Conflict of Interest: Definition, Examples and Tips
Updated October 17, 2022
Published January 13, 2021
Jamie Birt is a career coach with 5+ years of experience helping job seekers navigate the job search through one-to-one coaching, webinars and events. She’s motivated by the mission to help people find fulfillment and belonging in their careers.
Some situations present employees with a possible conflict of interest. These situations can involve both personal and professional loyalties, but they almost always have a professional impact. Understanding both types of potential conflicts of interest can help you avoid them.
In this article, we explain what a conflict of interest is, describe examples and provide a list of tips to avoid these challenging situations.
A conflict of interest is a situation in which an entity has competing responsibilities or interests.
In business, a conflict of interest arises when a person's personal interests conflict with their professional obligations.
Conflicts of interest often have legal consequences.
What is a conflict of interest?
A conflict of interest is a situation in which a person or organization has two or more competing interests. When a conflict of interest occurs, the person or team can't perform their duties appropriately because it could mean betraying their interests to one of the parties within the situation. When such a situation arises, it's often a legal requirement for the primary party to remove themselves.
For example, in the public sector, judges have the legal obligation to recuse themselves if they have a link to one of the parties in a case over which they're presiding. If a legislator attempts to profit from insider knowledge, this is an example of insider trading, an illegal activity. In the private sector, if a company has proof that a board member profited from their role on the board, the company can take the board member to court.
What are interests?
Interests can include many different types of commitments, duties, obligations and values, such as:
Contractual or legal obligations
Loyalty and relationships to family and friends
Reputation and status
For example, you may have a loyalty to the company for which you work but also to your family's business. If those two companies have disparate goals that directly clash, that could be a conflict of interest for you.
You can categorize an individual's potential interests into these four types:
Direct interests: These include an individual's own personal self-interest, family obligations and personal business interests.
Indirect interests: These include the personal, family and business interests of people or groups with whom the individual associates.
Financial interests: These include anything of monetary value, including services rendered, commercial dealings or share ownership.
Nonfinancial interests: These involve personal or familial relationships and other potential sources of bias.
6 common types of conflicts of interest
Conflicts of interest can take a variety of forms and involve multiple interests, both personal and professional. While there are many highly specific instances of conflicts of interest, there are some that occur more frequently than others. Review this list with examples of a few of the most common types of conflicts of interest:
Self-dealing occurs when a person, usually a high-ranking official within a large corporation, acts in their own best interest in a transaction at the expense of the business or their clients. They may use the company's money or access for personal betterment at the expense of the business. It represents an illegal act that can lead to litigation, penalties and termination of employment for those who commit it.
Example: The chief financial officer, or CFO, at a manufacturing firm, has recently learned that the company plans to acquire a company called Arnold Production. The CFO uses this information to bolster their stock portfolio before releasing the news of the acquisition. This insider trading is not only a conflict of interest, but it's also illegal.
Nepotism is a form of favoritism for family members or friends. In this situation, a person with power at a business awards favors, benefits or job opportunities to their family members based on the relationship rather than actual qualifications.
Example: The human resources manager at a rental company is in charge of hiring a new employee in their customer service department. One of the candidates is the HR manager's child. Despite the child's lack of experience in the industry as compared to the other top candidates, the HR manager decides to hire their child, anyway.
3. Excess compensation
Most common in the nonprofit sector, excess compensation occurs when the organization pays an employee far more than they do other, similar roles or comparable roles in other organizations. The employee is usually high-ranking, with substantial social or political influence.
Example: A national nonprofit organization that helps pair underprivileged job searchers with Fortune 500 companies in need of employees, needs a new director of philanthropy. It selects a former White House staffer with substantial political connections and offers them a salary two times that of its previous director of philanthropy.
4. External employment
When someone works more than one job in the same sector, a conflict of interest can arise. If working for one company gives you access to proprietary information, another other business doesn't and you use that information for your second job, that's a conflict of interest. This is especially true if you've signed a non-disclosure agreement.
Example: Alex is an employee at two different heating and air companies. One is slightly less expensive for customers. Alex has started telling customers from the other higher-cost company they should call the lower-cost one and ask for him to save money.
Accepting gifts from external interested parties to gain an advantage is a conflict of interest. While sometimes people give gifts without an ulterior motive, it can improperly influence someone's judgment on whether it's valuable.
Example: Pat is a real estate agent who works with several mortgage brokers. One of their regular brokers gives Pat a gift to encourage them to send clients to their brokerage. Pat accepts the gift and ensures their buyers work with that broker for their mortgage needs.
6. Stock manipulation
A very specific but highly impactful conflict of interest is stock manipulation. It occurs when a stockbroker uses their position to promote the value of a security they own to artificially inflate the price and then sell their shares at a profit.
Example: Henry owns a substantial amount of shares of a security. Hoping to make money on the investment quickly, Henry spreads rumors about its valuation and encourages peers to purchase this security. It quickly increases in value, and Henry cashes out, making a substantial profit.
Tips for avoiding a conflict of interest
Use these tips to help you avoid potential conflicts of interest in your professional life:
Know your company's policies. Some companies have a strict non-compete policy, which helps eliminate the potential for conflicts of interest, such as working for a competing business.
Ensure transparency. If you're in charge of managing funds or working with external interested parties, ensure your actions are transparent and well-documented to avoid the implication of impropriety.
Remove yourself. You may find yourself in a situation in which you have competing loyalties. If this is the case, speak to your supervisor about removing yourself from the situation to avoid a conflict of interest.
Decline when necessary. It might be necessary for you to decline a position or assignment that could put you in a conflict of interest.
Disclose as needed. You may want to take on an assignment or role that has the potential for a conflict of interest. In this situation, disclose your connections and loyalties to all internal and external parties for approval.
This article is for information purposes only and is not intended to constitute legal advice. Consult with an attorney for any legal issues you may be experiencing.
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