Stock Ownership and a Relationship with a Competitor

The Los Angeles mayoral race has unearthed some conflict of interest
allegations that are worth a look. There are three interesting
issues. One, how much stock ownership in a public company is required to give rise to a conflict? Two, what about ownership of a competitor?
And three, what if you don't know a public company whose
stock you own is involved in a matter before you?<br>
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According to <a href="http://www.latimes.com/news/local/la-me-garcetti-ethics-20130222,0,6649…; target="”_blank”">an article in Los Angeles <i>Times</i> last week</a>, one mayoral candidate
accused another of having voted, as a council member, on a legal
settlement that allowed Clear Channel Outdoor to convert hundreds of billboards to a digital
format.<br>
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<b>De Minimis Stock Ownership</b><br>
The council member had reported on his annual disclosure statement
owning stock in Clear Channel Communications worth between $2,000
and $10,000. Is this ownership interest sufficient to create a
conflict worthy of withdrawal from the matter? That's a pretty small
amount of stock for most people who own shares in individual
companies. It is hard to imagine that it would make the council member seriously biased toward the company, although many people would imagine this.<br>
<br>
It is also hard to make a case that the legal
settlement was worth enough to a huge company that
it would affect the price of its stock and, therefore, benefit the council member. The only imaginable way this
would happen is if this settlement was considered a breakthrough that
would likely lead to such settlements across the country.<br>
<br>
Therefore, if the council member had asked me, I would have advised
him to disclose his stock ownership and explain that the ethics
adviser considered it a de minimis stock holding, that is, because the council member could not benefit from the decision, his stock ownership was of
insufficient value to require withdrawal.<br>
<br>
It is common for ethics codes to make a de minimis exception for stock ownership of anywhere from 1% to 5% of a company. The problem with this is that 1% of a big public company is millions of dollars. That's going to make anyone biased toward the company. On the other hand, one percent of a small local company is very little (and very unusual for anyone to own). Therefore, a percentage of stock owned is not a good way to determine whether the ownership is de minimis. The value of the stock is a better indicator, but the value of a small company is hard to know. Therefore, the best thing is have no exceptions and, instead, require that an official with any interest in a company seek ethics advice and let the neutral, professional ethics officer determine how best to deal with a particular conflict situation.<br>
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<b>Ignorance of One's Ownership Interests</b><br>
The council member says, however, that he did not realize he had a
financial interest. He thought the company just owned radio
stations. Googling "Clear Channel" tells you immediately, without even opening a webpage, that Clear Channel
has two divisions, media and outdoor. Therefore, the council member
had reason to believe that Clear Channel Outdoor was part of Clear
Channel Communications.<br>
<br>
It may be that the council member has shares in too many companies to
keep track of them. In a small town, that might not matter. But in a city
the size of Los Angeles, a council member needs to keep track of his
ownership interests. Unlike an ordinary person, a council member has
an obligation to anticipate appearances of impropriety and deal with
them.<br>
<br>
One of the reasons financial disclosures are required annually is to
remind officials of their ownership interests and cause them to
consider the conflicts that may arise from them. Not checking even
the principal activities of a company is negligent. It should not be
accepted as an excuse for failing to disclose the ownership and deal
with it responsibly.<br>
<br>
But let's say you own General Electric. Even people who work there don't know all the businesses it owns. This is where it's important to have applicant disclosure. If a division of General Electric wants something from one's board, it has to disclose that it's owned by General Electric. Equally, a development company created for one development has to disclose every individual who has an ownership interest or represents it, as an attorney, realtor, or whatever. If this is done, then officials will be in a better position to know whether they might have a conflict.<br>
<br>
As it turns out, the council member appears to have realized his
small stock holdings weren't worth the bother and disposed of them
back in 2007. This was a reasonable, responsible way to deal with
this situation. He learned from his minor mistake, and
I don't think he deserves to be accused of anything at this point.<br>
<br>
<b>Ownership of a Competitor</b><br>
Another important conflict issue has arisen regarding the city controller who,
according to the <i>Times</i> article, pushed for the council to block a
Home Depot project, yet did not publicly disclose that she had
inherited a 50% share in a family building supply business nine
miles away. Her spokesperson said that there were other Home Depots
nearer to the family business and, therefore, she had no conflict.<br>
<br>
In a city, nine miles is a long way away for a store
to be a serious threat. I live in the suburb of a small city (New Haven),
and there are two Home Depots and a Lowe's within five miles of my
home, in addition to an independent hardware store. On the other
hand, the building supply business is probably reeling from all the
stores opened in the area by chainstore competitors. It would be
reasonable for the owner of such a business to be biased against the
chains wherever they want to open another store. With a 50%
ownership of a store, it would be best not to participate
in any matter in that store's area of business.<br>
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It is an important issue whether there is a conflict situation when
an official has a special relationship with a competitor of someone
who comes before her – whether the relationship involves ownership,
representation, business partner or client, or family. Too often a
relationship with a competitor is ignored. This is especially true
in the real estate business. Someone who works for or represents a
developer may not be involved in a project, but it's likely that one
of her company's or client's competitors is involved. This is why
someone involved with development has no place on a planning or
zoning board.<br>
<br>
This is less of a problem with contracts, at least if they are
competitively bid. It doesn't matter if an official has a
relationship with a competitor who chooses not to bid. One
possibility, however, is that an opponent of an official who has a
relationship with a contractor could use his influence to affect
specifications in such a way as to exclude that contractor, simply
out of spite. This is, however, a situation where the interest is
personal, but solely in a political way. Because it is political, it
is not a conflict in government ethics terms.<br>
<br>
However, if a contract is not bid out, an official's special
relationship with a competitor of the chosen contractor very well could give
rise to a conflict situation. Relationships with competitors must be taken seriously.<br>
<br>
Robert Wechsler<br>
Director of Research-Retired, City Ethics<br>
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