PER Vol. XV, No.4, Fall 2002

Conflicts of Interest and the False Comfort of “Full Disclosure”

By Robert W. Hahn

Robert W. Hahn is director of the AEI-Brookings Joint Center for Regulatory Studies, a resident scholar at the American Enterprise Institute, and a research associate at Harvard University. A longer version of this article originally appeared in the October 2002 issue of Policy Review, and is available on the web at www.policyreview.org.

The Enron “scandal” has raised several issues about disclosure of information and potential conflicts of interest. For example, an accounting firm that receives consulting fees from a company it audits may be less likely to report financial problems with that company. Similarly, academics and other commentators receiving monetary compensation from a company may be more likely to give that company’s policy positions a favorable review. An oft-proposed solution is “full disclosure” of all conflicts of interest. Unfortunately, this is easier said than done and may have unintended consequences.

Consider the problem of conflicts of interest in the context of funded research and opinions that are disseminated to the public by journalists, academics, and think tanks. “Full disclosure” may be a laudable goal, but is difficult to define and, therefore, not very useful. The problem is not that disclosure is bad—though it may occasionally lead to bad outcomes—but that the media and the public often use partial disclosure as a substitute for critical thinking.

The nature of the problem

There is no obvious place to draw the line on what needs to be disclosed. In some cases in public life, full disclosure has been interpreted to go beyond an individual to an individual’s acquaintances or family. What constitutes all relevant information for purposes of disclosure? Firms, non-profits, and individuals have dealt with the problem of establishing credibility in a number of ways. For example, Consumer Reports, which evaluates consumer products, does not take money from business for advertising. Many other media outlets place restrictions on what journalists can do in order to maintain their independence. Universities place restrictions on how professors identify themselves when doing outside consulting and testimony. And when pursuing stories, the press often asks for similar kinds of disclosure. When I receive a call from the press about one of my studies, one of the first questions asked is who funded it. It is problematic that many journalists either don’t have the time to, or cannot, evaluate the validity of studies. Instead, they simply take their cue from less important aspects, such as the funding source or the institutional affiliation.

The problem of assessing quality is not restricted to the press. Even academic peer review has serious problems, albeit for different reasons. In several instances, peer review has been shown to be an unreliable indicator of a paper’s quality, accuracy, or integrity.[1] Additionally, peer review cannot necessarily prevent or reveal dishonesty in academic work.

The costs and benefits of disclosure

The benefit of more disclosure is that the media and public are given additional information about possible conflicts of interest. When disclosure raises a red flag that makes an editor or journalist examine arguments more closely, this is a benefit. However, disclosure has real costs as well, including: difficulties in monitoring and enforcement, difficulties in defining an appropriate level of disclosure, and the impact on who provides information and how.

Monitoring and enforcement. Providing incomplete information to the public tilts the playing field toward the side that is viewed as “clean.” I think this bias is a very serious problem. The problem arises in part because the disclosure rules are difficult to monitor and in part because they are not always enforced with the same vigor. Moreover, the penalties for not disclosing are not that high in most situations.

For example, many people write opinion pieces on a particular subject for direct compensation. Some disclose that information while many others do not. Editors at major newspapers are less likely to publish op-eds that come with a disclosure statement because they do not want to be perceived as supporting free advertisements for a particular point of view. This perversely creates an incentive not to disclose.

Difficulties in defining an appropriate level of disclosure. We all have potential conflicts of interest because most of us work for a living. For academics and other professionals, it is not unusual to work for several companies, either giving speeches or on other short-term contracts. Over time, it can be easy to develop connections with businesses in the routine process of making a living. Not all of these connections pose a conflict of interest. When considering what to disclose, it is sensible to focus on activities that could pose a substantial conflict.

While some disclosure is justified, it is difficult to know where to draw the line. How should we deal, for example, with people whose firms link pay to visibility in the media? Why, in principle, should they be treated any differently from a business consultant taking money in exchange for writing an op-ed? Yet they are treated differently by the media — with the opinion of the business consultant being given less credence.

Impact on who responds and how they respond. Journalist Andrew Sullivan has suggested that an individual who consults for a company should not write about issues related to that company. He believes that individual’s journalistic independence has been compromised — no matter how innocent or transparent the consulting arrangement. Sullivan’s position, while extreme, has some empirical support. When an individual consults for a company, she is more likely to take on the perspective of that company as a result of continued interactions with a group of like-minded individuals.

Even stopping short of Sullivan’s suggestion, calls for greater disclosure could be counterproductive. The pool of potential experts on the subject may be reduced because some individuals will prefer not to disclose and not participate in the public discussion. Moreover, some may simply evade the requirements and hope they don’t get caught. Still others — the entrepreneurial types — will create “fronts” that make the probability of detection less likely.

What kind of fronts might be created? A look around at how the various think tanks operate can offer some food for thought. Even the top think tanks, like AEI and Brookings, get much of their money from — dare I say it? — business, or foundations whose wealth typically comes from business. A typical foundation will only provide support if it has a reasonable expectation of the kind of results that will be produced.

The way think tanks deal with potential conflicts is to introduce mechanisms that help preserve their reputation for doing quality work, including: hiring scholars who are interested in preserving their academic reputations, peer-reviewing their major published works, such as books, encouraging their scholars to publish in peer-reviewed journals, and diversification of funding sources. Admittedly, the competition for funds is fierce, which may lead to greater emphasis on producing work that increases funding rather than on first-rate scholarship. Still, at the leading think thanks and universities, I think these mechanisms work reasonably well for scholarship published in a scholar’s area of expertise.

What to do?

Calls for greater disclosure will lead to more innovative ways to circumvent disclosure, which we should keep in mind when crafting solutions. The current system of disclosure, for all its warts, is not a bad starting point. That system generally requires a scholar to identify conflicts that would not pass a political “smell test.” That is, if there is a reason to think that an average reader would be suspicious if a scholar did not disclose something, then she should disclose it.

The basic problem with the current system of disclosure is that it is incomplete. The media need to recognize this and do a better job. Here are five concrete suggestions.

Suggestion 1: Place less reliance on disclosure as a signal. Disclosure can provide a useful hint about a conflict of interest, but several other factors should be taken into account, including non-tangibles like “reputation.”

Suggestion 2: Apply rules for evaluating experts across the board. That means doing due diligence on all participants in a debate, not just those where the conflicts are most obvious.

Suggestion 3: Find out whether the person is really an expert. The press should not give some people a pass, just because they sound good.

Suggestion 4: The media should think harder. The press needs to be more critical in an academic sense. There is no substitute for actually reading some reports to determine their quality. Leading media outlets should hire people to support reporters who can think critically about technical issues.

Suggestion 5: We all should think harder. If more people learn to think critically, this would help.

What’s wrong with these recommendations? The media seem to be happy with the status quo, and for the most part, so is the public. The real story is that disclosure has serious limitations, there are lots of major conflicts of interest out there that don’t get reported, and the press tends to tilt the playing field in ways that have not been adequately considered.

Full disclosure, far from being a panacea, could make things worse. My immediate suggestions for fixing the problem are a press that thinks more critically and a public that does the same.

[1] For a discussion of some problems with peer review, see Linda R. Cohen and Robert W. Hahn, “A Solution to Concerns over Public Access to Scientific Data.” Science, July 23, 1999. Also, William Dewald, J. Thursby, and R. Anderson, American Economic Review 76, 587 (1986), for a study that found errors in a prominent economics journal that were not caught by peer review.

[1] Frye v, United States, 293 F.1013 (D.C. Cir. 1923).

[2] General Electric v. Joiner, 522 U.S. 136 (1997); Kumho Tire v. Carmichael, 526 U.S. 137 (1999).