The problem with apparent conflicts of interest

Virtually all codes of conduct prohibit apparent, as well as actual, conflicts of interest.   Apparent COIs are generally seen as less serious than actual ones.   Moreover, many compliance officers and others who conduct internal investigations are familiar with situations where it is hard to prove an actual COI (even where it seems obvious that one exists) but easy to prove the apparent type – the C&E equivalent of “getting Al Capone on a tax charge.”

But while apparent COIs are often easier to prove than actual ones, they may be harder to mitigate.  In that connection, consider the following hypothetical case and question:

X Company is considering using Y Company as a supplier, because Y offers the best goods on the best terms. But Y is owned and operated by A, whose twin brother A Plus is a senior manager of X.  A Plus has nothing to do with purchasing anything for X and rigorous controls are put in place at X to ensure that he doesn’t in any way help Y in its dealings with X.  Does the fact that X has in fact mitigated any actual conflict mean that it has done so with the apparent one?

The analysis in situations such as this turns in part on the question:  Apparent to whom?  For instance, is it well known among X employees and the company’s other suppliers that A and A Plus are brothers (as the case suggests from their being twins and from A Plus’ prominent role in the organization)? If so, then the employees and suppliers  – two groups whose trust companies like X typically have strong reasons to maintain – would likely need to know the particulars of the mitigation measures to believe that that there is nothing to the apparent conflict.  But for various understandable reasons, companies in this sort of situation are often reluctant to publicize their mitigation measures in any detail.  And even if they did, there would be a good chance that the parties to whom the conflict is apparent would be skeptical of the sincerity and efficacy of the effort.

Not all apparent conflicts raise significant challenges of this sort.  However, some present even greater mitigation difficulties than our hypothetical does – such as where the apparent COIs become known to shareholders (as in the Chesapeake Energy case described in previous posts) who are typically a more distant and dispersed group than are employees or suppliers and thus presumably harder to provide comfort to.  But regardless of the particulars of the situation, considering the “apparent to whom” question should be part of every mitigation analysis in addressing apparent COIs.

Finally, note that the concept of “potential COIs” is sometimes used interchangeably with apparent COIs.  However, they are clearly distinct from each other, with the former not having to do with present appearances but with the foreseeability of actual (or apparent) COIs coming into play in the future.

(Click here for various posts on the various forms of harm that can be caused by the various types of COIs.)

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