Why Companies Should Be Thinking About Conflicts of Interest

Compliance officers deal with a wide array of unwelcome news, but one phrase probably induces headaches more quickly than anything else: “that’s a conflict of interest”. With those five words, a compliance officer’s day can tumble down a rabbit hole of allegations, fact-finding, legal analysis, ethical debate, and awkward conversation.

Conflicts of interest (COIs) can come from any direction, involve any employees or third parties, and generally prove maddeningly difficult to resolve. And in our ever more transparent world, companies cannot afford not to think about conflicts of interest. COIs can scorch a carefully cultivated corporate culture of ethics and fair dealing.

Let’s examine a few specific reasons why companies should devote more time and energy to thinking about conflicts of interest.

A Conflict of Interest Can Be Illegal

Within the last several weeks, we saw the Securities and Exchange Commission sanction audit firms for violating auditor independence rules (which is the industry’s way of describing conflicts of interest). Those conflicts cost each firm time, money, and embarrassment—and they’re only two small examples of the enforcement risk here.

In healthcare, physicians labor under the Stark Law. That law bans doctors who accept Medicare or Medicaid payments from referring patients to healthcare facilities where the doctors have some financial or ownership stake. In securities trading, stockbrokers now face Regulation Best Interest, which requires them to disclose potential conflicts of interest about the financial products they sell to customers.

An individual who violates COI laws can face civil or even criminal penalties. A company that ignores compliance with COI laws can face the same. 

Conflicts Damage Reputations

The business world has been riveted recently by the troubles at WeWork, which just canceled its much-anticipated IPO and forced its CEO to resign. One big reason the CEO was shown the door: conflicts of interest between WeWork’s corporate assets and his other business holdings.

None of those conflicts is necessarily illegal; no regulators have imposed any sanctions against WeWork but too many potential investors in the public markets didn’t like what they saw in those relationships, which soured their interest in a potential IPO, which forced WeWork’s board to take action.

The longer a COI goes unchecked, the more it festers into something executives cannot ignore. Even without the threat of regulatory enforcement, the world has a habit of enforcing its own views about a conflict of interest eventually. Those reckonings can be just as expensive and time-consuming as any regulatory action.

Conflicts of Interest Can Confuse Employees

Compliance officers spend endless hours developing an ethical corporate culture and training employees about how to behave in certain situations. COIs undermine that message.

Fundamentally, a conflict of interest telegraphs the idea, “My personal benefits and concerns can supersede the values of honesty and rules-based business practices we profess to follow around here.” Once employees see ethical culture disregarded that way, they inevitably will start to contemplate disregarding ethical culture in other ways. You can avoid this fate by taking proactive steps to ensure COIs are efficiently handled in your organization.

Conflicts of Interest Are a Slippery Slope

Per our point above, COIs undermine the arguments for an ethical culture. Once that culture starts to atrophy—once employees sense that talk about ethical culture is only talk, while COIs take root—employees start to place their own interests and benefits ahead of ethical values, too. Why wouldn’t they?

Then comes greater risk of bribery, contract-fixing, harassment, or other workplace policy violations, disinterest in corporate objectives, or who knows what else. Left unattended, conflicts of interest show employees that personal judgments can supersede corporate culture and compliance goals. There’s no end to the mischief that message creates.

Preventing Conflicts Disciplines the Ethical Mind

For all our talk about how corrosive conflicts of interest can be, fighting them is not easy. Companies need to understand what their potential COIs might be, as well as the proper resolution for them. In a roundabout way, compliance officers should welcome potential COIs, because they force the company to consider how to embed its ethical goals into daily business operations.

That’s a good thing. Conflicts of interest are a constant threat, so working to prevent them becomes a constant exercise in thinking about ethics and compliance: what that means to the company, how commitment to compliance should work, what to do when it doesn’t. Paying attention to conflicts of interest fosters a culture of compliance—which is the thing we all supposedly want to achieve.

So if anything, conflicts of interest should be seen as an opportunity for the compliance program to roll up its sleeves and get to work. There’s lots to do.