Conflicts of Interest: A governance challenge or a moral maze?

By Judith Irwin, Institute of Business Ethics

Let’s start at the beginning.  What is a conflict of interest?  Wikipedia defines it as ‘a conflict of interest occurs when an individual or organisation is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other’.  Is this an accurate description?

Arguably, it is unwise to attempt to define a conflict of interest in absolute terms, for like many things in life, there is more than one definition.  What is deemed to be a conflict of interest in one social or cultural context may be entirely appropriate in another.  The same decision can be interpreted as entirely legitimate in a different setting.  Take the example of nepotism in Africa. In Africa, where family bonds are highly valued, nepotism is a common practice, and an employee may face ostracism for not hiring a relative for a position at the firm. However, most Western-based multinationals actively discourage allowing personal relationships to influence an employee’s business judgment.  

Who decides what constitutes a conflict of interest in a business context? A company’s board directs the policy, actions and affairs of the organisation.  The UK Corporate Governance Code (2010) (formerly the Combined Code) states that corporate governance is about what the board of a company does, including how it sets the values of the company: “the board should set the company’s values and standards and ensure that its obligations to its shareholders and others are understood and met.”  The most common way that a large corporate sets out the company’s values and standards is through an ethics policy and/or a code of ethics, which aims to govern employees’ day-to-day conduct.   Frameworks for dealing with a conflict of interest are normally included in such guidance documents.

It is without doubt that guidance for employees is necessary, especially since the definition of a conflict of interest will vary with context.  Thus, providing a framework based on the company’s ethical values for employees to refer to, will help to ensure consistency in employee’s decision-making across the organisation when it comes to dealing with a conflict of interest.  And it goes without saying that training for staff on the framework (and the company’s values) is required to help them identify, manage, and resolve potential conflicts of interest.  This should be coupled with a broader awareness of why it is important to manage those conflicts. 

But no framework and no amount of training can cover every potential conflict of interest or guarantee that every employee will make the ‘right’ decision, by the company’s standards.  Are conflicts of interest not moral dilemmas?  And are people’s morals not inherently different?          

There is often an expectation by senior management that many conflicts of interest are avoidable; an expectation that is not shared by experience. Conflicts of interest are not necessarily of our own creation. It could be argued that in fact the conflicts that employees encounter are the product of the structures implemented at a more senior level.  Normal human relationships can be transformed by individuals’ professional roles into a source of conflict, regardless of whether they do in fact influence the individual, or just create the perception of influence.   But we are very often influenced, and driven to act in certain ways, unconsciously. 

Having a framework to govern employees behaviour when it comes to conflict of interests shouldn’t stifle people’s ability to make their own decisions.  But trusting the ethical judgement of employees may not fit well with effective governance of a company.  The middle ground is hard to find. Perhaps conflicts of interest is such a moral maze that it cannot be governed with a framework? A supportive and open culture, which encourages employees to understand how their relationships may be perceived so that they may be transparent about their interests, may be the middle ground we are striving for.

Judith is Senior Researcher at the Institute of Business Ethics where she researches and writes on best practice on a range of business ethics topics, advises companies on embedding ethics in their organisations, and regularly engages in training and public speaking to raise awareness of the subject

(Editor’s note: Jeff Kaplan is on vacation until July 23, so there will be no additional posts on the COI Blog until after that, and any comments received about this or other pieces won’t be posted until then.)

 

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