Ethics Rules

How to Keep Professors Honest

105845229 Mishkin Bloomberg
Former central banker Fred Mishkin sparked a rethink for economic analysts, but did they go far enough? Source: Bloomberg

When it comes to Germany’s biggest case of tax fraud in decades, it wasn’t just the usual banking suspects that did wrong. A number of law professors also played a rather dubious role in the so-called “cum-ex scandal,” a form of illegal dividend stripping that cost the German taxpayer tens of billions of euros in lost revenue.

Law professors were specifically hired by bankers to write expert reports and even publish academic articles claiming that the tax tricks, which involved buying and selling millions of shares around the time dividends are paid out, were legal. They made no mention of their financial conflicts of interest. But then, there was no law or code of ethics requiring them to do so.

The financing may have been secret, but the problem wasn’t. Back in 2013 the German Science Council warned that the rise in consulting work was jeopardizing the academic independence of legal experts. They cited the German association for economists, which had added rules on conflicts of interest to its ethics code in 2012, as a model of good practice.

It took Hollywood to really shake up the profession on both sides of the Atlantic.

German publications have been relatively lenient compared to the United States and Britain.

In the Oscar-winning film “Inside Job,” Fred Mishkin, a former member of US Federal Reserve, nervously tries to explain why he boasted about the outstanding financial condition of Icelandic banks – shortly before they collapsed – in return for a hefty fee. He was hardly the only example of the murky relationship between an academic’s research activities and their financial interests.

The American Economic Association subsequently called upon its members to disclose any conflicts of interest in their essays and other public statements. The German equivalent, the VfS, soon followed suit. “Circumstances that could even potentially lead to conflicts of interest or bias should be identified in academic works,” the ethics code now demands of all VfS members, and specifically of the publishers of the two association-linked publications. The same goes for any public statements they make.

The code has since been held up as an example by other branches of German academia. But there’s just one problem: Five years on, it’s proven relatively ineffective in changing habits.

German publications have been relatively lenient compared to the United States and Britain, where it’s now standard practice in professional journals to print a disclaimer that either discloses conflicts of interest or states that no such conflicts exist. Some universities, including Columbia University, where Mr. Mishkin teaches, have taken it a step further and require their professors to disclose, on their website, all commitments and financial interests that could generally influence their research.

Such disclosures are still a rarity in many German journals, including those published by the VfS itself. It’s not uncommon to find an academic paper extolling the advantages of “factor investing,” for example, without expressly pointing out that the author happens to be a senior quant researcher at an investment company specializing in factor investing. Or an academic may write about regulation of the power grid without mentioning that he is the managing director of a consulting firm specializing in energy grids.

This may finally be about to change. Urs Schweizer a new ethics ombudsman for the VfS,  says he will submit plans to toughen up the guidelines at least for the two association-backed publications. He argues disclosure rules are especially relevant to journals that publish articles on economic policy. “Economic policy assessments and recommendations are rarely based on a one-to-one implementation of insights gained in a purely academic manner,” he said, suggesting readers should even be made aware of an author’s ideology.

Some others are joining the international moves toward disclosure and are busy toughening up their own rules, but not everyone sees the need for more transparency. Giacomo Corneo of the Free University of Berlin, who publishes the Journal of Economics, says disclosures are “irrelevant” for his journal, for example, because they only publish models with results that are proven mathematically. “Anyone can verify the accuracy of statements that are made,” he said.

PWP publisher Karl-Heinz Paqué of the University of Magdeburg also insists the information is already publicly available: “Everyone is free to read about an author’s possible activities on the Internet or, if he or she disagrees, to publish them in the PWP.”

If only the authors always published their ‘activities’ on their own websites.

 

Norbert Häring is a Phd economist who covers academia for Handelsblatt in Frankfurt. Christopher Cermak and Christopher Sultan adapted this article for Handelsblatt Global. To contact the authors: haering@handelsblatt.com and cermak@handelsblatt.com

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