How to Recognize Conflicts of Interest in the Workplace
Last Updated: September 16, 2024
Key Takeaways:
- A conflict of interest in the workplace is when someone's personal obligations or loyalties clash with their duties in the workplace.
- Conflicts of interest at work can include nepotism, romantic relationships, competing with an employer, and breaching confidentiality.
- Writing policies, signing NDAs and Non-Compete Agreements, and ethics training can help minimize conflicts of interest.
Picture this: An executive works for a corporation and owns many shares. However, because they know about confidential internal decisions and how they’ll affect the company, they anticipate that the shares' value will plummet shortly.
They decide to sell a large portion of the shares before they lose their value. In doing so, they've created a conflict of interest.
What is a conflict of interest?
A conflict of interest in the workplace is when someone's personal obligations or loyalties clash with their duties in the workplace. The conflict compromises their ability to make impartial decisions, judgments, or actions that serve the best interests of their clients or employers.
Family, friendships, finances, and self-serving interests are common factors that lead to conflicts of interest.
Actual versus perceived conflicts of interest
Trust in the integrity of a person, company, or system is essential. Part of that trust comes from the belief that a company prioritizes public interest over personal interest, whether it's their employees' or clients'. Repairing a reputation can take a long time once credibility is questioned. That's why perceived conflicts of interest are often just as serious as actual conflicts of interest.
An actual conflict of interest already exists, while a perceived conflict of interest is when someone could reasonably think there's one.
A low-stakes example of a perceived conflict of interest is when a company draws winners for prizes at its annual Christmas party, and the big boss just so happens to win the expensive trip to Hawaii. Even if the draw is conducted fairly, the outcome will likely leave the rest of the employees a little suspicious about the process. In this case, the big boss should sit this one out.
An example of a more serious perceived conflict of interest is a retail store using a third-party delivery service that employs the store's owner's sibling. It could appear to be a conflict of interest even if the delivery service is the best option available and the sibling isn't able to benefit from the arrangement directly.
When does a conflict of interest occur?
In the example mentioned at the top, the executive uses privileged information gained through their workplace to benefit financially at the corporation's expense. However, this is just one scenario out of many other possible conflicts of interest.
Nepotism and romantic relationships
Of all the different types of conflict of interest, nepotism and romantic relationships are two of the most frustrating for employees within a company.
Nepotism occurs when a person of authority exploits their position to favor friends and family members. Similarly, a person of authority dating a subordinate can also lead to favoritism.
In both instances, special treatment in the form of undeserved hiring, promotions, or lenient treatment when not meeting expectations can take place. The situation can also put coworkers and supervisors in an awkward position because they might hesitate to give an honest assessment of the friend or family member.
Another example would be an employee dating a company’s client. The relationship could affect the employee's judgment. They may offer the client deals that other clients wouldn’t usually receive, which conflicts with the employer's interests
Competing with an employer
It’s a tall order to expect the employee to give it their all when they’re in a position to benefit financially from their employer’s misfortune. That’s why it’s a conflict of interest for an employee to buy shares in or start another company that provides similar products or services to their employer.
It's especially an issue if the employee uses company hours, resources, or skills learned on the job to work on their own company or build their own clientele. Many employers ask new employees to sign a Non-Compete Agreement to avoid this situation.
An employee can also indirectly compete with their employer by consulting with a competitor. Not only are they hurting their employer by helping another company, but they're likely getting paid to do so as well.
Sharing confidential information
Consulting for another company can also open the door to conflicts if the employee shares confidential information. Even if it's unintentional, an employee can't use company knowledge or secrets to gain an opportunity to accept consulting fees.
That’s why Confidentiality Agreements (also known as Non-Disclosure Agreements) are also commonly included in Employment Contracts.
Giving gifts from clients
Suppose a client buys supplies from the same salesperson for years, and they become friendly acquaintances. Through many phone conversations, the salesperson learns that the client is a huge basketball fan and innocently offers them free tickets to a game they can't attend.
Accepting the tickets is a conflict of interest. It might make the client feel obligated to continue doing business with the salesperson even if it's not what's best for the company.
It also creates a possible perceived conflict of interest. Even if the client can accept the tickets and continue making objective business decisions, other people could perceive their decision-making as biased. Perception is almost as important as reality, and no one wants their credibility questioned.
Self-dealing
Self-dealing is when someone appointed to act on someone’s behalf (i.e., a fiduciary) takes action in a way that financially benefits themselves over the interests of their client. Some common scenarios include:
- Taking corporate opportunities
- Using corporate funds as a personal loan
- Advising a client to transfer money, real estate, or other assets to the fiduciary
- Advising a client to purchase more expensive products to earn a larger commission
An example of taking corporate opportunities is a partner neglecting to mention an opportunity meant for the whole partnership and keeping it for themselves.
Insider trading is also an example of self-dealing. It’s when a person uses inside information when buying stocks personally.
Strategies for avoiding conflicts of interest
Some conflicts of interest are so severe that they can lead to legal repercussions. That's why companies need to have official strategies for avoiding these situations.
Writing policies
Writing a code of conduct and a conflict of interest policy is a good start. Include the policies in Employment Contracts. Doing so ensures that new employees acknowledge they understand the company's expectations by signing the agreement. It also gives them a document to reference if they're ever unsure about what the company considers a conflict of interest.
Signing Non-Competes and Non-Disclosures
As previously mentioned, having all employees sign Non-Compete and Non-Disclosure Agreements is pretty standard practice for most companies.
Companies use Non-Compete Agreements to ensure their employees don't enter into competition with them. The employee typically agrees not to work for competitors in a specific geographical area for a period of time. However, most states require enforceable non-competes to be reasonable in time, space, and scope. Non-Disclosure Agreements (NDAs) establish a written guarantee from an employee that they won’t share confidential information with unauthorized people or organizations.
In the case of both agreements, a company could take legal action against any employee who breaks the agreement.
Ethics training
Periodically giving employees ethics training is also helpful because it can establish an ethical culture in the workplace. It's entirely possible that an individual could be involved in a conflict of interest and have no idea. More often than not, once someone is educated on the subject, they'll either disclose possible conflicts or make a genuine attempt to avoid them.
How to handle conflicts of interest when they occur
Conflicts of interest aren’t something a company wants to handle on the fly. It’s essential to be prepared if one occurs in the workplace.
Establish formal channels for transparency and disclosures
Making it safe for employees to disclose conflicts of interest also goes a long way. Some people might hesitate to come forward with relevant information because they’re worried about consequences or missed opportunities.
For example, an employee might avoid mentioning a conflict so they can participate in a project that will further their career. If they know their employer will take action in the future to minimize the impact of the missed opportunity, the employee is more likely to be transparent.
Conversely, it’s a good idea to make whistleblowing safe as well. The fear of being labeled a tattletale is a powerful motivator for keeping quiet. Formal channels should exist for an employee to come forward with information about a coworker or company practices without backlash.
Develop a conflict of interest policy
One way to make it safe for employees to be transparent is by writing policies (i.e., a code of conduct) outlining what the company considers a conflict of interest. Specifically, addressing conflicts of interest in writing can guide a company when dealing with allegations. It minimizes the chances of a company mishandling the situation and opening itself up for legal ramifications.
It can also ensure the company treats every case objectively. It’s especially important when the conflict involves people of authority.
A conflict of interest policy should include:
- Purpose: Why the policy exists and what its function is.
- Duty to disclose: An employee’s obligation to provide information relevant to a conflict of interest.
- Investigations: How the company will look into a conflict of interest allegations.
- How to address it: A guide on formally reaching out to an employee who may be involved in a conflict of interest.
- Disciplinary action: The consequences for being involved in a conflict of interest.
The U.S. Office of Government Ethics website can help guide a company through the creation of these policies.
Resolve or mitigate the issue
A company has a few options when resolving or mitigating a conflict of interest, but the first step it should take is talking to a lawyer. Using written policies as a guide is great, but a lawyer can provide legal advice specifically for each case.
Depending on the conflict's severity, the company can give the employee a warning or fire them. The company can use an Employee Warning Letter or Employment Termination Letter to do so.
The company can also decide no disciplinary action is necessary and the situation only requires internal adjustments. In that case, it can ask the employee to relinquish the conflicting interest, take them off projects that can create a conflict, or restrict their tasks on specific projects.
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