Common Ethical Problems Common Ethical Problems (2):(2):

Conflicts of InterestConflicts of Interest

Geoffrey G. Bell, PhD, CAGeoffrey G. Bell, PhD, CA

University of Minnesota University of Minnesota DuluthDuluth

September 2003September 2003

The heart of conflict of interestThe heart of conflict of interest Key is to have impartiality, both in fact and Key is to have impartiality, both in fact and

in appearance.in appearance. Conflict of interest impairs your judgment, Conflict of interest impairs your judgment,

or could appear to impair your judgment.or could appear to impair your judgment. E.g., Andrew Fastow at Enron arranged limited E.g., Andrew Fastow at Enron arranged limited

partnerships where he profited at Enron’s partnerships where he profited at Enron’s expense (estimated he made $30 million on expense (estimated he made $30 million on one partnership alone).one partnership alone).

NB Enron’s Board had to vote 3 times to NB Enron’s Board had to vote 3 times to suspend Enron’s ethics guidelines to create the suspend Enron’s ethics guidelines to create the partnership.partnership.

E.g., Arthur Andersen’s audit practice E.g., Arthur Andersen’s audit practice department answered to local client partners, department answered to local client partners, not national office.not national office.

Wall Street examplesWall Street examples

Think of the “Dot-con” video.Think of the “Dot-con” video. Brokerage firms have both Brokerage firms have both

investment banking and retail sales investment banking and retail sales divisions. Problems with this:divisions. Problems with this: Unwillingness to issue “negative Unwillingness to issue “negative

coverage” of investment banking clients.coverage” of investment banking clients. Investment analysts’ skills became a Investment analysts’ skills became a

sales tool (“we’ll promote your IPO”).sales tool (“we’ll promote your IPO”). Firms that did issue negative opinions Firms that did issue negative opinions

would be kept out of firm briefings.would be kept out of firm briefings.

The problem with bribes & giftsThe problem with bribes & gifts Bribes impair one’s judgment to act Bribes impair one’s judgment to act

impartially.impartially. Bribes may also make one subject to Bribes may also make one subject to

blackmail (I’ll tell on you!).blackmail (I’ll tell on you!). Issues of gift-giving may create major Issues of gift-giving may create major

problems when dealing with cultures where problems when dealing with cultures where it’s accepted.it’s accepted. Problem is adhering to firm policy without Problem is adhering to firm policy without

offending the gift-giver.offending the gift-giver. Clearly, one cannot personally accept the gift Clearly, one cannot personally accept the gift

without violating firm policy.without violating firm policy. Are there win/win solutions such as accepting the Are there win/win solutions such as accepting the

gift on behalf of the firm? (Maintains individual gift on behalf of the firm? (Maintains individual impartiality)impartiality)

Privileged InformationPrivileged Information

The idea is that you cannot use the The idea is that you cannot use the information you get in one setting to information you get in one setting to benefit you in a way that harms others.benefit you in a way that harms others.

This is Martha Stewart’s potential This is Martha Stewart’s potential problem with Imclone. She reportedly problem with Imclone. She reportedly used information from Sam Waksal to used information from Sam Waksal to sell her Imclone shares ahead of bad sell her Imclone shares ahead of bad news.news.

You may have to sign a non-compete You may have to sign a non-compete clause if you leave an employer.clause if you leave an employer.