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Business Ethics
Business Textbooks Boundless Business Business Ethics and Social Responsibility Business Ethics
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Business Textbooks Boundless Business
Business Textbooks
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Concept Version 11
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Conflicts of Interest

A situation in which someone in a position of trust has competing professional or personal interests is known as a conflict of interest.

Learning Objective

  • Outline how self-dealing, outside employment, family interests, pump and dumps, and gifts exemplify conflicts of interest, and differentiate that from an impropriety


Key Points

    • A conflict of interest can exist even if there are no improper acts that result from it. One way to understand this is to use the term "conflict of roles".
    • The presence of a conflict of interest is independent from the execution of impropriety.
    • A conflict of interest becomes a legal matter when an individual either tries and/or succeeds in influencing the outcome of a decision for personal benefit.
    • Common types of conflicts of interest include: self-dealing, family interests or nepotism, and the giving of gifts.
    • Conflict of interest can be mitigated by several actions including: removal, disclosure, recusal, third-party evaluations, and establishing codes of conduct.

Terms

  • pump and dump

    A form of financial fraud where the fraudster buys stocks cheaply, generates artificial excitement about them to create a temporary price increase, then sells the stocks before the price goes back down.

  • recusal

    An act of recusing. To remove oneself from a decision/judgment because of a conflict of interest.

  • disclosure

    The act of revealing something.


Examples

    • A person with two roles, such as an individual who owns stock and is also a government official, may experience situations where those two roles conflict. The conflict can be mitigated but it still exists.
    • An example of using a third-party to establish an 'arm's length' or fair transaction would be where a corporation that leases an office building that is owned by the CEO might get an independent evaluation showing what the market rate is for such leases in the locale, to address the conflict of interest that exists between the fiduciary duty of the CEO (to the stockholders, by getting the lowest rent possible) and the personal interest of that CEO (to maximize the income that the CEO gets from owning that office building by getting the highest rent possible).

Full Text

A conflict of interest (COI) occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other.

Conflict of Interest

A situation in which someone in a position of trust -- e.g., a doctor -- has competing professional or personal interests.

The presence of a conflict of interest is independent from the execution of impropriety. Therefore, it can be discovered and voluntarily defused before any corruption occurs. In fact, for many professionals, it is virtually impossible to avoid having conflicts of interest from time to time. It can, however, become a legal matter for example when an individual tries (and/or succeeds in) influencing the outcome of a decision, for personal benefit. A director or executive of a corporation will be subject to legal liability if a conflict of interest breaches his/her Duty of Loyalty.

Conflict of Interest vs. Impropriety

There often is confusion over these two situations. Someone accused of a conflict of interest may deny that a conflict exists because he/she did not act improperly. In fact, a conflict of interest can exist even if there are no improper acts as a result of it. One way to understand this is to use the term "conflict of roles".

As an example, in the sphere of business and control, according to the Institute of Internal Auditors:

"conflict of interest is a situation in which an internal auditor, who is in a position of trust, has a competing professional or personal interest. Such competing interests can make it difficult to fulfill his or her duties impartially. A conflict of interest exists even if no unethical or improper act results. A conflict of interest can create an appearance of impropriety that can undermine confidence in the internal auditor, the internal audit activity, and the profession. A conflict of interest could impair an individual's ability to perform his or her duties and responsibilities objectively. "

An organizational conflict of interest (OCI) may exist in the same way (as described above) in the realm of the private sector providing services to the government, where a corporation provides two types of services to the government that have conflicting interest or appear objectionable (i.e.: manufacturing parts, and then participating on a selection committee for parts manufacturers).

Corporations may develop simple or complex systems to mitigate the risk, or perceived risk, of a conflict of interest. These are typically evaluated by a governmental office (e.g., in a US Government RFP) to determine whether the risks pose a substantial advantage to the private organization over the competition or will decrease the overall competitiveness in the bidding process.

Types of Conflicts of Interests

These are some of the most common forms:

  • Self-dealing, in which an official who controls an organization causes it to enter into a transaction with the official, or with another organization that benefits the official, i.e., the official is on both sides of the "deal".
  • Outside employment, in which the interests of one job contradict another.
  • Family interests, in which a spouse, child, or other close relative is employed (or applies for employment) or where goods or services are purchased from such a relative or a firm controlled by a relative. For this reason, many employment applications ask if one is related to a current employee. In this event, the relative may be recused from any hiring decisions. Abuse of this type of conflict of interest is called nepotism.
  • Gifts from friends who also do business with the person receiving the gifts (may include non-tangible things of value such as transportation and lodging).
  • Pump and dump, in which a stockbroker who owns a security artificially inflates its price by "upgrading" it or spreading rumors, sells the security and adds short position, then "downgrades" it or spreads negative rumors to push its price down.

Other improper acts that are sometimes classified as conflicts of interests may be better classified elsewhere: e.g., accepting bribes is corruption; the use of government or corporate property or assets for personal use is fraud; not conflict of interest.

Codes of Ethics

These help to minimize problems with conflicts of interest because they spell out the extent to which such conflicts should be avoided, and what the parties should do where such conflicts are permitted (disclosure, recusal, etc.). Thus, professionals cannot claim that they were unaware that their improper behavior was unethical. As importantly, the threat of disciplinary action (for example, a lawyer being disbarred) helps to minimize unacceptable conflicts or improper acts when a conflict is unavoidable.

As codes of ethics cannot cover all situations, some governments have established an office of the ethics commissioner, who should both be appointed by and report to the legislature.

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