We continue to hear about the impact of apparent or real conflicts of interest — whether in government, in business, or in other organizations.  It is an issue of significant importance.  Within an organization, a perceived or real conflict of interest can undermine the very integrity of the organization and a specific person’s ability to act in a manner consistent with the organization’s interests.

Scandals stemming from conflicts of interests have occurred throughout history and brought down leaders and even companies (e.g. Enron).  CEOs and Board Chairs have fallen victim to such scandals themselves by improperly managing or failing to disclose real conflicts of interest.

Companies that ignore the issue or fail to devote adequate resources to the issue are jeopardizing their culture of integrity and ultimately their credibility.  Leaders and employees are acutely sensitive to such issues and can see through situations where conflict of interest questions arise.

A conflict of interest in business occurs when an individual’s personal interests may conflict (or appear to conflict) with the professional interests owed to their employer or the company.  In this situation, there is a risk that  the individual may choose to advance his/her personal interest to the detriment of the business’ needs.  Corporate board members and officers owe a fiduciary duty to their organization and have a basic duty of loyalty to the company.  If a director takes an action inconsistent with this duty to benefit himself or herself, they are harming the company with a conflict of interest.

It is easy to see how such a conflict may occur.  A board member of an auto insurance company may vote to lower the premiums of the company’s insurance, knowing that he has a separate business interest involved in auto rentals and will personally benefit from the lower premium rate.  The board member has a personal vested interest in the business decision to lower the rate of auto insurance premiums.

When this occurs, the director has to first disclose the existence of the conflict — i.e. his potential personal benefit from a business decision.  In this case, the disclosure brings transparency, light to the situation, so that the nature and extent of his conflicting interests can be assessed for purposes of determining whether or not he should recuse himself from the consideration of the organization’s decision to lower its premiums.

Companies committed to conflict of interest risk management execute an annual disclosure requirements with continuing disclosure obligations. These company-wide disclosure protocols are designed to unearth potential conflicts, assess the impact and then decide on a mitigation strategy.  Not all conflicts require a heavy-handed response.

By conducting a robust annual disclosure process, a company demonstrates the importance of objective decision making and conduct, free from personal interests and influence.  Along with this robust process, a company should adopt a separate and perhaps more stringent policy that applies to the board and its senior executives.  The potential harm from these board and senior executive conflicts can be far-reaching to the company’s integrity.  If a company ignores this risk of conflicts at the board and senior executive level, it does so at its own peril.

In the business world, personal conflicts, or self-dealing, occur frequently.  A company professional may engage in a transaction with anther organization that benefits the individual but harms the company.  Or, the individual may have a personal interest in the counterparty to the transaction so that he/she benefits from both sides of the transaction. Gift-giving behavior can create an actual or perceived conflict of interest, especially around holiday time, when a company official accepts a gift from a client or vendor.

Companies often suffer from the hiring or favoritism of a relative or spouse,  In these circumstances, favorable treatment of a family-member or a person with whom a manager is having a personal relationship can create a damaging conflict of interest.  In these circumstances, disclosure is often inadequate to mitigate the risks to the company, just ask the former CEO of McDonald’s who had an improper personal relationship with a subordinate who worked for the CEO.