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Opinions of Tuesday, 2 January 2018

Columnist: theoyibo

The bond saga, CHRAJ and the rules on conflict of interest

In the first part of this note, I said I would do a series of notes showing how CHRAJ’s decision on the Bond Saga complaint against the Minister of Finance fails to reflect the evidence it has on record. Thankfully, last night’s festivities went well – I was literally jumping from one party to another. I met with friends I have not seen in a while.

In this second part of the note, I will attempt a simplified explanation of a very difficult subject – conflict of interest. This explanation is to have us on the same page before I attempt a surgery of the report.

Meaning

Conflict of interest occurs when a person (an agent) is in a position where her personal interest interferes with the interest of another person (her principal) for whom and in whose interest she is supposed to act. In simple terms, conflict of interest occurs when a person finds herself in a position where she may be seen as serving two masters. It is simply a position of divided loyalty.

Personal and Impersonal

The interest may be personal or impersonal, but it is still ‘personal’. It is personal where the interest involves the interest of the actor personally. This happens when, for example, I sell my own car to Marcia who has asked me to by her a car (without me disclosing to her that the car I am selling to her is mine). Here, the car is mine; but the problem is that we won’t really be sure if I’ll be protecting Marcia’s interest or mine. On the other hand, the conflict is impersonal when it involves the interest of an organisation or a person other than the actor’s. Same example, except that the car in question here belongs to my mum or my company. In this case, too, one may not be clear whose interest – Marcia’s or my mum’s – I would protect.

Actual and Potential

Conflict of interest may also be actual or potential. It is actual if the actor did actually act against the interest of the person whose interest he is supposed to protect. Still with the car example, there would be actual conflict of interest if I sold the car to Marcia above the market price (so as to make a secrete profit). On the other hand, it is potential conflict of interest if there is a possibility or probability, no matter how small, that I would fail to protect the interest I’m supposed to protect even though I have not yet done or may , in fact, never even do so. Therefore, in the car example, I’ll be guilty of potential conflict of interest if there is a possibility or probability that I would sell the car to Marcia above the market price. It doesn’t matter that I have not done or may never even do so or that I have in fact sold it to her below the market price.

Whichever way – whether actual or potential – it is still conflict of interest. For, as the courts would say:

“It is not necessary that an officer or director have an intent to defraud or that any injury result for an officer or director to violate his fiduciary obligation.”

Similarly:

“Actual injury is not the principle upon which the law proceeds in condemning such contracts. Fidelity in the agents is what is aimed at, and as a means of securing it, the law will not permit the agent to place himself in a situation in which he may be TEMPTED by his own private interests to disregard that of his principal.” (Caps mine)

In other words, a person needs not actually intend or actually cause an injury to be found guilty of breaching the rules regulating conflict of interest. That, I think, is the true and proper position of the rule on the matter.

Enormity of the Rule

I’m sure you’re by now intimidated by the enormity of the conflict of interest rules. If you are, you’re justified. The rule is, indeed, superimposing. So, a great judge once put it this way:

“A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior… the level of conduct for fiduciaries [has] been kept at a level higher than that trodden by the crowd.”

A fiduciary cannot behave like us, the ordinary people. The standard for her crushes through the roof.

But why? Let me explain: When someone repose trust in you to protect her interest, law and equity would not allow you the space to stab her in the back by sacrificing her interest on the altar of yours. Let’s put it into the context of a public office: when the people of a country entrust you with the power to protect their interest, the law will not allow you to put them in a situation where they can’t be sure whose interest you’re really protecting. It may be that you’re really protecting their interest. But that is not the point, as far as the subject is concerned. The real question is: would they doubt that? It is not whether you “have“, “will” or “would” betray them. It is whether you “could” betray them.

Taken from this perspective, one would easily realise that the rule is an effective tool against corruption. It would, if properly understood and enforced, do away completely with (if not reduce drastically) the cornerstones of corruption – cronyism, nepotism, favouritism, tribalism and whatnots. It would actually “protect the public purse.” The framers of our Constitution knew this pretty well. That is why they wrote in Article 284 that:

“A public officer shall not put himself in a position where his personal interest conflicts or is likely to conflict with the performance of the functions of his office.” (Underlining is mine)

Now read the provision again. Carefully. It would be obvious to you that the Article sets a standard. The standard is “potential” conflict of interest, namely, the officer merely “putting himself in the position.” The standard is NOT “actual” conflict of interest. That is, the officer needs not intend or actually cause an injury or a loss. Indeed, this is the true standard.

The Duty to Disclose

However, the law also acknowledges the limitation of such a rigid application of the rules. For example, the rule in its unbridled form would prevent principals from getting ‘good deals’, if these good deals are from their agents or fiduciaries. For example, going strictly by the rule, I wouldn’t be able to sell my car to Marcia even if my price was below the market price. In a public office context, it would prevent the Republic from benefiting from the acumen of very experienced industry players like Hon Ken Ofori Atta (who has been a top player in the finance and securities industry for over 30 years) from serving us as Finance Minister. Let’s face it: after 30 years in the industry, he would literally be ‘related’ to everyone and every entity in the industry.

The law knows this. So, to avoid this situation, it provides for what is invariably called a “safe harbour.” Safe harbour rules are intended to do 2 main things: (1) allow principals to have ‘good deals’ from fiduciaries; and, at the same time (2) have their interests protected from backstabbing by fiduciaries.

Therefore, while the unbridled rules on conflict of interest would not ordinarily allow me to sell my car to Marcia under the circumstances, it would if and only if 2 things happen: (1) if I disclose all the material facts about the ownership of the car to her without withholding any AND, also, (2) if, consequent upon such disclosure, I allow her to freely decide whether to go ahead and buy it, my ownership notwithstanding. In other words, disclosure of personal interest is an integral part of the conflict of interest rules. This is because the primary aim of the rules on conflict of interest is to prevent what is unfair; and, as the courts and scholars have always maintained, “nondisclosure by an interested director or officer is, in itself, unfair.” This is exactly where CHRAJ tripped.