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Compromised Fiduciaries: Conflicts of Interest in Government and Business

By Claire Hill & Richard Painter. Full text here.

In both business and government, we can distinguish between two types of conflicts. One type traditionally and more effectively dealt with by law is a direct conflict, involving self-interest narrowly construed. Two common examples are the government official who is negotiating for a private sector job with an employer with whom he is doing business on behalf of the government and the corporate executive who is seeking to hire his close relative. These types of acts can simply be prohib­ited or scrutinized carefully. For expository ease, we will call these the easy cases.

But the other type of conflict—the hard cases—presents considerably more difficulties. Any time a government or corporate official acts (or does not act), he could be seeking to advance interests other than those he is supposed to be advancing. These illegitimate interests include self-interest narrowly construed; they also include interests of others with whom the official may feel personal or professional kinship, such as a former colleague, or someone similarly situated to the official or whose favor the official would like to curry. Some of these interests could be characterized as self-interest broadly construed. Others are more a matter of bias or perspective, such as a former corporate executive who becomes a government official favoring his former colleagues. Cases are hard enough when the question to be determined is whether an illegitimate interest is present. Complicating matters, a conflict might exist among several legitimate interests a corporate or government official could simultaneously be seeking to advance, as well as what may be an illegitimate interest. Law cannot be ever-present, micromanaging the conduct of so many actors and making intricate determinations of true intent. In the article, we argue that these hard cases present a critical challenge, one that must be far better met if business and government are to function well both independently and when government is involved in business.

We sometimes refer to the hard cases as cases of “structural bias.” The term comes from corporate law: it refers to the biases board members may have, consciously and unconsciously, to defer to management and to one another. They defer because their interests are best served by doing so, because they share a similar perspective on many matters, including compensation and appropriate (high) levels of deference to management, and because they are connected to one another through a web of business ties. Substituting government positions for “board member” and “manager,” and “political ties” for “business ties,” the term and concept does an excellent job of delineating the hard cases in government as well.

Part I discusses the conflict-of-interest problem in general as well as the fiduciary principle, and considers the particular conflicts at issue when government is involved in business. The Part also elaborates on our characterization of conflicts cases as “easy” or “hard” and contrasts the law’s relative success in dealing with the former with its lack of success in dealing with the latter.

Part II discusses how corporate law deals with conflicts of interest for business managers, including both easy cases—breaches of the traditional duty of loyalty—and hard cases. The easy cases are easy because triggering facts are usually straightforward to identify; the law then provides for close scrutiny. But close scrutiny is not appropriate or feasible for all matters. The law’s choice is to defer to the board’s business judgment unless there are strong indications that it should not do so. Some, and perhaps many, commentators think the law generally defers too much. But no one has thus far developed a viable alternative that would sufficiently address the hard cases. Law’s power in dealing with conflicts of interest in business is thus limited, leaving many problematic conflicts unaddressed.

Part III discusses how some conflicts of interest in government are addressed in government ethics law. Personal conflicts of interest, the revolving door between government and business, and the influence of private money on political campaigns are several of the most serious problems. The law effectively addresses some of these conflicts but many of them are not effectively addressed, particularly those that concern the systematic corruption of government. Ethics laws forbid government officials from holding certain stocks, preclude their participation in certain matters involving their spouses, and even forbid them from participating in particular party matters in which recent prior employers are a party. But ethics laws cannot prevent people from acting in all ways that advance illegitimate interests over those of the public. When government depends upon private contractors to do its work, these problems are even more difficult to resolve.