Conflict of Interest Definition - Investopedia

A conflict of interest occurs when an entity or individual becomes unreliable because of a clash between personal (or self-serving) interests and ... Business BusinessEssentials BusinessEssentials GuidetoMergersandAcquisitions WhatIsaConflictofInterest? Aconflictofinterestoccurswhenanentityorindividualbecomesunreliablebecauseofaclashbetweenpersonal(orself-serving)interestsandprofessionaldutiesorresponsibilities.Suchaconflictoccurswhenacompanyorpersonhasavestedinterest—suchasmoney,status,knowledge,relationships,orreputation—whichputsintoquestionwhethertheiractions,judgment,and/ordecision-makingcanbeunbiased.Whensuchasituationarises,thepartyisusuallyaskedtoremovethemselves,anditisoftenlegallyrequiredofthem. KeyTakeaways Aconflictofinterestoccurswhenaperson'sorentity'svestedinterestsraiseaquestionofwhethertheiractions,judgment,and/ordecision-makingcanbeunbiased.Inbusiness,aconflictofinterestariseswhenapersonchoosespersonalgainoverdutiestotheiremployer,ortoanorganizationinwhichtheyareastakeholder,orexploitstheirpositionforpersonalgaininsomeway.Conflictsofinterestoftenhavelegalramifications. 1:13 WatchNow:ConflictofInterestExplained UnderstandingConflictofInterest Aconflictofinterestinbusinessnormallyreferstoasituationinwhichanindividual'spersonalinterestsconflictwiththeprofessionalinterestsowedtotheiremployerorthecompanyinwhichtheyareinvested.Aconflictofinterestariseswhenapersonchoosespersonalgainoverthedutiestoanorganizationinwhichtheyareastakeholderorexploitstheirpositionforpersonalgaininsomeway. Allcorporateboardmembershavefiduciarydutiesandadutyofloyaltytothecorporationstheyoversee.Ifoneofthedirectorschoosestotakeactionthatbenefitsthematthedetrimentofthefirm,theyareharmingthecompanywithaconflictofinterest. Oneexamplemightbetheboardmemberofapropertyinsurancecompanywhovotesontheinductionoflowerpremiumsforcompanieswithfleetvehicles—whenthey,infact,ownatruckcompany.Eveniftheinstitutionoflowerpremiumsisn'tabadbusinessmovefortheinsurer,itcouldstillbeconsideredaconflictofinterestbecausetheboardmemberhasaspecialinterestintheoutcome. Inlegalcircles,representationbyalawyerorpartywithavestedinterestintheoutcomeofthetrialwouldbeconsideredaconflictofinterest,andtherepresentationwouldnotbeallowed.Additionally,judgeswhohavearelationshipwithoneofthepartiesinvolvedinacaseorlawsuitwillrecusethemselvesfrompresidingoverthecase. SpecialConsiderations Aconflictofinterestmayleadtolegalramificationsaswellasjobloss.However,ifthereisaperceivedconflictofinterestandthepersonhasnotyetactedmaliciously,it'spossibletoremovethatpersonfromthesituationordecisioninwhichapossibleconflictofinterestcanarise.Usingthepriorexampleofaboardmemberwhoownsatruckcompany,theycouldsimplyremovethemselvesfromalldecisionsthatcouldpositivelyornegativelyaffecttheirpersonalbusiness. CommonTypesofConflictsofInterest Self-dealingisthemostcommontypeofconflictofinterestinthebusinessworld.Itoccurswhenamanagement-levelprofessionalacceptsatransactionfromanotherorganizationthatbenefitsthemanagerandharmsthecompanyorthecompany'sclients. Giftissuanceisalsoaverycommonconflictofinterest.Ithappenswhenacorporatemanagerorofficeracceptsagiftfromaclientorasimilartypeofperson.Companiesnormallycircumventthisissuebyprohibitinggiftsfromcustomerstoindividualemployees. Troublesomesituationsmayalsoarisewhen,inthecourseofprofessionalduties,anindividualcollectsconfidentialinformation.Anyinformationofthistypeusedforpersonalgainbyanemployeeisahugeconflictofinterest,atleastintheUnitedStates.Thefinancialindustryconstantlygrappleswiththistypeofconflictofinterestintheformofinsidertrading. Finally,thehiringof,orshowingfavorableworkplacetreatmentto,arelativeorspouse—knownasnepotism—canresultinapotentialconflictofinterest. Afinancialadvisorwhoknowinglyadvisesclientstopurchasefinancialproductswhicharenotintheirbestinterests(tooexpensive,toorisky,ornotinlinewithstatedgoals),butwhichearntheadvisorabiggercommission,wouldbeguiltyofconflictofinterest. RealWorldExampleofConflictofInterest Inthefinancialindustry,anagencyproblemreferstoatypeofconflictofinterestwhereagentsdon'tfullyrepresentthebestinterestsoftheirprincipals.TheEnronscandalisanextremeexampleofanagencyproblemthatledtothecollapseofwhatwasatthetimeoneofthelargestcompaniesintheUnitedStates. In2001,EnronCorporationdeclaredbankruptcyafteritwasrevealedthatthetopleadersinthecompanyhadusedmark-to-marketaccountingandspecialpurposevehicles(SPVs)tohidefinanciallosses.Thismadethecompanyappearmoreprofitablethanitreallywas. WhileEnron'sexecutiveshadalegalresponsibilitytoprotecttheinterestsofitsshareholders,someexecutivesinsteadengagedinillegalactivitiestocamouflagethecompany'smassivelossesanddebts.Sharepricesdroppedfromover$90asharetounder$1ashare.Severalexecutiveswereindictedfortheiractionsandeventuallysenttoprison. CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. Provider Name Description RelatedTerms LearnWhatStakeholdersAreandtheRolesThatTheyPlay Astakeholderisapartywithaninterestinanenterprise;stakeholdersinacorporationincludeinvestors,employees,customers,andsuppliers. more WhatIsaFiduciary? Afiduciaryisapersonororganizationthatactsonbehalfofapersonorpersonsandislegallyboundtoactsolelyintheirbestinterests. more HowQuorumsWork Aquorumisaminimumacceptablenumberofindividualswithavestedinterestinacompanyneededtomaketheproceedingsofameetingvalid. more HowCCorporationsWork WithaCcorporation,theownersorshareholdersaretaxedseparatelyfromthecorporationitself,meaningprofitsaretaxedonbothabusinessandapersonallevel. more InsideMandatoryBindingArbitration Mandatorybindingarbitrationrequiresthepartiestoresolvecontractdisputesbeforeanarbitratorratherthanthroughthecourtsystem. more CodesofEthics::TypesandExamples Acodeofethicsencouragesethicalconduct,businesshonesty,integrity,andbestpractices.Readaboutthetypesofcodesofethicswithexamplesofeach. more PartnerLinks RelatedArticles BusinessEssentials TheAgencyProblem:TwoInfamousExamples Microeconomics AgencyTheoryvs.StakeholderTheory:What'stheDifference? Laws&Regulations WhatAreSomeExamplesofFiduciaryDuty? 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