Conflicts of interest in a business relationship may arise in several different situations. A conflict may arise when the personal interests of someone in a position of trust clashes with the person’s professional interests. A conflict may also arise when a person has different professional responsibilities and those responsibilities collide. A person who has these types of competing interests may have difficulty in fulfilling professional obligations.
Owners and managers of businesses may encounter conflicts during the course of the business. Conflicts of interest are often the result of a transaction between a business, such as a corporation, and a manager of the business. The manager may take advantage of this relationship and complete a transaction that benefits himself/herself and not the corporation.
In a majority of U.S. jurisdictions, the resolution of a conflict of interest for a controlling shareholder, director, or officer of a corporation focuses on the fairness of the transaction. The person who is involved in the transaction must prove that the transaction is the result of fair dealing and demonstrates a fair price.
Conflicts of Interest Within Huge Corporations
Corporations have always had the problem of conflicts of interest. For that reason, they often have policies requiring complete disclosure from employees as to whether they have any financial interest in transactions the company is about to engage in. thus, if a company is buying land, it would like to know that some officer with responsibility for that transaction owns interest in the land.
In the accounting world, a conflict of interest may involve a situation in which an internal auditor, who is in a position of trust, has a competing professional or personal interest. Such competing interests can make it difficult to fulfill his/her duties impartially. A conflict of interest exists even if no unethical or improper act results. A conflict of interest can create an appearance of impropriety that can undermine confidence in the internal auditor, the internal audit activity, and the profession. A conflict of interest could impair an individual’s ability to perform his/her duties and responsibilities objectively.
Handling Conflict of Interest
A person who faces a conflict of interest may not be able to avoid the conflict. In such an instance, the person may be required to take certain steps by law or may need to follow certain practices in order to avoid any appearance of impropriety.
Laws governing businesses handle conflicts by several different means. For instance, partners in a partnership are bound by a duty of loyalty that prevents the partner from competing in a business to the detriment of the partnership.
The following are some of the means by which conflicts of interest may be handled, either by law or as good professional practice:
a. duty of loyalty: in partnership law, for example, a partner is bound by a duty of loyalty, which forbids the partner from personally engaging in a business transaction to the detriment of the partnership.
b. fairness: some laws, such as those governing conflicts of interest within corporations, require that transactions involving such conflicts are fair.
c. full Disclosure: many professionals, such as lawyers and government officials, are required by law to give full, written disclosure of any conflicts of interest.
d. recusal: decision-makers, such as judges or members of government agencies, may choose to recuse themselves in situations where the subject of a decision involves a conflict of interest.
e. third-party evaluations: in some situations, such as where majority shareholders in a corporation decide to buy out minority shareholders, a neutral third party may be used to determine a fair market price for the minority shares.
Impact on Business
Conflicts of interest can lead an organization to bad decisions, additional expense, and increased risk in operations. Periodic overviews of business relationships, expert advisor roles, and business activity can decrease risk associated with potential bias.