What is a conflict of interest?
Family, friendships, finances, and self-serving interests are common factors that lead to conflicts of interest.
Actual versus perceived conflicts of interest
An actual conflict of interest is one that already exists, while a perceived conflict of interest is when someone could reasonably think there's one.
A low-stakes example of a perceived conflict of interest is when a company draws winners for prizes at its annual Christmas party, and the big boss just so happens to win the expensive trip to Hawaii. Even if the draw is conducted fairly, the outcome is likely to leave the rest of the employees a little suspicious about the process. In this case, the big boss should sit this one out.
A more serious perceived conflict of interest example is a retail store using a third-party delivery service that employs the store's owner's sibling. It could appear to be a conflict of interest even if the delivery service is the best option available and the sibling isn't in a position to benefit from the arrangement directly.
When does a conflict of interest occur?
Nepotism and romantic relationships
Nepotism occurs when a person of authority exploits their position to favor friends and family members. Similarly, a person of authority dating a subordinate can also lead to favoritism.
In both instances, special treatment in the form of undeserved hirings, promotions, or lenient treatment when not meeting expectations can take place. The situation can also put coworkers and supervisors in an awkward position because they might hesitate to give an honest assessment of the friend or family member.
Another example would be an employee dating a company’s client. The relationship could affect the employee's judgment. They may offer the client deals that other clients wouldn’t usually receive, which conflicts with the employer's interests
Competing with an employer
It's especially an issue if the employee uses company hours, resources, or skills learned on the job to work on their own company or build their own clientele. Many employers ask new employees to sign a Non-Compete Agreement to avoid this situation.
An employee can also indirectly compete with their employer by consulting for a competitor. Not only are they hurting their employer by helping another company, but they're likely getting paid to do so as well.
Sharing confidential information
That’s why Confidentiality Agreements (also known as Non-Disclosure Agreements) are also commonly included in Employment Contracts.
Giving gifts from clients
Accepting the tickets is a conflict of interest. It might make the client feel obligated to continue doing business with the salesperson even if it's not what's best for the company.
It also creates a possible perceived conflict of interest. Even if the client can accept the tickets and continue making objective business decisions, other people could perceive their decision-making as biased. Perception is almost as important as reality, and no one wants their credibility questioned.
- Taking corporate opportunities
- Using corporate funds as a personal loan
- Advising a client to transfer money, real estate, or other assets to the fiduciary
- Advising a client to purchase more expensive products to earn a larger commission
Strategies for avoiding conflicts of interest
Signing Non-Competes and Non-Disclosures
Companies use Non-Compete Agreements to ensure their employees don't enter into competition with them. The employee typically agrees not to work for competitors in a specific geographical area for a period of time. However, most states require enforceable non-competes to be reasonable in time, space, and scope. Non-Disclosure Agreements (NDAs) establish a written guarantee from an employee that they won’t share confidential information with unauthorized people or organizations.
In the case of both agreements, a company could take legal action against any employee who breaks the agreement.
How to handle conflicts of interest when they occur
Establish formal channels for transparency and disclosures
For example, an employee might avoid mentioning a conflict so they can participate in a project that will further their career. If they know their employer will take actions in the future to minimize the impact of the missed opportunity, the employee is more likely to be transparent.
Conversely, it’s a good idea to make whistleblowing safe as well. The fear of being labeled a tattletale is a powerful motivator for keeping quiet. Formal channels should exist for an employee to come forward with information about a coworker or company practices without backlash.
Conflict of interest policy
It can also ensure the company treats every case objectively. It’s especially important when the conflict involves people of authority.
A conflict of interest policy should include:
- Purpose: Why the policy exists and what its function is.
- Duty to disclose: An employee’s obligation to provide information relevant to a conflict of interest.
- Investigations: How the company will look into a conflict of interest allegations.
- How to address it: A guide on formally reaching out to an employee who may be involved in a conflict of interest.
- Disciplinary action: The consequences for being involved in a conflict of interest.
Resolve or mitigate the issue
Depending on the conflict's severity, the company can give the employee a warning or fire them. The company can use an Employee Warning Letter or Employment Termination Letter to do so.
The company can also decide no disciplinary action is necessary, and the situation only requires internal adjustments. In that case, it can ask the employee to relinquish the conflicting interest, take them off projects that can create a conflict, or restrict their tasks on specific projects.