26 Conflicts of Interest
John Spacey, updated on November 21, 2016
A conflict of interest occurs when an individual or organization has incentives that conflict with their duties. In other words, a situation in which a professional may be rewarded for poor performance. The term conflict of interest doesn't necessarily imply that wrong doing or low performance has occurred. It does however suggest that problems are likely. In general, conflicts of interest are avoided by businesses and are often prohibited by laws and regulations. The following are a few examples of potential conflicts of interest.
AgentsIn some cases, the agents for a buyer and seller in a transaction both work for the same firm. This can lead to the temptation to share confidential information to ensure that a deal is closed and commissions are realized. If this happens, it is typically considered a breach of fiduciary duty.
BailoutsGovernment bailouts of industry represent a moral hazard and may be carefully examined for conflict of interest such as campaign contributions or public speaking fees.
BanksInvestment banks put up an information barrier known as a Chinese wall between teams that advise corporate clients on things such as mergers & acquisitions and teams that manage money or advise brokerage clients. If buy-side teams obtained confidential information about such a client, this would be a clear conflict of interest.
CompensationHiring salary and salary adjustments may be impacted by cronyism such as an executive who hires friends at unreasonably high salaries with inflated job titles relative to their experience and responsibilities.
Content & SponsorshipMedia organizations may erect a Chinese wall between journalists and advertising departments to prevent advertisers from influencing the news or other content. It is an widely accepted practice to clearly label any content that has been influenced by advertisers.
DisciplineCronyism may impact employee discipline. For example, serious complaints about executives and their inside circle at a firm may be casually dismissed, potentially in violation of employment law.
Fee SplittingThe practice of referring clients from one professional to another for a fee. Considered unethical in the medical profession.
Governance vs ManagementIn many cases, governance is set up to direct and monitor management. As such, when governance bodies are controlled by management this can be a conflict of interest. For example, if the board of directors of a firm is controlled in some way by the firm's management.
Grassroots vs AstroturfingGrassroots is a term for an organization set up by people who are not the member of an elite in pursuit of a common goal. Astroturfing is when an industry, firm or elite political group set up a fake grassroots organization to pretend that there is public support for their goals.
Insider TradingAn employee of a firm who uses confidential material information for material gain.
Judiciary & Commercial InterestsA judiciary that is influenced by commercial interests such as a privatized prison that influences a judge to give tougher sentences.
Judiciary & Personal ExperienceA judge that knows a defendant and similar conflicts of interest based on the personal experiences of judge and jury.
Media & PoliticsA high level politician has dinner with a media executive and asks that a journalist be fired for a critical article.
Medical MarketingWhen a doctor is given material incentives to recommend a treatment by the firm selling the treatment.
ProcurementProcurement of goods and services is often governed by regulations and expected due diligence to prevent bribery, small gifts, relationships or any other conflict of interest from influencing the process. In some countries, procurement fraud is a major issue that impacts economic efficiency.
NepotismGranting favors to family in a commercial or political setting.
Outside EmploymentHolding two jobs can theoretically result in conflicts of interest. For example, you may be tempted to use the secret propriety knowledge of one firm to complete work at the other.
Performance ManagementCronyism in performance management such as promoting friends despite low performance.
Perverse IncentivesA negative unintended consequence of a performance goal, incentive or system. For example, an executive who contractually gets a large bonus if they are fired has an incentive to fail in some circumstances.
Profit Motive & Public ServicesAllowing the profit motive to corrupt institutions designed for the public good.
Regulatory CaptureA failure of government whereby commercial interests have undue influence on the agencies designed to provide oversight of an industry. In some cases, this extends to capture of the legislative process itself.
Research & SponsorshipResearch designed to satisfy a sponsor as opposed to being scientifically accurate.
Revolving DoorA system of influencing government whereby a firm's employees are sent to work for government or government employees are offered lucrative future employment in exchange for influence.
Self AuditsAn organization or department that audits its own controls may be likely to miss things.
Self DealingA general term for a violation of fiduciary duty in pursuit of self-interest.
Self RegulationIndustry self-regulation may risk conflict of interest as the profit motive may supplant the public interest.
Business EthicsThis is the complete list of articles we have written about business ethics.
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