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A Conflict of Interest Exam Question from Long Branch, NJ
Saturday, February 20th, 2010
Robert Wechsler
Especially in small towns, bankers often have business relationships
with many people and, therefore, do not make the best board and
commission members on account of the many conflicts they have or, more
frequently, the appearance of impropriety.
According to an article this week in the Asbury Park Press, in Long Branch, NJ (pop. 40,000) there is a dispute concerning the reappointment of a sewerage authority commission member, not a position that usually creates problems for bankers. But it turns out the situation reads like a question on a government ethics exam.
The commission member was a founder and is a director of a local bank, and a large contributor to the mayor's campaign. He needs to be reappointed by the council, which includes the mayor. One of the five council members is the bank's chief financial officer and also a director. Another council member works part-time as a messenger for the bank, and a third owns a few shares in the bank. The city attorney, who advises the council, is also a director of the bank, and according to a letter to the editor by the individual who raised the conflict issue, a major stockholder.
The exam question ends, Which of these people should recuse themselves, and why?
The easy answer is the bank's CFO and board member on the council. As a close business associate, he should not participate in any way.
Nor should the commission member's fellow board member, the city attorney (unfortunately, he already has participated, saying that the conflict is far-fetched, making a recommendation to table the issue, and saying he will get a conflict attorney to advise on the matter, which is good, only he shouldn't choose the conflict attorney).
The part-time employee is a tougher question. He gets his pay from the bank, but it's part-time work and he would have no contact with a member of the bank's board of directors. Would he be afraid to vote against a board member? That's a possibility. If I were him, I would recuse myself. There's an appearance of impropriety that puts him in a lose-lose situation: if he votes for the board member, he'll be seen as having felt obliged; if he votes against him, he could jeopardize his job.
The small shareholder is easier. If the amount is small for the individual, it shouldn't affect, or be seen to affect, his decision. And there would be no possible benefit or loss from his decision. But someone in his position should disclose the stock ownership, even if not required by law.
The mayor poses a difficult and recurring problem. His only relationship with the commission member is as the beneficiary of large campaign contributions. Some local governments formally consider this a conflict. But whether or not it is legally a conflict, it certainly creates an appearance of impropriety. Citizens hate cronyism. It makes local government look like a club of connected business people, with others left out in the cold. A mayor who recognizes this, and recuses himself (and, in other situations, does not nominate people who have given him or her large campaign contributions) will be very popular and, more important, it sends the message to the entire government that merit trumps connections.
I would argue that the council should censure the city attorney for participating in this matter, to send the message that government ethics, more than any area of city activity, should be free of conflicts. And, I think, the council should determine that the city attorney has so tainted the issue by saying the conflict is far-fetched, that the council should not even consider reappointing the bank director to the sewerage authority commission.
Irrelevant to this conflict situation, but to show you how small the world of New Jersey local government unethical conduct is, according to the letter to the editor, another founding member of the same bank was a man who, after being charged in connection with a multimillion-dollar real estate Ponzi scheme, turned informant to help the FBI catch a network of crooked officials in New Jersey (see my July 2009 blog post on the case). The man was also a major client of the city attorney's law firm. No Long Branch officials were arrested by the FBI, but one Long Branch resident was arrested for money laundering.
Robert Wechsler
Director of Research-Retired, City Ethics
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According to an article this week in the Asbury Park Press, in Long Branch, NJ (pop. 40,000) there is a dispute concerning the reappointment of a sewerage authority commission member, not a position that usually creates problems for bankers. But it turns out the situation reads like a question on a government ethics exam.
The commission member was a founder and is a director of a local bank, and a large contributor to the mayor's campaign. He needs to be reappointed by the council, which includes the mayor. One of the five council members is the bank's chief financial officer and also a director. Another council member works part-time as a messenger for the bank, and a third owns a few shares in the bank. The city attorney, who advises the council, is also a director of the bank, and according to a letter to the editor by the individual who raised the conflict issue, a major stockholder.
The exam question ends, Which of these people should recuse themselves, and why?
The easy answer is the bank's CFO and board member on the council. As a close business associate, he should not participate in any way.
Nor should the commission member's fellow board member, the city attorney (unfortunately, he already has participated, saying that the conflict is far-fetched, making a recommendation to table the issue, and saying he will get a conflict attorney to advise on the matter, which is good, only he shouldn't choose the conflict attorney).
The part-time employee is a tougher question. He gets his pay from the bank, but it's part-time work and he would have no contact with a member of the bank's board of directors. Would he be afraid to vote against a board member? That's a possibility. If I were him, I would recuse myself. There's an appearance of impropriety that puts him in a lose-lose situation: if he votes for the board member, he'll be seen as having felt obliged; if he votes against him, he could jeopardize his job.
The small shareholder is easier. If the amount is small for the individual, it shouldn't affect, or be seen to affect, his decision. And there would be no possible benefit or loss from his decision. But someone in his position should disclose the stock ownership, even if not required by law.
The mayor poses a difficult and recurring problem. His only relationship with the commission member is as the beneficiary of large campaign contributions. Some local governments formally consider this a conflict. But whether or not it is legally a conflict, it certainly creates an appearance of impropriety. Citizens hate cronyism. It makes local government look like a club of connected business people, with others left out in the cold. A mayor who recognizes this, and recuses himself (and, in other situations, does not nominate people who have given him or her large campaign contributions) will be very popular and, more important, it sends the message to the entire government that merit trumps connections.
I would argue that the council should censure the city attorney for participating in this matter, to send the message that government ethics, more than any area of city activity, should be free of conflicts. And, I think, the council should determine that the city attorney has so tainted the issue by saying the conflict is far-fetched, that the council should not even consider reappointing the bank director to the sewerage authority commission.
Irrelevant to this conflict situation, but to show you how small the world of New Jersey local government unethical conduct is, according to the letter to the editor, another founding member of the same bank was a man who, after being charged in connection with a multimillion-dollar real estate Ponzi scheme, turned informant to help the FBI catch a network of crooked officials in New Jersey (see my July 2009 blog post on the case). The man was also a major client of the city attorney's law firm. No Long Branch officials were arrested by the FBI, but one Long Branch resident was arrested for money laundering.
Robert Wechsler
Director of Research-Retired, City Ethics
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