires going beyond understanding why private‐sector and civil‐society institutions may wish to enhance and protect their own perceived legitimacy. We must also ask whether or why they are actually legitimate in a democratic society. For example, why do they have a right to self‐regulate rather than to be regulated by the state? And what responsibilities do they have to members, customers, or to society at large given the privileges they are granted? Answers to these “macrolevel” ethical questions will surely have a bearing on both the appropriate design and the justification of conflict of interest provisions adopted by institutions, and ultimately therefore on the moral expectations we have for the members working within these institutions.

1. Dennis Thompson   Restoring Responsibility (New York: Cambridge University Press, 2005), 275.

2. Ibid. , 268 . Clearly, at some level this claim of Thompson's is false or at least overstated. There are now substantial concentrations of experts in, for example, business ethics and medical ethics who live at this “mid‐level” of ethical analysis. That said, Thompson's exhortation to pay more attention to ethics for the mid‐level might seem rather radical indeed to anyone who took the tables of contents of leading journals like Ethics or Philosophy and Public Affairs as their guide to the field of academic ethics.

3. Neil Luebke “Conflict of Interest as a Moral Category,” Business and Professional Ethics Journal 6 (1987): 67.

4. Consider the following passage from John Rawls   A Theory of Justice (Cambridge, Mass.: Harvard University Press, 1971) , 4: “although a society is a cooperative venture for mutual advantage, it is typically marked by a conflict as well as by an identity of interests. There is an identity of interests since social cooperation makes possible a better life for all than any would have if each were to live solely by his own efforts. There is a conflict of interests since persons are not indifferent as to how the greater benefits produced by their collaboration are distributed, for in order to pursue their ends they each prefer a larger to a lesser share” (our italics). For reasons that should become clear as we discuss definitions of “conflict of interest,” below, John Rawls is not talking about our notion, he is merely using the same words to mark a different idea. According to the concept we are discussing here, the conflict is not between two different people's interests but, if you will, within one single person. It is, in a sense, a conflict between that person's interest in being a good provider of expert advice or service, on the one hand, and some other interest she happens to have, on the other hand. Hence we now talk about how an individual herself might be “conflicted.”

5. Michael Davis “Conflict of Interest,” Business and Professional Ethics Journal 1 (Summer 1982): 17–27.

6. Joseph Margolis “Conflict of Interest and Conflicting Interests,” in Ethical Theory and Business , ed. Tom L. Beauchamp and Norman B. Bowie (Englewood Cliffs, N.J.: Prentice Hall, 1979).

7. Michael Davis “Introduction,” in Conflict of Interest in the Professions , ed. Michael Davis and Andrew Stark (New York: Oxford University Press, 2001) , 8. Many of the proffered definitions of “conflict of interest” by different theorists use different letter placeholders for the person with the conflict, the other person that first person owes a duty to, and so on. We will lightly edit each author's definition to make these placeholders consistent: so X will be used for the person with the possible conflict, and Y and Z for the parties X might owe duties to.

Davis, “Introduction,” 8–11.

John Boatright, “Financial Services,” in Davis and Stark, Conflict of Interest in the Professions , 219, emphasis added.

10. Thomas L Carson “Conflict of Interest and Self‐Dealing in the Professions: A Review Essay,” Business Ethics Quarterly 14 (2004): 165.

11. Andrew Stark “Why Are (Some) Conflicts of Interest in Medicine So Uniquely Vexing?” in Conflicts of Interest: Challenges and Solutions in Business, Law, Medicine, and Public Policy , ed. Don A. Moore , Daylian M. Cain , George Loewenstein , and Max H. Bazerman (New York: Cambridge University Press, 2005), 152–53.

Note that X may be entrusted to exercise judgment on behalf of Y , or to promote Y 's interests, without X being Y 's agent and Y being X 's principal. X may, for example, be a trustee.

13. See, for example, Thomas Carson “Conflicts of Interest,” Journal of Business Ethics 13 (1994): 391 , and Carson, “Conflict of Interest and Self‐Dealing in the Professions.” It must be said that many authors who work casually with the concept of conflict of interest, but who are not specifically offering an analysis of it, do sometimes seem to include all potential selfish motives of a professional as sources of conflicts of interest.

The definition we gave from Davis early in the previous section was preceded, for example, by the sentence: “A conflict of interest is a situation in which some person X (whether an individual or a corporate body) stands in a certain relation to one or more decisions” (Davis, “Introduction,” 8, our italics). His quoted definition then lays out what he takes to be the salient features of such a situation. This aspect of the definition immediately sets this concept apart from most other moral concepts like virtues and vices which focus more directly on character and behavior.

15. Davis, “Introduction,”13. This quote from Davis raises an interesting question: whether “conflict of interest” is actually a moral concept. This used to be a very hot topic in the era when conceptual analysis, rather than normative justification, was the primary concern of moral philosophers; and when Julius Kovesi's little book Moral Notions (London: Routledge and Kegan Paul, 1967) highlighted the significance of a range of concepts that were, in effect, hybrids of fact and value, normative and descriptive. All of the definitions of “conflict of interest” that we have examined here actually contain clear references to ethical duties or obligations (namely, of X having a duty to look after Y 's interests); and thus have a clear normative dimension. But the concept also refers to elements of a situation that are descriptive: for example, that X has interests, that these interests can interfere psychologically with X 's judgment or abilities to act; perhaps also that Y has expectations that X will act impartially, and so on. In sum: “conflict of interest” would seem to be a normative‐descriptive hybrid. That said, one could hardly do better in explaining succinctly the nature of its normative content than Davis does in this quote.

16. A textbook by the British philosopher Jennifer Jackson   An Introduction to Business Ethics (Oxford: Blackwell, 1996) , is a good example. It explicitly rejects utilitarian and deontological ethical traditions in favor of a virtue‐based approach that “relies on the judgment of those who have virtues, for resolving particular dilemmas and problems” (109). And despite attempting to offer very practical decision‐making advice on the problems facing business people, it does not seem ever to discuss conflicts of interest or why such situations might require more than just virtuous judgment by the professional with the dilemma.

17. See, for example, John C. Maxwell   There's No Such Thing as “Business Ethics ”: There's Only One Rule for Making Decisions (New York: Warner Business, 2003) . This bestseller, which purports to tell you everything you need to know about being ethical in business, does not seem to mention conflicts of interest—even though it begins with a discussion of Enron, a case that can normally not be explained without reference to insidious and crippling conflicts of interest. Its advice throughout is simply to follow the golden rule and resist temptations to wrong others for your own gain.

18. Bayless Manning , “The Purity Potlatch: An Essay on Conflict of Interest, American Government, and Moral Escalation,” Federal Bar Journal 24 (1964): 252–53 , quoted in Andrew Stark , Conflicts of Interest in American Public Life (Cambridge, Mass.: Harvard University Press, 2000) , 5 (our italics).

See, for example, Davis, “Introduction,” 13–15.

20. Or consider the focus of this recent book: Janine Griffiths‐Baker , Serving Two Masters: Conflicts of Interest in the Modern Law Firm (Oxford: Hart, 2002) .

21. It is true that courts, in the United States at least, are historically reluctant to second‐guess managers who are accused of making decisions that serve other interests than those of owners. They generally adopt the “business judgment rule,” acknowledging their own inability to evaluate the senior manager's decision. See, for example, Frank H. Easterbrook and Daniel R. Fischel , The Economic Structure of Corporate Law (Chicago: University of Chicago Press, 1991), 93–100 . Note that the basic justification the courts use for backing off is itself a primary reason for thinking of senior managers as quasi‐professionals with potential conflicts of interest: namely, that they are being called upon to make expert judgments that are difficult for any outsiders, including Delaware judges, to evaluate.

22. For a comprehensive survey of conflicts of interest in the financial services industry see John Boatright , Ethics in Finance (Oxford: Blackwell, 1999) , and John Boatright, “Financial Services,” 217–236. Note that we do not want to give the impression that conflicts of interest for firms themselves (as opposed to, or in addition to, conflicts of interest for the individuals working within firms) occur only in financial services. For a fascinating illustration of multiple and overlapping conflicts in the “hospital group purchasing” industry, see the case of Premier, Inc. as described in the case of the same name by Anne T. Lawrence and published by Babson College Case Publishing. This case is centered around an investigation by Walt Bogdanich, Barry Meier, and Mary Williams Walsh, “Medicine's Middlemen: Questions Raised of Conflicts at Two Hospital Buying Groups,” New York Times , March 2, 2002, A1, A18.

Stark, “Comparing Conflict,” 336, emphasis added.

See Boatright, Ethics in Finance , chap. 3.

Stark “Comparing Conflict,” 341, and Eric Orts, “Conflict of Interest on Corporate Boards,” in Davis and Stark, Conflict of Interest in the Professions , 129–55.

Stark, “Comparing Conflict,” 337.

Davis, “Introduction,” 16, emphasis added.

28. See especially Daniel Kahneman,   Paul Slovic , and Amos Tversky , eds. Judgment Under Uncertainty: Heuristics and Biases (Cambridge: Cambridge University Press, 1982) .

32. Michaely, R. and K. L. Womack , “Conflict of Interest and the Credibility of Underwriter Analyst Recommendations,” Review of Finance 12 (1999): 653–86.

Moore, D. A., G. Loewenstein, L. Tanlu, M. H. Bazerman, “Auditor Independence, Conflict of Interest, and the Unconscious Intrusion of Bias.” Harvard Business School Working Paper #03–116 (2003).

Nelson, Mark W. “A Review of Experimental and Archival Conflicts‐of‐Interest Research in Auditing,” in Moore et al., Conflict of Interest .

Note: we are not by any means claiming that it is the only , or even the most central, component of a mid‐level theory for this problem. Our aim here is to illustrate how this kind empirical information can and should inform a sophisticated normative theory in institutional contexts.

Dale T. Miller, “Commentary: Psychologically Naϯve Assumptions about the Perils of Conflict of Interest,” in Moore et al., Conflict of Interest , 129.

Stark, Conflicts of Interest in American Public Life , 119.

Anne E. Tenbrunsel, “Commentary: Bounded Ethicality and Conflict of Interest,” in Moore et al., Conflict of Interest , 100.

39. The brief parenthetical comments are ours. See John Boatright , “Conflict of Interest,” in Encyclopedia of Business Ethics and Society , ed. Robert W. Kolb (Thousand Oaks, Calif.: Sage, 2007) for much fuller explanations.

Perhaps the most troubling example of gaming such strategies can be found in (1) the attempt by boards of directors to align the CEO's interests with that of the shareholders by tying much of his or her compensation to increases in the share value; and (2) having the CEO find increasingly “creative” ways of artificially and temporarily inflating the share price, to the medium‐ and long‐term detriment of the firm.

Daylain M. Cain, George Loewenstein, and Don A Moore, “Coming Clean but Playing Dirtier: The Shortcomings of Disclosure as a Solution to Conflicts of Interest,” in Moore et al., Conflict of Interest .

Moore et al., “Auditor Independence.”

Cain, Loewenstein, and Moore, “Coming Clean but Playing Dirtier: The Shortcomings of Disclosure as a Solution to Conflicts of Interest.”

Tom Tyler, “Managing Conflicts of Interest Within Organizations: Does Activating Social Values Change the Impact of Self‐Interest on Behavior?” in Moore et al., Conflict of Interest .

It must be said that there is an absolutely voluminous literature that falls under article or book titles of roughly the form, “ Conflicts of Interest in X ,” where “X” is the name of a profession, a trade, a managerial task (like supply‐chain management, human‐ resource management, or purchasing), a business sector (e.g., consulting, biotech, healthcare, banking), or a realm of public administration. These analyses are generally useful for enumerating the typical kinds of conflict‐of‐interest situations in each of these domains, as well as some of the standard ways of managing them. Our very informal survey of this literature confirms both the general typology we have borrowed from Stark of the basic types of conflicts of interest, and Boatright's list of options for dealing with conflicts of interest. Not surprisingly, one does not tend to find anything like a comprehensive normative theory lying behind these piecemeal attempts to get a handle on the challenges of recognizing and managing conflicts of interest in quite specific realms.

46. See, for example, Marc Rodwin   Medicine, Money, and Morals: Physicians' Conflicts of Interest (New York: Oxford University Press, 1993) ; Susan P. Shapiro   Tangled Loyalties: Conflict of Interest in Legal Practice (Ann Arbor: University of Michigan Press, 2002) .

47. Allen Buchanan “Is There a Medical Profession in the House?” in Conflicts of Interest in Clinical Practice and Research , eds. R. Spece , D. Shimm , and A. Buchanan (Oxford: Oxford University Press, 1996), 109 .

50. Ibid. , 112 .

51. See, for example, Keith MacDonald   The Sociology of the Professions (Thousand Oaks, Calif.: Sage, 1995) ; M. T. Law and S. Kim “Specialization and Regulation: The Rise of Professionals and the Emergence of Occupational Licensing Regulation,” The Journal of Economic History 65 (3) (2005): 723–56.

52. See, for example, John Boatright, “Reluctant Guardians: The Moral Responsibility of Gatekeepers,” Business Ethics Quarterly 17 (4): 613–32, and John Boatright “Individual Responsibility in the American Corporate System: Does Sarbanes‐Oxley Strike the Right Balance?” Business & Professional Ethics Journal 23 (1&2) (2004): 9–41.

Davis, “Introduction,” 17. The quotes immediately following from Davis are from the same page.

Boatright, “Conflict of Interest.”

For Rawls the “basic structure of society” is the primary subject of justice. See his A Theory of Justice , 7–11; and Political Liberalism (New York: Columbia University Press, 1993), especially lecture 7.

Suggested Reading

Boatright, John . “Conflict of Interest.” In Encyclopedia of Business Ethics and Society . Edited by Robert W. Kolb . Thousand Oaks, Calif.: Sage, 2007 .

Google Scholar

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Carson, Thomas L. “ Conflict of Interest and Self‐Dealing in the Professions: A Review Essay. ” Business Ethics Quarterly 14 (1) ( 2004 ): 161–82.

———. “ Conflicts of Interest. ” Journal of Business Ethics 13 ( 1994 ): 387–404. 10.1007/BF00871766

Dana, J. , and G. Loewenstein . “ A Social Science Perspective on Gifts to Physicians from Industry. ” JAMA 290 (2) ( 2003 ): 252–55. 10.1001/jama.290.2.252

Davis, Michael . “ Conflict of Interest. ” Business and Professional Ethics Journal 1 (Summer 1982 ): 17–27.

Davis, Michael , and Andrew Stark , eds. Conflict of Interest in the Professions . New York: Oxford University Press, 2001 .

Griffiths‐Baker, Janine . Serving Two Masters: Conflicts of Interest in the Modern Law Firm . Oxford: Hart, 2002 .

Luebke, Neil . “ Conflict of Interest as a Moral Category. ” Business and Professional Ethics Journal 6/1 ( 1987 ): 66–81.

MacDonald, Chris , Wayne Norman , and Michael McDonald . “ Charitable Conflicts of Interest. ” Journal of Business Ethics 39 (1–2) ( 2002 ): 67–74. 10.1023/A:1016379900781

Michaely, R. , and Womack, K. L. “ Conflict of Interest and the Credibility of Underwriter Analyst Recommendations. ” Review of Finance 12 ( 1999 ): 653–86.

Moore, Don A. , Daylian M. Cain , George Loewenstein , Max H. Bazerman , eds., Conflicts of Interest: Challenges and Solutions in Business, Law, Medicine, and Public Policy . New York: Cambridge University Press, 2005 .

Rodwin, Marc . Medicine, Money, and Morals: Physicians' Conflicts of Interest . New York: Oxford University Press, 1993 .

Shapiro, Susan P.   Tangled Loyalties: Conflict of Interest in Legal Practice . Ann Arbor: University of Michigan Press, 2002 .

Spece, R. , D. Shimm , and A. Buchanan , eds. Conflicts of Interest in Clinical Practice and Research . Oxford: Oxford University Press, 1996 .

Stark, Andrew.   Conflicts of Interest in American Public Life . Cambridge, Mass.: Harvard University Press, 2000 .

Williams‐Jones, Bryn , and Chris MacDonald . “ Conflict of Interest Policies at Canadian Universities: Clarity and Content. ” Journal of Academic Ethics 6 ( 2008 ): 79–90. 10.1007/s10805-007-9052-6

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Case Study in Review Integrity: Undisclosed Conflict of Interest

13 comments.

A series to raise awareness and inspire creative problem solving of the challenges in maintaining integrity in peer review

Sometimes it takes detective work to unearth attempts to undermine the integrity of peer review.  

Take the case of Dr. Smith, one of the reviewers on a study section in the Center for Scientific Review.  The scientific review officer (SRO) would like Dr. Smith to review an application with Dr. Jones as principal investigator (PI). 

In checking for potential conflicts of interest (COI), the SRO cast a wider net and found something troubling.  Dr. Smith, one of the reviewers currently set to review the application listing Dr. Jones’ as PI, had been listed as one of the key personnel on an application with Dr. Jones as PI that was under review in another, recent study section.

It was obvious Dr. Smith had a clear COI as a reviewer for the application with Dr. Jones as PI.  The COI instructions for reviewers state that a reviewer may not review certain applications and must leave the room when the reviewer, within the past three years, has been a collaborator or has had any other professional relationship with any person on the application who has a major role.

In this case, Dr. Smith, who is being considered as a reviewer for the application, is a professional associate of Dr. Jones, the PI on the application.  However, Dr. Smith had not declared a conflict with that application.

The SRO immediately notified the review chief, who unearthed more information when searching PubMed. They found that Drs. Smith and Jones co-authored multiple research publications within the past two years.  Coauthoring publications within the past 3 years also is a clear conflict of interest ( NOT-OD-13-010 ) .

The review chief alerted the research integrity officer (RIO), who found more irregularities. Turned out that Dr. Smith was on the study sections that reviewed a few more grant applications listing Dr. Jones as PI. At no time had Dr. Smith declared a COI with the applications. The RIO alerted the NIH Office of Extramural Research (OER).

OER terminated Dr. Smith’s service in peer review indefinitely and the application listing Dr. Jones as PI was reassigned to a Special Emphasis Panel for initial peer review.

All participants and stakeholders in the peer review system are responsible for its integrity.  Whether you are a reviewer, PI, or NIH staff, each of those roles is crucial. NIH is paying attention, and NIH is taking action.

This scenario is fictitious, but based on real events. Stay tuned as the case unfolds. If you want more on the topic, please listen to this NIH All About Grants podcast conversation on how NIH manages conflicts of interest during the peer review process ( MP3 / Transcript ).

If you see something, say something .

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“…a reviewer may not review certain applications and must leave the room when the reviewer, within the past three years, has been a collaborator or has had any other professional relationship with any person on the application who has a major role.”

Yes. Makes perfect sense. On day 1095 after Dr Smith co-authors a paper with Dr Jones he is still in conflict with Dr Jones. But on day 1096 (> 3 years) he is not.

This goes to root the problem with the NIH peer review system. They set these arbitrary regulations in a cosmetic effort to identify “COI”, fully understanding that human relations are much more complex, not easily identifiable, and don’t adhere to their timescale. Friends and enemies often last a lifetime, and you don’t have to be a collaborator to be a friend, nor do you have to publicly declare yourself an enemy to be one.

Real COI are often hidden by both the applicant and reviewer, and it will take a lot more effort and investigation on parts of SROs to identify them.

Sending on behalf of Sally Amero (NIH’s Review Policy Officer): NIH peer review regulations and policy further stipulate that, regardless of the level of financial involvement or other interest, if the reviewer feels unable to provide objective advice, he/she must recuse him/herself from the review of the application at issue. Regulations and policy also state that the peer review system relies on the professionalism of each reviewer to identify to the designated government official any real or apparent conflicts of interest that are likely to bias the reviewer’s evaluation of an application. Therefore, reviewers have a responsibility to report their conflicts of interest.

In other words, it’s an honor system that works. If honor systems work, why doesn’t our Judicial System institute it? Why do we need attorneys to thoroughly vet and approve jurors? Why can’t we simply trust the jurors to do the right thing? Why is a juror automatically disqualified if he or she has ANY contact whatsoever, past or present, with the plaintiff or defendant? Why can’t a past defendant be a juror on case in which the person he will be sitting in judgement of was a juror for his trial?

Honor systems don’t work in our judicial system, nor do they work in the peer review system. COI often go undisclosed, wittingly or unwittingly.

As much as we’d all like to believe otherwise, human relationships are at the core of peer review. This is a great point you made. The reality is that if you’re an expert in a field, then you probably have some personal relationship with most of the investigators in that field. This is the Catch-22 of the NIH peer review. By definition, the exact people who are in a position to best review a grant have some built in conflict; you help grants that support your field, you hinder grants with which you feel in competition, you have a negative/positive history, etc….Ok, so those experts recuse themselves. Then what? Now the grant is reviewed by people with less expertise in that field, putting that application at a strong disadvantage.

LOL. “Therefore, reviewers have a responsibility to report their conflicts of interest”. Reviewer to SRO: “I hold a grudge against this applicant because I know he was one of the reviewers who trashed my application a couple of years ago (not hard to figure out). So I want to recuse myself from reviewing his application”.

That “professionalism” was blatantly on display when reviewers were caught sharing applications with one another, others not involved in the review, and in some cases with foreign entities. The NIH wants you to believe this problem was solved when a few high profile bad apples were fired by their institutions. Think again. It was only pushed under the surface. Those “professionals” have now learned to be more careful when perpetrating their misdeeds.

Totally agree.

The NIH peer review system is broken, period. In my opinion, a bureaucracy built on such policies, but with no organized and efficient oversight of the review process and its related conflict of interest is dysfunctional. Unknowledgeable “senior” reviewers, you call professionals, who know SROs, who know Program Officers, who know Division directors, work, as my colleague above stated, in honorary, corrupt systems that only benefit those already in it. Incompetent, dishonest “Professionals” and this corruption need to be rooted out for the NIH peer review to work in an unbiased fair way……

There are major challenges we face with the peer review system, which are only becoming worse as the stakes get higher. This applies to publications as well as grants. But could we come up with a better system? This is analogous to the famous quote (often inaccurately attributed to Churchill) that “democracy is the worst form of Government except for all those other forms that have been tried from time to time”.

Our system has worked well for a long period of time thanks to the enormous time and efforts contributed by so many stakeholders to whom thanks are owed. But perhaps it can be improved.

A suggestion that has been tested is fully anonymized applications which would address some other biases as well. Don’t know how feasible it is. If not already done, NIH should perhaps consider an effort to assess the whole peer review process including tweaks and alternatives and open it up to comments.

As the case unfolds, more information about Dr. Smith becomes available. Dr. Smith was requested by Dr. Jones to provide a letter of support for a different application and serve as a consultant without any funds or experimental work committed. Dr. Smith agrees as a scientific colleague to provide the letter, but in the absence of any further interactions with Dr. Jones, does not consider this a formal collaboration. Dr. Smith and Dr. Jones work have never trained together, never worked at the same institution, have no financial interests, or shared mentee/mentor relationships. Is Dr. Smith a professional associate of Dr. Jones because she/he agreed to be a scientific colleague and provide a letter of support for another pending grant and does this constitute a major professional role in an application (NOT-OD-13-010).

Upon review of the publications, they are either review articles or articles with shared reagents that both Dr. Jones and Dr. Smith provided as active leaders in their field, but none of the article demonstrated collaborative research performed or led by either Dr. Smith or Dr. Jones. Published NIH guidelines allow such co-authorships as not demonstrating conflict of interest ( https://grants.nih.gov/grants/peer/peer_coi.htm ). In the end, Dr. Smith has to consider whether she/he has a COI with Dr. Jones based on NIH guidelines as well as his/her knowledge of their relationship. Her/his judgement is that he/she does not have a COI that precludes impartial review. The OER comes to the opposite conclusion.

Will simply removing Dr. Smith from the peer review system improve the integrity and robustness of peer review by eliminating an experienced peer reviewer who is a leading researcher in the area of the study section? Or should the definitions that the NIH uses to define COI have further clarity to prevent such confusion? Do letters of support automatically, for any application outside of the application being reviewed automatically constitute a COI to the NIH? Perhaps the case is not so simple after all, like many in COI.

If you want integrity in the reviews, select reviewers with gravitas and integrity. Have you looked at the composition of some of these study sections? They are case studies in political correctness. People selected for permanent membership who have a dismal record of impactful publications, sitting in judgement of others who are far more accomplished than them. How are these reviewers selected? Are the SROs responsible, and who is holding them to account? Is it because they have grants from that study section? That may be so, but the more important criterion should be WHAT HAVE THEY ACCOMPLISHED USING THAT GRANT FUNDING? Is anyone asking this question?

They are selected because they have connections in the study section. They know someone in the study section (maybe Chair) who recommends them to SRO and then it’s a done deal. That’s how the NIH review “meritocracy” works.

There is a trend to select young scientists to “experience” the study section. Those young scientists often lack experience in grant writing, but sit there to judge others’ work. Why cannot they be an observer first?

The Center for Scientific Review (CSR) operates an Early Career Reviewer (ECR) program. Decisions about the eligibility criteria and the participation level of ECRs were made with quality of review being the primary consideration (more in the October 2019 report from the CSR Advisory Council Early Career Reviewer Working Group). In addition to some publication requirements, ECRs must have an independent position and must have submitted a grant application to NIH and received the summary statement. Two ECRs serve at each meeting of a CSR standing panel and are assigned two proposals as Reviewer 3. As all new reviewers do, ECRs receive extensive training and guidance from their scientific review officer. Early career or new reviewers may not observe a study section before serving as a reviewer. The study section meetings are closed to the public in accordance with section 1009 of the Federal Advisory Committee Act and sections 552b(c)(4) and 552b(6) of the Government in the Sunshine Act . As such, the deliberations are confidential. All attendees must have a “need to know”.

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Wells Fargo Fraud

Under pressure to meet steep sales goals and incentives, Wells Fargo employees created over a million fraudulent accounts in their customers’ names.

American financial institution Wells Fargo was beating the odds in a bad economy. During the financial crisis in 2008, the bank acquired Wachovia to become the third-largest bank by assets in the United States. A few years later, its growing revenue and soaring stock brought the company’s value to nearly $300 billion. But behind this success was a company culture that drove employees to open fraudulent accounts in attempt to reach lofty sales goals. Between 2011 and 2015, company employees opened more than 1.5 million bank accounts and applied for over 565,000 credit cards in customers’ names that may not have been authorized.

Many former employees reported that company sales goals were impossible to meet, and incentives for compensation and ongoing employment encouraged gaming the system. Wells Fargo pressured employees to cross-sell, offering customers with one type of product, such as checking or savings accounts, to also buy other types of products, such as credit cards and loans. One former employee described it as a “grind-house,” with co-workers “cracking under pressure.” Another former employee reported, “If you don’t meet your solutions you’re not a team player. If you’re bringing down the team then you will be fired and it will be on your permanent record.”

In mid-2014, Well Fargo attempted to curb fraudulent activity with an ethics workshop that warned employees not to create fake accounts in customers’ names. Wells Fargo also modified its compensation structure to place less emphasis on sales goals. But in the following years these efforts were not enough. The company continued to fire employees over fraudulent accounts. Wells Fargo spokesperson Mary Eshet stated, “The steps we have been taking have been effective…[and] we are continuing to do more.” Their own analysis showed a decline in fake accounts by 2015, but many were still being created.

One former employee described his brief time at Wells Fargo as “the lowest point of my life.” He encouraged an elderly woman to sign up for a credit card she did not want by telling her “it was confirmation that she stopped by to update her address.” This made him sick to his stomach. He reported, “But it was a tough economy, and I was worried, if I lost this job, I would be in a tough financial situation.” Deceptive practices such as this were widespread across the company, and many former employees reported that their managers knew about them. Jonathan Delshad, a lawyer working on behalf of former employees, said, “The better they did at sales, the more they advanced, so it got spread across the company. An entire generation of managers thrived in the culture, got rewarded for it, and are now in positions of power.” One former employee said she could not meet sales goals in any ethical way and called the Wells Fargo’s ethics hotline. She was eventually fired.

In 2016, Well Fargo was fined a combined total $185 million for fraudulent activity, and CEO John Stumpf resigned. Between 2011 and 2016, approximately 5,300 employees were fired for fraudulent sales practices. Sales quotas were eliminated effective January 1, 2017.

Related Videos

Incentive Gaming

Incentive gaming, or “gaming the system,” refers to when we figure out ways to increase our rewards for performance without actually improving our performance.

Related Terms

Conflict of Interest

Conflict of Interest arises when our interest conflicts with another’s to whom we owe a duty.

Ethical Insight

Wells Fargo has a fiduciary duty to treat its customers fairly. The bank offered many different services to its customers. But the bank’s management set unrealistically high sales goals for its employees, encouraging many employees to game the system. If a customer bought one service, employees were urged to “cross-sell” several more. “Eight is great” was the company mantra. The only way that Wells Fargo employees could meet their unrealistic sales targets, and thereby keep their jobs, was to make up accounts that customers had not requested and often didn’t even know they were being charged for. Employees fabricated millions of fraudulent accounts in order to keep their bosses happy and remain employed. It was a classic conflict of interest.

Discussion Questions

1. In what ways does this case study demonstrate conflict of interest? Explain.

2. In what ways does this case study demonstrate incentive gaming? Explain.

3. What factors played the most important role in leading so many Wells Fargo employees to cheat the bank’s customers?

4. Was the problem at Wells Fargo the corporate culture or a few thousand “bad apples?” Explain.

5. In what ways did company culture and compensation at Wells Fargo encourage incentive gaming? Explain. How did incentive gaming become entangled with conflicts of interest?

6. Although Wells Fargo attempted to curb fraudulent activity with an ethics workshop and change in compensation structure, the company continued to find fraudulent accounts being opened by employees. Why do you think this continued to occur? What do you think Wells Fargo could have done to better curb fraudulent activity?

7. Are the low-level employees more to blame, or the managers? Were both in a conflict of interest situation? Explain.

8. Many employees admitted that they knew what they were doing was wrong but continued to open fraudulent accounts. Do you think their actions were in any way ethically justifiable? Why or why not? If you were in their position, what would you have done?

9. What rationalizations did employees use to justify cheating their customers?

10. Losing your job is tough. Losing sleep at night because you knowingly ripped off a customer might be tougher. How would you resolve such a conflict of interest?

11. In response to the Wells Fargo case, U.S. Treasury Secretary Jacob Lew stated, “This ought to be a moment when people stop and remember how dangerous the system is when you don’t have the proper protections in place.” He added, “This is a wake-up call. It should remind all of us and firms that culture and compensation make a difference,” continuing, “How you reward people, how you motivate people and what values you hold people to matter.” Do you agree with Lew? Why or why not? How would you suggest companies protect against such “dangerous” systems?

12. Can it be difficult for companies to strike a balance between adequately incentivizing employees and over-incentivizing them? How does a company strike the proper balance?

Bibliography

Wells Fargo Fined $185 Million for Fraudulently Opening Accounts https://www.nytimes.com/2016/09/09/business/dealbook/wells-fargo-fined-for-years-of-harm-to-customers.html

The Wells Fargo Fake Accounts Scandal Just Got a Lot Worse http://fortune.com/2017/08/31/wells-fargo-increases-fake-account-estimate/

How Wells Fargo’s Cutthroat Corporate Culture Allegedly Drove Bankers to Fraud https://www.vanityfair.com/news/2017/05/wells-fargo-corporate-culture-fraud

Former Wells Fargo Employees Describe Toxic Sales Culture, Even At HQ https://www.npr.org/2016/10/04/496508361/former-wells-fargo-employees-describe-toxic-sales-culture-even-at-hq

Wells Fargo Warned Workers Against Sham Accounts, but ‘They Needed a Paycheck’ https://www.nytimes.com/2016/09/17/business/dealbook/wells-fargo-warned-workers-against-fake-accounts-but-they-needed-a-paycheck.html

Wells Fargo’s pressure-cooker sales culture comes at a cost http://www.latimes.com/business/la-fi-wells-fargo-sale-pressure-20131222-story.html

Wells Fargo is eliminating retail sales goals after settlement over aggressive tactics http://www.latimes.com/business/la-fi-wells-fargo-sales-20160913-snap-story.html

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• Conflicts of Interest
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• Introduction

The National Science Foundation (NSF) has awarded a grant to Aristotle University to fund Professor Jones' proposal. His project involves research on using carbon nanotubes in water filtration systems. Professor Jones has several personal consulting agreements with companies involved in nanotechnology. He also sits on the Scientific Board of Advisors of Clean Water, Inc. and owns $20,000 in stock. The company has recently begun investigating new methods of filtering water in residential homes with the intent of competing with commercial water filters on the market. The results of Professor Jones' NSF project, if positive, could have a significant impact on product development within the Clean Water, Inc.

The situation above reveals issues related to conflicts of interests that are frequently confronted by universities and other institutions. While administrators are not directly involved in research projects, they may discover problems related to conflicts of interest or conflicts of commitment. They then need to know how to address them.

Administrative staff need to be able to identify real and potential conflicts of interest Conflicts of Interest A situation in which an individual has one or more significant financial interest that have the potential for tainting or have the potential to taint the conduct or reporting of the work conducted under a sponsored project. . They are entrusted by the institution to administer sponsored projects Sponsored Projects Sponsored projects are research, training, or instructional projects involving funds, materials, other forms of compensation, or exchanges of in-kind efforts from sources external to the institution under awards or agreements which contain any one of four criteria. See Glossary for full definition. and to ensure that the institution is providing appropriate stewardship of sponsored project funding. This does not mean that each administrator must "police" awards or financial relationships. Rather, it means that administrators must be able to identify situations in which a conflict of interest has arisen, or as well as instances in which there is a potential for a conflict arising, or a good possibility that others will perceive the existence of a conflict of interest. It also means that administrators must be familiar with the institution's and sponsor's policies that are used to resolve or mitigate an actual or potential conflict.

Administrators can find themselves in difficult situations with regard to conflicts of interest involving faculty. In particular, departmental administrators can find themselves having long-term working relationships with faculty members, while reporting to department chairs, and being ultimately responsible to the institution. Sometimes, the interests of the individual faculty members can be very different from those of their departments, and/or the institution. At times, because of personal loyalty to a faculty member, administrators may be asked to perform functions that are in conflict with their responsibilities to the institution. This will raise ethical decisions for administrators. It is important for administrators to know what to do and how to do it when they sense that something "just isn't right."

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