What is a ‘conflict of interest’?

Twice in recent months I have become involved in blogosphere debates about claimed conflicts of interest. First I disputed James Farrell’s argument that ABC TV news needed to disclose the fact that finance presenter Alan Kohler also operates a financial advice newsletter, which in turn is partly financed by a firm that had links with companies that Kohler reported on for the ABC. Then this week I questioned Andrew Leigh’s suggestion that Westpac CEO Gail Kelly had a conflict of interest when she was reported suggesting that the RBA would not increase interest rates again this year. According to Andrew L:

nowhere does the journalist mention the key commercial conflict: people who expect a rate rise will be less likely to buy a Westpac variable rate mortgage.

The basic problem behind the concept ‘conflict of interest’ is that the different roles people play can have different interests attached to them. There is said to be a ‘conflict of interest’ where a personal interest might be put ahead of the interests of those relying on the person’s words or actions.

The ‘interests’ in conflict often have different definitions. The personal interest seems almost always, as it was in the two blog cases, to be related to financial or material gain, for the individual, or those associated with the individual. Other personal interests don’t seem to classed as potential conflicts, even if they could be seen to be bad for other reasons. If someone offers commentary on interest rates because they like getting their name mentioned in the media, that isn’t going to be seen as a conflict of interest, despite that person’s interest in publicity.

The interests with which the personal financial interest is conflicting are far more varied. In the Kohler and Kelly cases, the main interest seems to be in getting news reporting free of material that may be distorted by financial self-interest, which reflects a higher interest in getting quality commentary. Of course, for people making investment decisions there could be money at stake if they act on tainted advice. But the range of interests with which financial interests can conflict is very long: doctors should give patients the most suitable treatment, not the one offered by the pharmaceutical company that has wined and dined him; the bureaucrat should give a government contract to the best tenderer according to the set criteria, not his children; a judge should decide a case on the law as applied to the facts of the case, and not on which party offered him the largest bribe.

One reason I am more sceptical than some on ‘conflicts of interest’ is that I think that the idea of ‘interest’ can be distorted. Like the people who believe that all you need to know about the arguments of think-tanks is that they receive corporate money, there is an assumption that money is the dominant interest that will trump all else. (People like Clive Hamilton make parallel sphere-crossing arguments about the self-interest of the market colonising other aspects of life.) But many professionals – and workers generally, though others are less often accused of conflicts – have a strong sense of vocation that is important in itself but also aligns their interests: a professional who engages in improper behaviour will suffer financial loss.

I thought that a distorted sense of interest explained how James Farrell (and Media Watch, which triggered his post) had the Kohler story wrong. Kohler’s primary interest is his reputation as a good financial journalist. Not only would be he personally disgraced if he was found to be reporting in a misleading or corrupt way, but nobody would in future pay for his analysis. The idea that he would endanger his reputation to secure a few subscriptions to a newsletter he part owns is not credible. Like most low risks, it is better to punish those who do offend than to burden the innocent on the chance that they might do something wrong.

An overly puritanical concern with avoiding possible conflicts of interest can also distort the interests of those conflict of interest rules are trying to protect. One problem the media has is that many of the people who have expertise also have at least theoretical conflicts of interest. They know a lot because they are involved in the activitity in question (eg bank CEOs need to know about interest rates). If there is nobody else prepared to, or available to, comment are journalists better off omitting potentially conflicted analysis?

Many would say that in these cases disclosure is sufficient. But disclosure, though often desirable, is not always sensible. That Westpac’s CEO might want you to borrow money seems rather obvious, and to point it out could be to insult the reader’s intelligence or, in space and time limited media, cause more interesting material to be cut. In the Kohler case, for the ABC to point out that he runs a newsletter on the side would have been more likely to breach the ABC’s anti-advertising policy than to raise doubts about Kohler’s reporting.

What ‘conflict of interest’ issues require are not inflexible rules, but considered judgments. What are the real interests at stake? How likely is an actual impropriety? How serious are the potential consequences? These are all more useful questions than asking whether someone has any opportunity to mix the interests of their roles.

11 thoughts on “What is a ‘conflict of interest’?

  1. Following on from Andrew Leigh’s logic then, you should never discuss the merits of teritary ed because there would be a conflict of interest.

    When you follow silly ideas to the final conslcusion you always end up realizing they are silly ideas.

    Gail Kelly is also saleswoman for her firm. It’s her job to sell as many loan products as she can when the credit risk falls within the credit risk parameters and the loan amount is inside the capital ratios of the bank.

    This conflict of interest stuff is now getting silly.

    If Andrew is that concerned with nexus he may want to tell us exactly where he stands allowing public servants to vote in elections when there could actually be you know enormous conflict of interest issues.


  2. “I thought that a distorted sense of interest explained how James Farrell (and Media Watch, which triggered his post) had the Kohler story wrong. Kohler’s primary interest is his reputation as a good financial journalist. ”

    Media Watch had a go at him simply because he would be as close to a decent and interesting journalist they have. He obviously doesn’t fit their culture. They hate business.

    It’s just a case of the political left trying to turn molehills in mountains. They would politicise toilet activities if they could. Hang on. They have.


  3. Nice post. I agree that we should do some form of cost/benefit analysis on this. If good commentary is limited, you might want to have more of it from conflicted sources, especially if you think the extent of the conflict is small (eg. Stephen Kirchner argued on my blog that the elasticity of new loans with respect to the interest rate is negative, but very small). This would suggest that quoting from conflicted sources is more reasonable in a small country like Australia than a large country like the US.

    However, it’s not clear to me that there’s any shortage of impartial commentary on the ‘what are rates going to do?’ question.


  4. Andrew L

    How on earth would you CBA the CEO of westpac selling her firms wears? Is using common sense a reasonable substitute?


  5. I had not realised that Kohler had an interest in a newsletter until someone complained about it.

    A potentially significant conflict of interest, especially in light of recent fuss over house prices, is the potential conflict of interest when politicians own investment properties while deciding tax dedictibility of interest, zoning, development approvals, land releases, stamp duties and other related matters. It’s funny how no one mentions those even though share holdings can have a politician dis-endorsed.


  6. Ellen

    Do you and Andrew Leigh then expect us to recruit our politicians and CEO’s from the Carmelite nuns and various abbeys that swear blind faith to poverty?

    People do recuse themselves and there are blind trust arrangements for senior pols.


  7. Actually Andrew Leigh has his own conflict of interest here. As an academic who seems to seek media attention, it’s in his interest to highlight shortcomings in commentators from rival environments. I am not saying that was Andrew’s motivation, but there’s clearly a possibility that it was.

    As Andrew Norton points out, there can be many forms of benefit other than direct financial gain.

    Secondly, I think Andrew misunderstands the workings of the media. It’s not actually impartiality that journalists seek for comment on an economics trend, but authority. That is, they want someone readers will accept as knowing what they’re talking about.

    The issue of implicit bias in a bank executive can be factored out by readers, and is. In the case of predicting interest rate rises, there’s also an implicit honesty check, in that commentators will be assessed on the accuracy of their forecast.

    Also, I suspect the journalist didn’t explicitly seek out Kelly. He or she probably contacted the bank’s PR department expecting to get one of the bank’s economists. Instead, the PR department took the opportunity to give their new boss some exposure.


  8. Tony, your point is a neat one – but given the way most academic economists view media work, I should point out that any media I do probably drives down my promotion probabilities, and hence is strongly against my financial interest….


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