Conflict of Interest: What Is It? - The Balance Small Business

Types of Conflicts of Interest · Nepotism · Self-dealing · Excess compensation. LinkedInwithBackground BusinessLaw&Taxes Glossary WhatIsaConflictofInterest? Definition&ExamplesofaConflictofInterest TableofContents Expand TableofContents WhatIsaConflictofInterest? HowaConflictofInterestWorks TypesofConflictsofInterest IsaConflictofInterestaCrime? By JeanMurray FullBio LinkedIn Twitter JeanMurray,MBA,Ph.D.,isanexperiencedbusinesswriterandteacher.Shehastaughtatbusinessandprofessionalschoolsforover35yearsandwrittenforTheBalanceSMBonU.S.businesslawandtaxessince2008. Learnaboutour editorialpolicies UpdatedonJune30,2020 TheBalance/MelissaLin Aconflictofinterestoccurswhenapartyhascompetinginterestsorloyaltiesbecauseoftheirdutiestomorethanonepersonororganization.Apersonwithaconflictofinterestcan'tdojusticetotheactualorpotentiallyconflictinginterestsofbothparties. Learnmoreaboutconflictsofinterestsothatyoucanbeproactiveandavoidthemwhenpossible. WhatIsaConflictofInterest? Aconflictofinterestinvolvesapersonorentitythathastworelationshipscompetingwitheachotherfortheperson'sloyalty.Forexample,thepersonmighthavealoyaltytoanemployerandalsoloyaltytoafamilybusiness.Eachofthesebusinessesexpectsthepersontohaveitsbestinterestfirst.Thus,theconflict.Conflictsofinterestcanhappenbothpersonallyandprofessionally. HowaConflictofInterestWorks Aconflictofinterestcanexistinmanydifferentsituationsinvolvingpersonalloyaltyandloyaltytoaprivateemployer,governmentemployer,orprofessionalrelationship.Specificinstancesofconflictsofinterestcanincludeapublicofficialwhosepersonalinterestsconflictwiththeirexpectedloyaltytotheorganization,apersonofauthorityinonebusinessthatconflictswiththeirinterestsinanothercompanyororganization,oranattorneywhoattemptstorepresentbothpartiesinadivorce. TypesofConflictsofInterest Severalcommonactivitiesthatcancreateaconflictofinterestinclude: Nepotism Self-dealing Excesscompensation Nepotismisthepracticeofgivingfavorstorelativesandclosefriendsinmattersofhiring,promotion,transfer,ortermination.Thetermcomesfromthewordfor"nephew,"anditwascommonpracticeinancienttimes.Nepotismisconsideredaconflictofinterestbecausetherelativemaynotbethebestpersonforthejob. Self-dealingisanactiontakenbyacorporatefiduciaryforthatperson'spersonalgain,ratherthanforthebenefitofthecompany.Examplesincludingusingcorporationfundsasapersonalloan,orbuyingcompanystockbasedoninsiderinformation—whichisalsoaninsidertradingviolation.Inanon-profitorganization,settingcompensationorbenefitsforofficers,directors,ortrusteesmayresultinaconflictofinterest.Forinstance,payinganemployeeinapositionorsubstantialauthorityexcessivecompensationservesaprivateinterest. ConflictsofInterestintheWorkplace Conflictsofinterestintheworkplace cantakeonmanydifferentforms.Therearebusiness-relatedsituations,suchasanemployeehavingasidebusinessthatcompeteswiththeemployer,andtherearepersonalmatters,suchasamanagerinaromanticrelationshipwithanemployee.Thelatterpresentsaconflictbecausethemanagerhasthepowertogiveraisesorpromotionstotheemployee,anddiscussionsaboutthecompanybetweenthetwopeoplemayalsobreach confidentialityrestrictions. Forcompaniesthatrelyonasupplychain,conflictsofinterestaremorelikelytohappen.Forinstance,anemployeewhohasafriendshipwithasuppliermayallowthemtogoaroundthebiddingprocessandwincontractswithlittletonocompetition.  Manyorganizationshavepoliciesandproceduresthatdon'tallowaconflictofinterest,suchasregulationsagainsthiringrelativesincertainsituations. ConflictofInterestAfterEmployment Evenaftersomeoneleavesaposition,aconflictofinterestcanoccur,thoughmanyinstitutionshavespecificrestrictionsagainstthiskindofconflict. Non-competeagreements areoftenrequiredofexecutivesandbusinessownerstoavoidsituationssuchassomeonetakingtheirformercompany'scustomerlistanddirectlycompeting. Ingovernment,formerfederalemployeesintheexecutivebrancharerestrictedfromappearingbeforethefederalgovernmentonbehalfofotherpeopleororganizations.Thisincludes"switchingsides"restrictionsafterleavingthegovernmentandbeinghiredbyacompanyforwhichtheofficialhadaroleingovernment. Incommonwithothergovernmentandprivateentities,theMassachusettsconflictofinterestlegislationbansapersonfromworkingforanyoneotherthanthegovernmententityonamatterthattheyworkedfortheentitydoing.Theseafter-employmentrestrictionsmayalsoinvolvebusinesspartnersandimmediatefamily. IsaConflictofInterestaCrime? Likeothertypesofillegalorunethicalactivities,conflictofinterestactivitiescarrytheriskofconsequences.Federalandstatelawshavebeensetuptocriminalizeconflictsofinterestinthepublicsector,andincertaincircumstances,conflictofinterestcanresultinprosecution. The federalgovernment hasacriminalconflictofintereststatutethatprohibitsgovernmentemployeesfromparticipatingpersonallyandsubstantiallyinofficialmatterswheretheyhaveafinancialinterest.Thespouse,minorchild,generalpartner,andcertainothersarealsoincludedinthisprohibition.Potentialconflictsofinterestcanarisefromseveralsources: AssetsandinvestmentsLiabilitiesPrivateinvestmentfundsBusinessorfarmownershipCorporateemploymentAlawfirmorconsultingemploymentEmploymentwithinstitutionsofhighereducation,andrelatedresearch,speaking,andwritingactivities Penaltiesarefinesofupto$10,000,prisonforuptotwoyears,orboth. KeyTakeaways Aconflictofinterestinvolvesapersonwhohastworelationshipsthatcompetewitheachother.Aconflictofinterestcantakeplacebothpersonallyandprofessionally.Certainformsofconflictsofinterestareillegal.Governmentrulesareputinplacetolimitconflictsofinterest.  ArticleSources Law.com."ConflictofInterest."AccessedJune21,2020. Lawsider."Nepotism."AccessedJune21,2020. U.S.SEC."InsiderTrading."AccessedJune20,2020. IRS."Form1023:PurposeofConflictofInterestPolicy."AccessedJune20,2020. U.S.OfficeofGovernmentEthics."CriminalConflictofInterestLaws,"Page26.AccessedJune20,2020. CommonwealthofMassachusetts."SummaryoftheConflictofInterestLawforMunicipalEmployees."AccessedJune20,2020. U.S.GovernmentPublishingOffice."Title18-CrimesandCriminalPunishment."AccessedJune21,2020. U.S.OfficeofGovernmentEthics."AnalyzingPotentialConflictsofInterest."AccessedJune21,2020. Share Tweet Share Email WhatDoesaBoardofDirectorsDo? The7BestWorkplaceSafetyTrainingProgramsof2021 WhatDoesLimitedLiabilityMean? 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