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
- Level one is caveat emptor. Society doesn’t have an interest compelling enough to create a solution beyond “deal with it.”
- Level two is ethical. Rely on collective shame heaped on used-car dealers to enforce behavior.
- 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).
- 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.
- 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.
- A sixth is regulatory. The National Used Car and Brother-in-Law Exchange Commission will do what the industry failed to do.
- 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?