What is a Conflict of Interest? You’ll Know it When You See It.
In 1964, Supreme Court Justice Potter Stewart when ruling on what constitutes obscenity wrote, “I know it when I see it”. Determining whether a proposed business relationship is a conflict of interest can likewise be subject to interpretation. Most business managers and leaders understand the basics of what creates a conflict. A conflict of interest is when a person making a business decision is unable to make an objective, well-reasoned decision because of some personal or self-interest that impairs their ability to act objectively and in the best interest of their employer. Awarding business to a family member, friend or someone who can propel the decision-maker’s self-interest is one example. Hiring or promoting someone over other, more qualified or deserving candidates due to some type of personal relationship is another. Most conflicts of interest that cause the most problems are those that the decision-maker and beneficiary keep secret. This can be out of a lack of understanding of what constitutes a conflict or a deliberate act of omission.
In its 2023 Risk & Compliance Hotline & Incident Management Benchmark Report, compliance management software company NAVEX detailed its study of 3,430 organizations that received a total of 1.52 million individual hotline reports. In 2022, 7.87% (over 119,000) of the 1.52 million hotline reports alleged conflicts of interest. Conflicts of interest frequently occur in the procurement of goods and services, hiring, compensation and promotion decisions and customer acquisition and business development.
When investigating conflicts of interest, it is important to approach the case objectively and to gather and analyze as much information as possible to determine whether the conflict exists and if it is a breach of the company’s compliance program. The first question to ask is: “does the code of conduct expressly prohibit conflicts of interest and does it clearly define and provide relevant examples of the types of conflicts that could arise within the business?” Next, determine if the conflict was disclosed before the transaction went forward and whether the management team was given an opportunity to evaluate the specific circumstances of the potential conflict. Another important consideration is whether the decision maker, someone in their chain of command or a family member was likely to receive a financial benefit from the transaction under consideration. The merits of the proposed transaction are also an important factor to consider. Were any other candidates even considered? Was the proposed counterparty to the transaction the most qualified of the other options? Most importantly, would an objective third party conclude that an individual’s competing personal interests’ conflict with their duty to act in the company’s best interests?
When investigating potential conflicts of interest, any prior or current relationship between the parties may be relevant. Background investigations that include social media analyses can provide useful information in exposing relationships between the parties. Background investigations can reveal the names of household members and whether there is an undisclosed familial or romantic relationship, common addresses or surnames, jointly held assets or overlapping employment or schools. Social media friend relationships, likes, comments, posts and photos can likewise be revealing. If two people who are supposed to be at arm’s length in a transaction or employment decision are linked in social media, depicted in photos together at social gatherings or appear to have a more substantive relationship with one another than was disclosed at the outset, that could be problematic.
Romances are a reality of the workplace. Even if there is no prohibition against such relationships, they can lead to conflicts of interest. For example, onboarding a vendor in which the approver’s romantic partner has a financial interest creates a clear conflict of interest. Even if the conflict is disclosed at the outset and approved, it will be difficult for the approving party to be objective in holding that vendor accountable for their performance due to the blurring of the lines between the personal and the professional.
Hiring friends and family members is not always prohibited. In fact, many organizations encourage recruiting friends and family members, and some pay bonuses to employees who have successfully recruited candidates.
Disclosing potential conflicts of interests on the front end goes a long way toward dampening the potential problems down the road. A disclosure enables management and the leadership team to weigh all the relevant information in considering the proposed hire, new vendor or customer. Considerations should include they are the right fit, aligned with the company’s needs and are objectively the best option based on the merits and risks of a potential conflict of interest. With careful consideration of these circumstances, conflicts can be properly mitigated through ethical walls and other controls.
The act of disclosure and the timing of that disclosure are key determinants of the intent of the parties. If both parties openly and matter-of-factly disclose the conflict, this removes one big hurdle and potential risk from the equation since the bigger issue in the realm of conflicts of interest is the “undisclosed conflict of interest” subset. By disclosing the potential conflict of interest, this allows the company to carefully consider the situation, weigh all the plusses and minuses, document their thought process and make an informed business decision through the lens of what is in the best interest of all of the parties concerned. Conversely, conflicts that are not disclosed often cause a negative inference to be drawn when the conflict eventually does come to light. In hindsight, the members of leadership and compliance personnel called upon to deal with a potential conflict will likely consider the lack of disclosure as an additional red flag that could be construed to be fraud by omission.
Conflicts of interest present themselves at regular intervals. They are like snowflakes – no two potential conflicts are exactly alike. They must be evaluated based upon both the events leading up to the creation of the potential conflict, the disclosures that were made or omitted, the mitigating steps and documented thought process and the vendor, employee or customer performance over time. Did the company take a chance on a potentially problematic relationship and it resulted instead in a productive and problem-free dynamic? Or did the potential conflict become an actual conflict with all of the accompanying backlash?
How will you know if a proposed new relationship is a conflict of interest? You will know it when you see it.