Ethics @ Work: Can conflicts of interest be preempted?

Was it perhaps a mistake for the authorities to pursue Dankner, insofar as his employer, his ostensible victim, is happy to keep him on board?

As chairman of Bank Hapoalim, Dan Dankner’s responsibility was to further the interests of the bank. As a businessman in his own right, and as a member of the Dankner family, whose business empire controls a large fraction of the Israeli economy, he had competing interests. Many observers feel he didn’t adequately manage this conflict of interest.
Last year, bank regulators pressured the bank’s owners to force him out of the chairmanship. Last week, police questioned him on suspicion of various kinds of financial wrongdoing.
Given these structural conflicts, was it a mistake to appoint Dankner as chairman? Or was it perhaps a mistake for the authorities to pursue Dankner, insofar as his employer, the ostensible victim of his alleged self-serving conduct, is happy to keep him on board?
To answer this question and similar ones, I suggest the following approach to studying conflicts of interest: Where do they come from, and where do they lead?
The second question is easiest. Conflicts of interest often lead to a bad place. Ideally, we should all put aside our private interests and pursue in a professional manner the interests of our employer. But in practice it is virtually impossible for a person to totally disregard what is best for him.
It is interesting that the Torah states: “Don’t slant judgment; don’t show favoritism. And don’t take bribes, for bribes blind the eyes of the wise and distort the words of the righteous.” Even if we are cognizant of the impropriety of slanting judgment or showing favoritism, extraneous considerations such as bribes can still blind and distort the judgment of even the wise and righteous.
On the other hand, the source of a conflict of interest is often a salubrious one. For example, often the CEO of a company is also chairman of the board – the same board whose job it is to oversee management. The problem is that the chairman of the board needs to be a person with intimate knowledge of the workings of the business, and that will often be a person whose ability is irreplaceable in day-to-day management.
Politicians often have a personal stake in the outcome of legislation, but often they were elected partially because of this very stake. Voters may feel, for instance, that someone who is himself a farmer will be less likely to sell out the interests of farmers. So sometimes a conflict of interest has its source in a certain confluence of interest.
Based on this framework, we can ask ourselves in any particular situation: What is the extent of the expected benefit from the source of the conflict of interest, and what is the extent of the potential harm from its result? The answer will depend on the context.
In auditing, the benefit from having a personal interest in the stake is negligible. A competent auditor can audit a firm’s books even if he doesn’t have a lengthy personal involvement with the firm. And the potential harm from a conflict is great: The auditor is one of the most important lines of defense against fraud.
In politics, voters often see meaningful benefit in electing someone who has interests and experience in a certain area. Conversely, the potential harm due to a conflict of interest is considered dwarfed in most cases by the prospect of denying voters representation on issues where the representative has a personal interest. As a result, in politics, conflicts of interest are almost always managed by disclosure and not through recusing.
What about business? Generally, the feeling is that business enterprises are able to monitor and control conflicts, and formal prohibitions on conflicts are fairly limited. (One example is that board members may not be affiliated with a direct competitor, even though competitors might have excellent knowledge of the industry.)
In the case of an exceptionally capable manager, owners may even be willing to look the other way at certain questionable transactions, viewing them as part of the person’s de facto compensation. That may also explain why Shari Arison, Bank Hapoalim’s controlling shareholder, wanted to keep Dankner on board despite all the allegations.
Such a freewheeling attitude may be understandable in some industries, but I feel it cannot be justified in banking. When banks do business aggressively, they reap the upside. But the public has to bear the downside as regulators are forced to intervene at public expense to maintain stability and liquidity.
As the facts come out, we will see if Dankner’s conduct was illegal or inherently unethical. But it is already pretty clear that it crossed the line of what is acceptable at a major bank.
Asher Meir is research director at the Business Ethics Center of Jerusalem, an independent institute in the Jerusalem College of Technology (Machon Lev).