What is a Conflict of Interest?

Compliance Knowledge Base | Ethics

Posted by: India Wentworth Published: Tue, 16 Jul 2019 Last Reviewed: Tue, 16 Jul 2019
What is a Conflict of Interest?

A conflict of interest is when an individual has competing interests or loyalties. They could have two relationships that might compete with each other for that person's loyalties – this could be a conflict between loyalty to an employer and loyalty to a family member. The conflict of interest causes an employee to experience a struggle between diverging interests, points of view, or allegiance.

The key thing about a conflict of interest is disclosure. If disclosed beforehand, and the person is given the all-clear to continue, then the conflict of interest is not a problem – and therefore legal. However, if the conflict of interest activity was disapproved and the individual continued anyway, or never disclosed it in the first place, it could be considered illegal.

The main thing that gets people in trouble is failing to disclose before engaging in the activity. Additionally, a lot of the time there is a failure to document the decision for record-keeping purposes.

How do they occur?

A conflict of interest can exist in many different situations. The easiest way to explain the concept of a conflict of interest is by using some examples:

  • A public official whose personal interests conflict with his/her professional position
  • A person who has a position of authority in one organization that conflicts with his or her interests in another organization
  • A person who has conflicting responsibilities
  • There are different activities that can create a possible conflict of interest:
  • Nepotism is the process of giving favours to relatives or close friends, usually by hiring them. This classes as a conflict of interest because the relative may not be the best person for the job, yet because of the personal link, you are prioritising them over other candidates.
  • Self-dealing is when someone high up in a company acts off their own interests rather than the interests of the company.

Employees need to avoid any behaviour or choices that could potentially signal a conflict of interest. This is because employee reputation and trustworthiness could be damaged as a result.

Here are some examples of conflicts of interests:

  • A manager is promoted and ends up being his wife's boss
  • A lawyer represents a client whilst secretly accepting money from the opposing side of the case
  • An employer priorities his brother-in-law's decorating company to carry out the refurbishment of his business without telling anyone of the link
  • An employee starts a company that provides similar services to similar clients as those of her full-time employer (This is even worse when she has had to sign a non-disclosure agreement for her full-time employer)
  • An employee works part-time in the evening for a company that makes a product that competes with the products of his full-time employer
  • An employee accepts free gifts from a training and development company and then recommends the purchase of these products without comparing them to comparable products from other vendors
  • An employee sets up a personal website on which he sells his employer's software products
What is a Conflict of Interest?

How can they be managed?

Organisations tend to have policies and procedures in place to avoid conflict of interests occurring in the first place. For example, many businesses are against hiring relatives because of the potential problems it can cause.

Members of the board of directors have to sign a conflict of interest policy statements, and if a conflict surfaces, they could be kicked off the board, and possibly even sued – it is something to be taken seriously.

One common conflict for board members is insider trading. This is when they could hear of a potential deal that might affect the selling prices of company stock – their influential position means that they can exploit the information for their own personal gain.

The appearance of a conflict of interest is when something looks like it could potentially become a conflict of interest. For example, if a business executive hires her daughter, it already looks like it could be a conflict of interest. However, it isn't automatically a conflict of interest, it just looks like one. Unless the daughter is given preferential treatment, such as having a higher salary than her equals, then it isn't a conflict of interest. If the executive isn't in the position to give favours, then there's no problem – but it will always be a tricky situation because of how it looks from the outside.

To avoid a conflict of interest occurring, it is easiest to just avoid the appearance of a conflict in the first place. Sometimes just appearing to have a conflict is enough to have negative consequences. You should set up strong policies and procedures for all types of conflicts, and then enforce these structures from the top to the bottom of the company. By doing this, you can maintain a strong company reputation, and make effective ethical decision-making.

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