How to Properly Manage Corporate Conflicts of Interests

February 14, 2024

From the biggest corporate giants to small businesses that are well on their way to success, no organization is immune to conflicts of interest (COI). 

A conflict of Interest emerges when personal circumstances conflict with someone’s ability to perform their professional duties. This happens when a person prioritizes personal gain over their commitment to a company in which they are a stakeholder. 

A COI challenges an employee’s ability to maintain unbiased judgments, decisions, and ideas. Not all cases of conflict of interest are strong and clear. Sometimes, these situations can take a much subtler form. Because these subtle instances come across as minor or insignificant, they often go unflagged. 

At the end of the day, conflicts of interest can severely hurt an organization and even damage its bottom line. When not identified and managed well, COIs can bring serious reputational harm, financial losses, and criminal sanctions to a company. This is why so many corporate leaders deploy solid systems in place to manage (and avoid) them. 

Here, we explore the different types of conflicts of interest, the impact they can have on businesses, and the best practices to avoid them. 

Who Can Have A Conflict of Interest? 

Anyone – from entry-level employees to C-suite execs, business owners, leaders, and other stakeholders – at an organization can slip into a COI situation. Board members have an even bigger responsibility to avoid COIs because they have certain important duties to the company. It’s vital for them to prioritize action that’s in the best interest of everyone over their own personal interests. Employees must also know exactly what situations are considered a conflict and how to avoid them. Many organizations include an elaborate section explaining COI in their employee handbook. 

Types of COIs 

Conflicts of interest come in all shapes and sizes. Spreading an organization-wide deep understanding of the types of COIs is an important first step in avoiding them. The three main types of conflicts of interest include:

Financial Interests 

Financial COIs emerge when a person prioritizes their personal financial gain over their professional duties. Here are a few examples of financial conflicts of interest:

  • Self-dealing. When someone in a financial role exploits their knowledge of the organization’s finances to benefit themselves financially. 
  • Insider trading. When someone has access to confidential information and uses it to benefit themselves and others they favor.
  • When an employee shares confidential company financial information with a competitor.
  • When a bookkeeper uses their organization’s bank accounts for personal use 
  • When an executive with a large number of shares of a company decides to sell their holdings after finding out that their business will take some steps that may bring down the price of the stock soon.

Professional Interests 

Professional conflicts of interest are a result of a leader favoring the success of someone they like over the business as a whole. An example of professional COI would be promoting an employee simply because you like them instead of offering the position to someone who actually deserves it. 

Personal Interests 

This is when someone puts their own personal interests over their company’s interests. Nepotism is a common example of personal COI. These circumstances arise when a hiring manager, business owner, or executive hires people from their family or friend circle even when the candidate is not qualified for the position. Other examples of personal COIs include:

  • Letting an employee you favor leave early 
  • Dating someone who reports to you 
  • Bribery 
  • Working for a competitor while being employed in another organization 

Note that a conflict of interest can also fall under all three types. For example, starting a company that becomes a direct competitor of the organization you’re employed in is an example of personal, professional, and financial conflict of interest. 

Risks of Conflict of Interest 

While some cases of conflict of interest may not be outright illegal, they can still bring heavy losses for both the employee and the employer. COIs can cause risks such as:

  • Legal losses and liabilities wherever contracts are involved. 
  • Financial losses when there are breaches of contracts with suppliers, partners, or employees.
  • Reputational losses that cause your employees, stakeholders, customers, and partners to perceive your business as unethical. 

Your Guide to Mitigating Conflict of Interest 

Knowing how to keep conflicts of interest at bay can protect businesses from unethical activities, legal and financial losses, and reputational damages. In a healthy business, everyone, including employees, business owners, stakeholders, and the leadership knows how to avoid COIs and prioritize the overall well-being of the organization. Once you clearly define what exactly your organization considers to be a conflict of interest, the next steps would be to:

Craft a COI Policy 

Your policy should define conflicts of interest in relation to everyone’s role within the organization. This policy must also outline the disciplinary actions that would be taken should someone choose not to reveal a conflict. Finally, your COI policy must offer clear steps for your people to disclose anything they might consider a conflict. 

Educate your People 

This involves training your employees, managers, leaders, and stakeholders to spot, disclose, and avoid COIs. Your people must also have a clear understanding of the consequences that come with engaging in COIs.

Foster a Culture of Ethical Decision-Making 

Encouraging your workforce to put their best ethical foot forward for every decision they make is one of the most impactful ways to avoid instances of COI. Your employees, board members, and everyone in between must have a mindset that prioritizes company values over personal gains. 

Allow Transparent Communication 

For conflicts of interest to come out of hiding, your people must first feel free to disclose them. This is where the need for fostering a culture of transparent communication comes in. By making your employees feel comfortable communicating potential conflicts of interest, such as a personal relationship with a vendor, you can spot and mitigate risks before they become a reality. 

Over to You!

Conflicts of interest are a form of unethical action that is insidious for business. Mitigating COIs starts with understanding exactly how conflicts unfold. It is vital to educate your people on how conflicts of interest work and encourage them to disclose conflicts before they transform into financial, legal, and reputational damages.