Compliance Glossary

Conflict of Interest

What is a Conflict of Interest?

A conflict of interest happens when an individual involved in multiple interests finds themselves in a decision-making situation where serving one of those interests would harm another. Interests include many different types of commitments, duties, obligations, and values, such as:

  • Contractual or legal obligations (to business partners, vendors, employees, employer, etc.)
  • Loyalty to family and friends
  • Fiduciary duties
  • Professional duties
  • Business interests

An individual’s potential interests can be grouped broadly into 4 types:

  1. Direct Interests – An individual’s own personal self-interest, family-interest and personal business interests.
  2. Indirect Interests – Personal, family, and business interests of people or groups with whom the individual associates.
  3. Financial Interests – Involve a gain or loss of money or value.
  4. Non-financial Interests – Involve personal or familial relationships and other potential sources of bias.

Conflicts of interest create a risk that the individual will act in a way that betrays their duties or obligations, usually to their primary employer. 

Three Common Types of Conflicts of Interest

Many different types of corruption stem from conflicts of interest that arise between an individual’s professional duties and direct or indirect interests.

Nepotism

Nepotism happens when an individual in charge of a hiring process chooses to award a job offer to someone in their own family or with whom they have a personal relationship. In this case, the individual’s duty to their employer (choosing the most qualified or best candidate for the role) may conflict with their loyalty to a family member (choosing a family member to receive the benefits of the job instead of an unknown person). 

Self-Dealing

A corporate fiduciary is legally obligated to act in the best interests of the corporation and its shareholders. When a fiduciary acts in their own best interests instead of in the best interests of their client, this is known as self-dealing. Self-dealing involves a conflict of interests between an individual’s fiduciary duties (legal obligation to the client) and financial interests (desire for personal financial gain). 

Business Relationships

Many conflicts of interest stem from personal business interests. An individual who works for two businesses in the same industry, or who works for the public sector while maintaining interests in companies that bid on government contracts may experience a conflict of interest when their job duties and business interests come into competition. In addition, a conflict of interest could be sitting on the board of another company, owning stock in another company, and deciding which vendor gets a contract.  

What is an Example of a Conflict of Interest?

Conflicts of interest can appear in any decision-making process where the individual making the decision has multiple interests at stake. Some common situations could include:

  • Hiring an unqualified friend or relative to fill a position instead of the most qualified candidate.
  • Preferentially awarding a government contract to an organization in which you or someone you know owns stock.
  • Performing part-time or contract-based work for a competitor organization

A famous conflict of interest took place in 1967 when a group of Harvard scientists were paid by the Sugar Association to publish a paper that minimized the relationship between heart health and sugar consumption. These scientists violated their obligation to publish truthful and reputable research in order to support their personal financial interests. 

How to Handle an Employee Conflict of Interest

Organizations should establish a clear Conflict of Interest policy that describes how such conflicts will be handled. Employees should be encouraged to talk to their managers and voluntarily disclose any perceived conflicts of interest.

When a public or private sector employee experiences a conflict of interest, they may resolve the situation by choosing to either: 

  1. abandon one of the conflicting roles, or 
  2. recuse themselves from the relevant decision-making process
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