Conflict of Interest in Business: Understanding the Risks and How to Mitigate Them

What is a conflict of interest in business?

A conflict of interest in business ethics is when an individual has a conflict with another employee or the business as a whole. For instance, a business may have a conflict of interest when leaders hire family members or friends instead of more qualified candidates.

The true definition of conflict of interest is ambiguous but refers to a clash that can occur due to overlapping interests between two parties.

Another conflict of interest in business example is when an employee takes on a second job, which impacts their performance at work, or when a business owner uses company funds for personal expenses. In any case, these conflicts lead to personal gain for one party and potential loss for another.

Unfortunately, there are many different types of conflicts of interest in business ethics that can affect employees, employers, or the entire business.

Types of conflict of interest

There are several types of conflicts of interest in business. Perpetrators can be employees, business owners, leaders, or stakeholders.

The most common types of conflict of interest include the following:

Financial interests

Financial conflicts of interest are those in which the perpetrator receives personal financial gain. A few examples of financial conflicts include:

• An employee working for a competitor
• A stakeholder selling shares because they know the business's financial information
• A bookkeeper using a company's bank accounts for personal uses
• An individual who owns stock in another company begins a business relationship with them

Personal interests

Personal interests are those that put an individual's personal interests over the business'. The most common example of a personal conflict of interest is nepotism. Nepotism is when an executive, hiring manager, or business owner hires family members and friends who aren't qualified instead of qualified candidates or promotes employees into those positions.

Dating a subordinate or someone who works directly under you can also be considered a personal conflict of interest that impacts the business because it can lead to favoritism and bias.

Professional interests

A professional conflict of interest is when a leader prioritizes someone's career over the business as a whole. An example of professional interests is giving employees promotions because you like them when there are more deserving employees based on work performance.

Of course, a conflict of interest can fall under all three of these categories. For instance, if you start a company and become a direct competitor of your employers', you're engaging in a professional and financial conflict of interest.

Examples of conflict of interest in business

We've already touched on a few conflicts of interest in business examples of when a personal or professional conflict can negatively affect a business. But below are a few of the most common examples of conflict of interest in business today:

Employee relationships

Relationships are important in business. You build customer relationships to build brand trust, and you build relationships with your employees to get to know them. However, relationships can become a conflict of interest when two employees are romantically involved, especially if one is the other's superior.

This creates a conflict of interest because both employees may prioritize their personal gain over the business. Engaging in these relationships can compromise someone's priorities and decisions in the workplace.

Supplier relationships

Supplier relationships can also be a conflict of interest if you choose a supplier based on personal, financial, or professional gain of some kind.

For instance, a supplier might give you a gift, and you repay them by ordering more inventory than you need. Again, this creates a conflict of interest because you directly benefited from the relationship and ended up costing the business by spending more money on inventory.

Nepotism

Nepotism is especially common in small businesses but can happen in large corporations as well. When someone hires their friend or family member for a position they're not qualified for, they prioritize their personal relationships over the business's best interests instead of considering other candidates and internal employees.

Risks and consequences of conflict of interest

A conflict of interest isn't inherently illegal, but it can be. For instance, if an employee signed a non-compete and freelance for a competitor, they violated their employment contract. Even if a conflict of interest isn't technically illegal, it can lead to a loss in some way.

Employees working for a competitor can lose their job or be sued by their employer. The company also loses because the employee may have shared intellectual property or valuable information with the competition.

Legal issues

Conflicts of interest are unethical activities and can result in legal consequences. For example, if an employee signs a contract stating they won't work with clients outside of regular business hours and goes behind their employer's back to freelance for them, they directly interfere with their employer's ability to make money and can be sued for a breach of contract.

However, disclosure can prevent legal issues from arising. If an employee tells their employer that a client has come to them directly for work and the employer gives them approval to proceed, it's no longer a conflict of interest.

Financial losses

Financial losses are the most common repercussions of a conflict of interest. For instance, if a remote employee takes a second job and works for another client during business hours when they're expected to work for your company, it can result in financial losses because they won't be as productive.

On the other hand, if a business engages in unethical practices and breaches a contract with partners or suppliers, it can damage its reputation among consumers, which can also cause financial losses.

Damaged reputation

Large companies invest hundreds of thousands of dollars in building a brand identity, but that identity doesn't matter if you have a bad reputation. A damaged reputation can affect a business for many years regardless of the good they do afterward.

How customers, employees, stakeholders, and partners perceive your business matters. Unfortunately, if you habitually engage in unethical behavior like conflicts of interest, you may damage your reputation for good and lose valuable business opportunities.

Loss of trust

With a damaged reputation comes a loss of trust among consumers and employees.

For example, if an employer has a habit of hiring family members instead of qualified employees, which prevents existing employees from climbing up the corporate ladder, they'll lose the trust of their staff.

How to mitigate conflict of interest

Knowing how to avoid conflict of interest can protect businesses from individuals prioritizing personal, financial, and professional gain over the business's interests.

An ethical business focuses on creating a healthy work environment for employees, so it's not only staff who must avoid conflict of interest. Instead, business owners, leadership, and stakeholders should also learn how to avoid conflict of interest in business to prioritize the overall company's success instead of their own personal gain.

Establish clear policies

Including a conflict of interest policy in your employee handbook and code of ethics can help employees and leaders understand how to avoid and handle situations resulting in a conflict of interest.

You should include common conflicts of interest they may encounter, such as:

• Gifts from suppliers: Preventing staff members from accepting gifts from clients or vendors can mitigate the risk of them choosing one over the other, even when it might not be the best option for the business.
• Insider trading: Insider trading is an illegal conflict of interest. Protecting against it safeguards your confidential financial information from being used in a way that can financially benefit employees.
• Non-competes and confidentiality: Non-compete and confidentiality clauses can prevent your employees from working directly for competitors and sharing confidential information.

Promote awareness

Your company's communication strategy can help you promote awareness of conflicts of interest that can affect the business, other employees, stakeholders, and customers.

Teaching employees what a conflict of interest is and how it can affect them and those around them can help them understand the consequences and avoid potential conflict.

Encourage ethical decision-making

An ethical business needs ethical employees and leadership that makes decisions in the business's best interests. Encouraging ethical decision-making by prioritizing moral values over profits will ensure employees make the best decisions for themselves and the business.

Enforce accountability

Having conflict resolution skills is crucial when dealing with potential conflicts of interest. Holding your employees accountable for their actions makes them understand the potential repercussions of what can happen if a conflict of interest arises, such as financial and legal ramifications.

Foster open communication

When employees feel comfortable discussing potential conflicts of interest with their employer, they'll more readily disclose important information, such as a romantic relationship with another employee, a personal relationship with a vendor, a vested interest in another business, and so forth.

Your employees should want to disclose potential conflicts of interest and allow business owners and decision-makers to authorize them. While disclosure doesn't always benefit both parties, transparency can foster more trust among employers and employees.

Conduct regular reviews

While it's impossible to catch every conflict of interest in business, you should conduct regular reviews to ensure employees adhere to your business's code of ethics. In most cases, business leaders should review themselves and their relationships to ensure they're not engaged in such conflicts.

Reviewing the employee handbook and code of ethics can help you determine whether your guidelines are clear and provide advice for how employees can avoid them.

Navigate conflict of interest for an ethical business practice

Ethical businesses avoid conflicts of interest that can negatively impact the business as a whole and its employees, customers, partners, and stakeholders. Unfortunately, not all of your employees will disclose potential conflicts of interest that can impact your business, so it's up to leaders to provide clear guidance and help staff understand the potential consequences.

Your business's code of ethics can be an essential resource for employees, giving them examples and advice for what to do in these situations. Updating your handbook and sending employee surveys to help understand potential conflicts of interest in your business can improve corporate communication.

Use Mailchimp to improve your corporate communications strategy, highlight important updates for employees, and collect valuable feedback to learn about unethical business practices that may be happening in your business.