Conflicting loyalties can harm the organisation
JP Morgan Chase paid $307m to settle charges that it steered its clients into buying its own investment products, rather than those of other companies. Its wealth management people allegedly failed to disclose that they preferred to invest clients’ money in hedge funds and mutual funds that were operated by its affiliates.
The bank paid the fine to the US Securities and Exchange Commission (SEC) and the US Commodities Futures Trading Commission (CFC). It said the weaknesses were ‘unintentional’.
Conflicts of interest can occur where an organisation’s behaviour towards to a client is influenced by a secondary motive. This typically occurs in the following areas:
Universities are given research grants by controversial organisations, such as tobacco, alcohol or munitions suppliers, and then find it hard to be critical of their funders. This impairs their academic independence. In 176 studies of Bisphenol A, a compound used in plastic, 86% of government funded research found some harm, compared with 0% of industry sponsored studies.
Regulators are at risk of capture by those they are regulating. This happens when the firms, often bigger and better resourced that the regulator, provide staff, research data and facilities to the regulator. Regulators may come to identify with the firms’ needs, and become their supporter, rather than protecting the consumer.
Regulators are less likely to pay much attention to special interest groups unless they are well organised, and may regard them as radical or extreme, in contrast to the modulated tones of the besuited industry lobbyists.
Procurement officers may prefer to give contracts to suppliers they like.
Education: when students are paying for their schooling, as opposed to receiving free state education, their teachers and professors come under pressure to award them higher grades.
Accountancy practices are reluctant to issue audit opinions that would scare investors, for fear of precipitating their client’s bankruptcy. A qualified audit report may create a self-fulfilling prophecy, because lenders will decide to call in loans and not extend the, thereby causing the client to fail. Moreover, the auditors are dependent on their clients, since they are hired and fired by them. This leads them to sign off sometimes doubtful financial statements.
Research analysts can come under pressure from their own firms to issue positive research reports or recommendations for fee paying companies, or those who might become clients.
Rating agencies such as Moody’s are paid by organisations to rate them. They’re at risk of over valuing them, for fear of upsetting their client.
Charities can become reliant on major donors and sponsors. It was found that Age UK has received £6m a year for encouraging pensioners to buy electricity from energy company E.ON despite cheaper rates being available from other firms.
The revolving-door phenomenon. Senior figures in regulators or government departments anticipate gaining employment inside the regulated industry once their government service finishes. An over-representation of clients in an organisation’s policy making will result in a policy bias in favour of these interests.
Tech: Google has been accused of ranking its own products higher than is justified, a claim it has denied.
Self regulation. Industry groups are likely to be protective of their members than independent regulators.
Beyond corporate conflicts of interest, individual employees often have the same risk. Examples might include hiring a relative, accepting a favour from a client, or recommending a supplier who is a personal friend.