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How Much of a Company Must an Official Own Before There Is a Conflict of Interest? - A Story from Missouri
Friday, September 26th, 2008
Robert Wechsler
A difficult aspect of government ethics is the percentage of a company
that must be owned by a government official in order for there to be a
conflict of interest. The figure chosen for ethics codes is usually 5%.
The City Ethics Model Code uses the following language in defining "outside employer or business":
This language could be improved (and advice is welcome). This blog entry will look at a situation in Missouri involving a financial aid program and a law that considers only percentage, not value of the stock.
According to an article in today's Southeast Missourian, the state treasurer insisted that state politicians and their immediate families have no interest in any company that gets money through the financial aid program. When an ethanol plant applied for the program, she rejected its application because its investors included the governor's brother and a state representative. The state legislature then changed the law so that no application could be rejected unless a state politician or family member owned at least 2% of the company. The brother and representative did not own this much of the ethanol plant.
Story over? No. It turns out that another company owns 10% of the ethanol plant, and neither the treasurer nor the ethanol plant could find out who owned that company. Coincidentally, the day the treasurer rejected the application (two years after it was filed) due to the lack of this ownership information, the ownership information was sent to the ethanol plant. It turns out that neither person owned enough of the 10% owner to bring his interest in the ethanol plant up to 2%.
It also turns out that the treasurer ran for governor as an anti-ethanol candidate, losing to a pro-ethanol candidate, and that her term is over in January. So the plant will almost certainly get its financial aid (saving up to $6 million in interest payments).
The problem with raw percentages like this is that the value of the interest matters too, which is why the City Ethics Model Code includes a value amount, as well. If you own 5% of a local restaurant, that might be worth $40,000. If you own 5% of a regional fast food franchise, that might be worth $200,000. If you own 5% of a fast food company, that might be worth $200 million. Percentages tell only part of the story.
A government official who owns $50,000 worth of shares of a big publicly traded fast food company means nothing to the company. It won't even know who that person is. There would be no collusion between the two. But that company means a lot to the official who owns the shares, unless the official is very wealthy. And anyone who knows that the official owns the shares will think he's biased when he votes to give the fast food company a zoning exception, for example. There's no reason why that official should have to sell the shares, but there is a reason that official should recuse himself from voting on the zoning exception.
The ethanol plant issue is more difficult. The state representative is not in any way involved with giving out financial aid. He's not even part of the executive branch, which makes this decision. If a company were owned by a bunch of state representatives, each with a small share, that would look bad. But just one does not seem to me to create an appearance of impropriety.
But the governor's brother is a different story. Even though it's the treasurer who is making the decision, the governor is the head of the executive branch, and it would look bad if the treasurer used state funds to benefit the governor's immediate family. Here I think the 2% rule is not sufficient, because this ethanol plant is worth $82 million, so even a tiny 2% interest means a value of $1.6 million, and the financial aid would help a 2% owner to the tune of $120,000. Those are big numbers.
I think the state legislature should have included a value amount along with the 2% figure, and that it should have treated legislative and executive officials differently, although this might have looked as if the legislature favored its members. Perhaps it should also have considered the number of government investors along with the amount of their interest, because this also creates an appearance of impropriety, and several interested legislators would also mean that there would be a number of legislators using their influence with the executive branch, which would likely be far more than the influence of just one.
Robert Wechsler
Director of Research-Retired, City Ethics
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The City Ethics Model Code uses the following language in defining "outside employer or business":
(c) any entity located in the city or
which does business with the city, in which the official
or employee has an ownership interest, except a public corporation
in which the official or employee's ownership interest is the lesser of
(i) stock valued at less than $50,000 or (ii) five percent of the
outstanding stock.
This language could be improved (and advice is welcome). This blog entry will look at a situation in Missouri involving a financial aid program and a law that considers only percentage, not value of the stock.
According to an article in today's Southeast Missourian, the state treasurer insisted that state politicians and their immediate families have no interest in any company that gets money through the financial aid program. When an ethanol plant applied for the program, she rejected its application because its investors included the governor's brother and a state representative. The state legislature then changed the law so that no application could be rejected unless a state politician or family member owned at least 2% of the company. The brother and representative did not own this much of the ethanol plant.
Story over? No. It turns out that another company owns 10% of the ethanol plant, and neither the treasurer nor the ethanol plant could find out who owned that company. Coincidentally, the day the treasurer rejected the application (two years after it was filed) due to the lack of this ownership information, the ownership information was sent to the ethanol plant. It turns out that neither person owned enough of the 10% owner to bring his interest in the ethanol plant up to 2%.
It also turns out that the treasurer ran for governor as an anti-ethanol candidate, losing to a pro-ethanol candidate, and that her term is over in January. So the plant will almost certainly get its financial aid (saving up to $6 million in interest payments).
The problem with raw percentages like this is that the value of the interest matters too, which is why the City Ethics Model Code includes a value amount, as well. If you own 5% of a local restaurant, that might be worth $40,000. If you own 5% of a regional fast food franchise, that might be worth $200,000. If you own 5% of a fast food company, that might be worth $200 million. Percentages tell only part of the story.
A government official who owns $50,000 worth of shares of a big publicly traded fast food company means nothing to the company. It won't even know who that person is. There would be no collusion between the two. But that company means a lot to the official who owns the shares, unless the official is very wealthy. And anyone who knows that the official owns the shares will think he's biased when he votes to give the fast food company a zoning exception, for example. There's no reason why that official should have to sell the shares, but there is a reason that official should recuse himself from voting on the zoning exception.
The ethanol plant issue is more difficult. The state representative is not in any way involved with giving out financial aid. He's not even part of the executive branch, which makes this decision. If a company were owned by a bunch of state representatives, each with a small share, that would look bad. But just one does not seem to me to create an appearance of impropriety.
But the governor's brother is a different story. Even though it's the treasurer who is making the decision, the governor is the head of the executive branch, and it would look bad if the treasurer used state funds to benefit the governor's immediate family. Here I think the 2% rule is not sufficient, because this ethanol plant is worth $82 million, so even a tiny 2% interest means a value of $1.6 million, and the financial aid would help a 2% owner to the tune of $120,000. Those are big numbers.
I think the state legislature should have included a value amount along with the 2% figure, and that it should have treated legislative and executive officials differently, although this might have looked as if the legislature favored its members. Perhaps it should also have considered the number of government investors along with the amount of their interest, because this also creates an appearance of impropriety, and several interested legislators would also mean that there would be a number of legislators using their influence with the executive branch, which would likely be far more than the influence of just one.
Robert Wechsler
Director of Research-Retired, City Ethics
---
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Comments
randa (not verified) says:
Tue, 2009-10-06 14:08
Permalink
Very nice!