Why Seemingly Innocent Actions Can Be Conflicts of Interest

Imagine you discover a financial opportunity that promises to benefit yourself, your family or your friends. The only drawback is that this opportunity would put your company or its clients at a slight disadvantage. In this situation, your loyalties are torn between personal and professional duties -- what’s known as a conflict of interest.

Most of us have seen or heard about such conflicts -- arrangements that appear too cozy or strike you as taking advantage of a situation. Being able to clearly identify and discuss conflicts of interest is essential in order to protect your organization from corruption.

Why Conflicts of Interest Matter

Let’s say you’re hiring for a management position at your company, and happen to run into a close friend from college. He tells you his daughter is looking for a job, and that he’d really appreciate it if you’d hire her. Bowing to the social pressure, you do your friend a favor and hire his daughter. She turns out to be a great manager and an asset to the company.

On the surface, it may seem like you’ve done the right thing: You’ve helped a friend, and the company. Unfortunately, your actions still qualify as cronyism, and hiring family and friends may be a conflict of interest. Hiring people due to their social connections harms companies because it can exclude more qualified candidates who would have been more beneficial to the company.

But wait -- didn’t we say that the friend’s daughter was actually a great manager? That doesn’t necessarily matter: Your actions don’t need to actually harm the company or have bad intentions to constitute a conflict of interest. It comes back to split loyalties: simply being in a position to benefit yourself, your friends or your family, at the expense of the company.  

Penalties for Conflicts of Interest

Conflicts of interests are considered corruption -- a serious matter for all concerned. And compliance professionals have a responsibility to seek out and address any instances of such corruption.

Earlier this year, the head of the UK’s central bank had to resign over just such a matter. Charlotte Hogg, a Deputy Governor of the Bank of England, resigned when it was revealed that her brother was an executive at Barclays, one of the large banks Hogg regulated. The issue wasn’t whether she made decisions that benefited or harmed Barclays. What mattered was that she kept this potential conflict of interest secret. The perception of corruption was damaging enough to require her resignation.

As the above example shows, people who have conflicts of interest could face serious penalties. These range from disciplinary actions to loss of a job, from legal actions to harm to one’s professional reputation.

Identifying Conflicts of Interest

Nepotism is a well-known example, but it’s just one type of conflicts of interest. The most common conflict arises when a person has a personal interest in a company transaction, and is in a position to influence that transaction or arrangement. Again, the interest may be actual or potential, direct or indirect -- and it doesn’t need to cause harm to the company.

Here are four other types of conflicts of interest that may arise in your company:

  • Diversion of business opportunities: In the course of their work, an employee comes across a business opportunity of potential interest to the company, such as an investment, but decides to take it for themselves without prior permission.

  • Accepting benefits from third parties: Accepting gifts, entertainment and hospitality from other parties raises conflicts of interest, because the social pressure to return the favor conflicts with an employee’s duty to do what’s best for the company. In some cases, accepting such courtesies can even represent a breach of anti-corruption laws.

  • Close relationships with competitors, regulators or business partners: An employee is involved in a relationship between your company and its business partners, regulators or competitors, and has a close personal relationship with someone who works for or is involved with the other organization.

  • Outside employment and professional activities: This may sound obvious, but employees must avoid taking on outside employment and professional activities that would in any way compete with the needs of your company. Upon leaving the company, employees may be prohibited from soliciting your clients or recruiting your other employees.