Proper Managing of Conflict of Interest: Why Does It Matter? (with podcast)

Conflict of interest is common in business life and occur when personal, social, financial, or political interests overlap with your work responsibilities. Examples of conflict of interest may include, in particular, personal relationship with subordinate colleague or supplier; financial investments in supplier; use of corporate information for personal gain, etc. Watch this short 2-minute video on conflict of interest on Youtube.

The above conditions do not necessarily create conflict of interest. For example, in case you work in sales and have relations with employee from operations, usually you do not have direct influence over each other’s careers. Or you can own a stake at supplier’s business, but there are little chances for you to inappropriately benefit from this as all procurement are conducted by purchasing team under strict tender procedures. But, in any case, conflict of interest should be properly managed through disclosure and other preventive means. The reason? People usually have trouble making right decisions when faced with competing personal interests, in which case the others should be involved to test person’s impartiality.

Conflict of interest might create issues for both businesses and governments, so both try to mitigate it. For instance, the Law of Ukraine “On Corruption Prevention” states that decisions made or contracts signed in the conflict of interest might be invalidated by the court. Interestingly, decisions made by a government official with respect to the person that granted a legitimate gift to such government official or its relative are deemed to be made under the conflict of interest, and, as well, might be invalidated.

According to mentioned Law, certain government officials should avoid conflict of interest, inform once they get to know about conflict of interest, do not take any actions or make any decisions in case of conflict of interest, and take measures to settle conflict of interest. Ukrainian legislation offers the following mechanisms to mitigate conflict of interest: (i) removal of the person from certain task, action or decision making; (ii) establishing external control over certain actions or decisions of the person; (iii) restriction of access to certain information; (iv) limiting the scope of working duties; (v) transfer to another position; and (vi) dismissal.

Similarly to government, international companies and progressive Ukrainian companies establish mitigating mechanisms in their codes of conduct, corporate policies or other internal documents. Among such instruments are dedicated online platforms for conflict of interest disclosure, regular internal trainings, periodic submission of declarations on conflict of interest by employees, random checks of employees and third parties with respect to conflict of interest, etc. Most companies clear conflict of interest by removal of employee from company’s decision-making process in a particular situation in which such employee has conflicted interests. Dismissals are rare and are usually applied after internal investigation when conflict of interest has not been disclosed and certain decision or actions have been taken not in best company’s interest due to such conflict of interest. 

Here is a U.S. example illustrating the importance of pure handling of conflict of interest in private sector. Last-year, SEC launched its first enforcement action for auditor independence failures due to close personal relationships involving one of the Big Four audit firms. It’s “senior partner on an engagement team for the audit of a New York-based public company maintained an improperly close friendship with its chief financial officer, and a different partner serving on an engagement team for the audit of another public company was romantically involved with its chief accounting officer.” Investigation found out that notwithstanding availability of policies requiring audit teams to access their independence, these procedures did not explicitly inquire about non-familial close personal relationships that could impair auditor’s independence.

You should remember that even if you have the best intentions and negotiated the best possible contract for your company (that most people won’t know about) with the consultant who is your closed relative (that most people would probably know), your objectivity might be compromised. In such case, you should always remember: conflict of interest does not create any issues, if properly disclosed, reviewed, and mitigated.

Stay tuned and be compliant!