Standards for waivers of conflicts of interest

By Jeffrey M. Kaplan

While some organizations bar conflicts of interest in all cases, many opt for allowing COIs to exist where appropriate. But how should appropriate be defined for these purposes?

One formulation that I have recommended to various organizations:

A COI may be approved only where doing so would clearly be in the best interest of the company.

Two comments about this.

First, the word “clearly” is intended to require a showing greater than a mere preponderance of the relevant facts. Of course, it is not as high as “beyond a reasonable doubt,” which, in my view, would be widely seen as overkill in this setting.  But, it is still a high standard and presumably would require rejection of any proposed COI where there was a lack of genuine clarity on this issue.  Indeed, given that COI problems often involve lack of clarity, the use of the word in a COI policy should itself be helpful.

Second, the “best interest of the company” should be read broadly. It requires more than an absence of corruption or other outright misconduct. Rather, it also mandates consideration of how the COI at issue could impact the ethical culture of the organization and related matters.

(For more on COIs and harm see this piece from the FCPA Blog.)

But there are other dimensions to this area – consideration of the interests of the employee and the potential harm caused by the conflict.

With respect to the latter consideration (potential harm), we note that the position of the employee within the organization and the particular type of conflict at issue are important in determining the potential harm to the company from a conflict. For example, when the head of Procurement wants to engage a supplier that is owned by her spouse, there is much greater likelihood of harm than where the supplier’s spouse is a junior sales associate at the company.

As described by Joe Murphy, at least to challenge conventional thinking: “It is fair to make a big distinction between workers and managers/executives. I first saw this done in Europe, particularly in Germany.  For workers, the company does not own them.  Why does it have a right to tell them what to do, other than how to do their jobs while working?   Executives, on the other hand, have more power that can be abused, and they are getting more from the company.

Joe suggests a standard that ratchets up the higher the level of employee in the company.  A  higher standard may also be appropriate for all employees in particular functions, such as in procurement, E&C, and the legal department.

The second consideration – the interests of the employee – is also an important factor.  As Joe colorfully notes, “Why should a company control the employee, or have a say in anything they do off the job?  From that perspective, it is odd that we consider loyalty to one employer as almost sacred, on a quasi-religious level.  But why should it be, at least for the workers?” Indeed, if the position of the worker means that the conflict would not create harm, or that disclosure and controls are sufficient, then permitting the conflict (with controls) is likely the better course.  As Joe suggests, where an employee does not have real power to influence relevant decision making, it does not make sense “to treat companies as if they were sacred entities to whom total, all-consuming loyalty is owed by all who come in contact with them. Employees do not sell their souls and do not give up all other interests.” 

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