Sunday Times 2
The Governor’s case and the conflict of interest concept
“CB scam: Probe panel blames tender board; Governor exonerated” – News Item
The conclusion of the probe panel that consisted of three UNP lawyers was a foregone conclusion. So the CB Governor is exonerated. The panel says the Governor had no direct role in deciding to accept bids over and above the one billion rupees stipulated in the 30-year bond tender and acceptance of bonds to the value of 10 billion rupees at 12.5% interest was done outside his purview.
The Tender Board, the BOC, and the Public Debt Department (PDD) of the CB are all at fault. The 8-member Tender Board and the PDD are both part of the CB administrative apparatus. And who is the Head of the CB? It is quoted that the committee found that “Governor Arjuna Mahendran had no direct role in deciding to accept bids over and above the one billion rupees”. Does it not imply that he had an indirect role? But then let us not ask embarrassing questions.
The CB Governor is now squeaky clean. He resumes duties and it is ‘business as usual’.
But when you look at the whole sequence of events, there are many more questions that the three-member panel has pertinently avoided, but need answers. These questions need unambiguous answers before the CB Governor can be cleared and absolved of any misdemeanor. Does the ‘exoneration’ of the CB Governor also mean that his son-in-law will not gain financially from this deal with the CB? What about the US$ 5 million gain by Perpetual Treasuries? Ok. I won’t ask too many awkward questions. But let me say this.
In my 37 years of professional life and 35 years in medical academia and at the highest levels of university administration, dealing with many agencies of government and the corporate sector, I have come to realise that ‘Conflict of Interest’ (COI) is a concept that is either not clearly understood (by not only the average Sri Lankan, but also by academic and corporate communities and politicians in general) or is being deliberately misunderstood or beguilingly misinterpreted for their personal survival or gain.
As a result, I have been studying this phenomenon in Sri Lankan society at two levels: First, in general, as observed from news reports and investigative journalistic exposés of public officials and politicians; and second, from an academic theoretical standpoint. My interest in the subject grew in intensity when I observed this phenomenon occurring repeatedly in my own profession — medicine — to the great detriment of patients. The COI between the doctor and the pharmaceutical industry is phenomenal. Hence, I have spoken and made presentations in as many medical forums as I have been invited to speak.
Andrew Stark, in his book “Conflict of Interest in American Public Life” published by the Harvard University Press in 2000 says there are three stages in the process of acting in COI.
They are:
(i) The Antecedent Acts (Stage 1) – These are factors that condition the state of mind of an individual towards partiality, thereby compromising the potential to act towards the public interest rather than private (or personal) ones. Please note that the issue at hand is public vs private interest. The ‘partiality’ mentioned refers to sources of undue influence that create the condition of bias; in the case of the CB scandal, the antecedent act is that the CB Governor is the father-in-law of the owner of Perpetual Treasuries;
(ii) The States of Mind (Stage 2) – These represent the affected sentiments or affinities conditioned by the antecedent acts. That is, creating a particular orientation to act in a determined direction; in the CB case, it’s the mindset to ‘insider deal’ on behalf of Perpetual Treasuries; and;
(iii) Outcome Behaviour (Stage 3) – These are actions or decisions taken that arise from an affected state of mind as influenced by the antecedent conditions. That is the ultimate awarding of Rs. 5 billion worth of Treasury Bonds to Perpetual Treasuries.
The universally prescribed remedy to correct this expected outcome behaviour is ‘disclosure’. That is, you disclose or expose or cite your COI to the stakeholders and either remove yourself out of the decision-making process or expect the stakeholders or other contending parties to consider your expressed opinion in the light of that disclosure. Often, in societies where institutional hierarchies are feudal in attitude and high officials can easily influence decision-making even after ‘disclosure’ and removing one’s self from the decision-making process like in Sri Lanka and many developing countries, this remedy is hardly a preventive.
How one makes the disclosure, and when, is also important. There has to be ‘space’ for the person/s who can be affected by a perceived sense of partiality, to withdraw from the situation if he so desires. Disclosure for the sake of disclosure is not what is expected in the principle of disclosure as the remedy.
We have many anecdotal examples found in the press of public officials and powerful politicians who blithely declare a ‘right’ to COI. For example, a minister in the CBK government once, had the temerity to say that the company owned by his wife and son had the right to bid for tenders under his ministry. After all, they are doing a legitimate business like any other citizen in the country. Even so, the question of ‘perception of COI’ (see below) is evident. What he didn’t disclose was that the company was hastily formed to make a bid for the highly lucrative tender. Then there are others in power and authority who magnanimously declare their COI and leave Tender Boards of institutions they head, knowing very well that no member of the board will dare reject or object to his personals interests in the tender. Therefore, self-righteous statements that suspicious tenders were approved through due process by tender boards are no guarantee of moral or ethical propriety.
To understand the pervasiveness of COI in any society, it is necessary to understand the concept of the ‘Inevitability of Bias’. If we do not understand this concept, we are in danger of having to face a situation of unmanaged COI. That is the situation that exists in Sri Lanka today, both in the state and corporate sectors.
It is important to recognise the distinction between bias and conflict. It is reasonable to state that unintentional bias is pervasive. It should be distinguished from intentional or undue bias. An honest public official who is sensitive to the concept of COI will ensure that even unintentional bias is eliminated in his dealings with external agencies. COI can and should be avoided at all times because it has the potential to weaken the integrity and ethical legitimacy of any given process itself.
Tolerance and/or mishandling of COI could jeopardise the public trust in public officials and compromise the moral fabric of our society. Thus, failure to disclose COI is not acceptable and mechanisms should exist to ensure and/or enforce transparency with regard to COI among those in positions of authority and financial decision-making.
One of the important problems of managing COI is the issue of ‘moral blindness’ that effects COI situations. Many institutions worldwide have developed strategies and policies for handling COI issues. But I know of none in Sri Lanka where their policies are publicised. These policies rely on disclosure as a mechanism to manage COI. Although such practice is now widespread and widely accepted, it has been argued that individuals in conflict, more often than not, have difficulty recognising their own conflicts. Even in individuals of high moral character, a perceptual blind spot may exist that prevents critical self-evaluation when conflict exists. If this is true, it raises a red flag for many policies of disclosure, since they are based on the assumption that a person in conflict will recognise and disclose the conflict.
Furthermore, there is the concept of ‘appearance of a COI’. That is, that one has to be sensitive not only to an actual COI, but also as to whether an act can be construed to be a COI; that it “appears” to be a COI. A person in a decision-making role can be reprimanded for allowing an ‘appearance of COI’ to arise. The sequence of events of the bond issue by the CB is replete with such ‘appearance of COI’. The ‘Appearance Standard’ has been definitely violated in the CB case.
It is an ironic coincidence that, according to Andrew Stark, the US Controller of the Currency, Robert Clerk (Head of an independent bureau within the United States Department of the Treasury) was reprimanded in 1991 for allowing ‘an appearance of COI’ to arise because he was “taking out loans from state-chartered banks”. Imagine what kinds of legal action would have been taken against Robert Clerk if the US Office of the Controller of Currency (OCC) had issued Treasury Bonds to a company owned by his son-in-law?
To ensure that there is minimal influence and effect of COI in public life, public officials and corporate executives have to become fully aware of these concepts of COI in the first instance. Thereafter, institutions and other professional bodies should take both systematic and systemic measures to incorporate them into their administrative and regulatory structure so that they consciously prevent COI.
Then there is the concept of “behavior of partiality”. In terms of public COI law (which is non-existent in Sri Lanka), a person could be found guilty of a COI only if it could be proved that his behaviour resulted from gifts or favours taken or unacceptable relationships maintained. Legally, one cannot infer that decisions that were self-serving were, in fact, the consequences of such questionable alliances. Furthermore, a person’s state of mind, or more precisely, the process of thinking, cannot be decided or proven in a Court of Law. Even if we ‘know’ that a decision-maker behaved partially resulting in outcomes favourable to an allied alliance, we do not know — and we would find it impossible to demonstrate — that the favourable decisions made, are a direct outcome of the conflicting alliance. Therefore, the current focus in regulatory law is on eliminating the first stage – namely, the antecedent acts and not the outcome behaviour, the third stage.
Though the CB Governor has been exonerated by the thee-member panel, can the public, based on the afore-mentioned concepts of COI, absolve him from blame? Can it be ever said that the US$ 5. million profit made by Perpetual Treasuries was made on a level playing field with the rules of engagement equal to all players?
(The theoretical content on Conflict of Interest in this article is partly based on the ‘K.N. Seneviratne Memorial Oration 2009′ titled “Conflict of Interest: Relationship between Industry and Research” given by the author on the invitation of the Physiological Society of Sri Lanka, wherein the relevant references were included.)