Trust, Conflicts of Interest and Death Bonds

You trust your brother- in-law, and tell him you want to buy a used car. He says his cousin knows cars. You talk to his cousin, who recommends you buy a Saab. He finds you one; you buy it. All is good.

Then you learn the cousin is a used car dealer, and the car came from his inventory. Next, you learn your brother-in-law received a referral payment from his cousin for your business.

Now there are at least two people you trust a lot less. And the phrase “conflict of interest” becomes personal. But how, exactly, are the two related?

When I wrote (with Maister and Galford) The Trusted Advisor, we introduced the Trust Equation:

T = (C+R+I) / S, where
C=credibility, R=reliabilty, I=Intimacy, and S=self-orientation.

(To be precise, it’s a formula not for trust, but for trustworthiness of the one who would be trusted.)

The numerator factors are pretty clear. It’s the denominator that gets most readers’ interest, and rightly so—it’s the most powerful.
On a personal level, we trust someone if their focus and interest is about us: we do not trust them if their focus and interest is about themselves.

It’s why we’re sceptical of used-car dealers, telemarketers, and other stereotypes of sellers—people who clearly want our money, but less clearly have our interests at heart.

Conflicts of interest are fuel for the fire of self-orientation. How we choose as a society to deal with them says a lot about our view of government, and of humanity.

Arrayed in increasing order of social involvement:

Seven Responses to Conflicts of Interest: 

    by Level of Social Involvement

  1. Level one is caveat emptor. Society doesn’t have an interest compelling enough to create a solution beyond “deal with it.”
  2. Level two is ethical. Rely on collective shame heaped on used-car dealers to enforce behavior.
  3. A third is professional. The Association of Used Car Dealers should develop and enforce guidelines. (The Association for Brothers-in-Law is a less likely candidate for this approach).
  4. A fourth is enforcement. Vote for whatever district attorney will prosecute the hell out of the guilty parties using whatever laws are on the books.
  5. A fifth is required disclosure. As long as your brother in law and his cousin tell you their interests, the problem reverts to level 1.
  6. A sixth is regulatory. The National Used Car and Brother-in-Law Exchange Commission will do what the industry failed to do.
  7. Finally, there is structural reform. Separate the evil-doers so that they are not only free from temptation, but can never conspire to develop their nefarious schemes.

Society evolves. Big Tobacco went from level 1 to level 7 in mere decades. Sarbanes-Oxley was a level seven solution after many years at level three. Elliot Spitzer got elected governor of New York because of his activity at level four. Glass-Steagall’s repeal went from level seven back to levels five and lower.

Senator Herb Kohl of Wisconsin has been holding hearings about the pharmaceutical industry’s role in medical research; many researchers are funded by pharmaceutical industry money. The question is: what to do about it?

Kohl is inclined to recommend level five—disclosure. The Pharmaceutical Manufacturers Association says leave it at level three. Doubtless there are other views covering the others.

The July 30 2007 cover story in BusinessWeek is about Death Bonds—securitized life insurance policies, the same thing we’ve seen with mortgage-backed securities. The idea is individuals can cash in their life insurance policies to investors, and benefit. Along with the investors. The sooner the insured dies, the faster the investor makes money.

Right now, 26 states require professional licensing for "life settlement brokers"—level six.  Several investment banks have founded the Institutional Life Markets Association to lobby for appropriate regulation—level three. New York is prosecuting Coventry First—level four.  (Data from the BW article.)

What is the right role of society in mitigating conflicts of interest to foster greater trust?

0 replies
  1. Ian Welsh
    Ian Welsh says:

    Y"Know, I’m not sure that farther down the list is always ‘better’ than higher.   Number 2, in particular,  strikes me as the best way to go when it works – and when it doesn’t, when social "shaming" breaks down, it often seems like none of the other levels really work either, unless you push it very hard at level 4 (put the fear of God into them) or go all the way to level 7 (you just can’t do it.  One reason why, as you say, Glass Steagal repeal was very foolish).

    Reply
  2. Charles H. Green
    Charles H. Green says:

    Ian, I definitely agree that the "ranking" should not be read as a value judgment.  It is a sorting of the degree of social pressure applied.  The issue is not which solution is best, but rather which is appropriate to any given situation at hand.

    We don’t need "chinese walls" legislation to prevent realtors from the conflicts of serving both buyers and sellers.  Nor do we trust the stock markets’ behavior to levels 1 and 2 alone.

    The "right" answer is a blending of the particular situation with the population’s appetite for social intervention. 

    Reply
  3. Lark
    Lark says:

    It seems our business frameworks – from a socio-political and legal point-of-view – are what are ultimately at issue.

    Firstly, corporations are set up to shield real persons from from real liability… while an onerous financial burden is placed on real consumers if they are harmed… and should a conflict develop.
     
    Secondly, shareholders and management feel protected from personal accountability for their actions; and that same corporation is treated as a legal person under the law – muddying the landscape even more.

    Thus, the burden of potential legal jeopardy is substantially lessened for the corporation from the get-go.

    After all, who wants to pay lawyers anything unless we’re coerced somehow?

    Anyway you look at it… real persons are  beholden to the non-person’s well-being… while conflicts involving a presumption of trust and performance… seldom favor the consumer.

    This is why when issues arise which are of an ethical or moral nature nobody in the corporation – including management and their lawyers – feels this has any place in their drive towards more and more profit, no matter the degree with which these issues are obfuscated.

    If anything, the matter is treated as a minor public relations fiasco which must be swept under the rug… or ignored. For the corporation, it’s an accepted cost of doing business they are better prepared to deal with compared to  an ordinary consumer.

    It’s simply not a part of their game plan to be entirely open and up-front because the very framework of the business organization is skewed in their favor.

    Though it’s true much propaganda is often generated to cast the corporation as a "good citizen" in the minds of its employees and customers, it’s clear why this type of entity has dominated our lives today.

    On the other hand… in the world of private contractors involved in sales… referrals are the very lifeblood for these "little guys" – including one’s brother-in-law.

    If I direct a new customer (even a family member) to a trusted outsource partner am I not simply protecting my customer from the harm s/he might receive at the hands of someone I don’t know and trust? And shouldn’t I be compensated for this effort – especially if my aim is to continue the same three-party relationship over the long haul?

    For my money I prefer this type of business (real person-to-person) arrangement over "dealing with unscrupulous suits with two identities" that are prone to "double-dealing" me any day of the week…

    … Because this type of transaction is infinitely more transparent and trustworthy.
    Even though my outsource partner may be a corporate entity too, from my standpoint, I’m still only dealing with people.

    And if I’m harmed I just take my business to someone else more deserving of my trust… and the value of my referral.

    For these reasons I’m wary of doing business with any corporation, preferring instead to deal with real persons.

    The documentary film, The Corporation, explains this much better and in greater detail. Conflicts of interest are inherently part-and-parcel with modern corporations; and from the filmmakers point of view, they’re an absolute scourge.

    As for "death bonds"… aren’t these just new forms of institutionalized gambling and usury… all dressed up in typical corporate finery?

    Caveat emptor, indeed. 

    Reply
  4. Charles H. Green
    Charles H. Green says:

    I want to highlight one issue Lark is raising, which I think is quite right. 
    The purpose of business, in many business conversations, is framed as the ongoing success of the corporate entity–which, as Lark reminds us, is an impersonal legal creation.

    If that is your starting point, and you never get past it, then certain ethical and dis-human implications are bound to follow.

    The perpetuation of a non-human entity is a curious way to premise business thinking.  One thing I’m trying to do is evolve a different way of framing business conversations, one that includes and entails at its heart the relationship to commerce and to people.  

    Reply

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