Managing Conflict of Interest in a Business Enterprise

By Vijaya Devan Nair,
A member of MIM, OM 125677

Corporations all over the globe share a common dreadful feature and in the absence of this feature, businesses figuratively are said to be one that operates in the holy heaven. That feature is known as risk! Risks created either by forces of external events or those that we find hidden amongst strategic business units (SBU’s) internally in our organisations will always exist and threaten the line of sight set forth by the stewards of businesses as long as they remain running businesses anywhere on this globe. Shareholders, by virtue of their capital investment, exercise their legal rights to assemble knowledgeable and skillful people to manoeuvre their interest and in doing so, delegate authorities to board of directors of the incorporated entity the shareholders had built. 

Many enterprises’ board of directors strive to fulfill the strategic and oversight roles dictated by good corporate practices indoctrinated in board charters. They meet regularly and make decisions within the scope of their responsibilities. Within the board, separate committees with appropriate skills are often seen to arise to handle specialised operations. Nevertheless, the existence of the committees does not relinquish the board of their holistic accountability and responsibility mandated by shareholders.

The board of directors determines a company’s policy decisions, oversight and its management team and therefore exhibits overall control on it. As much as the board exercises its control, shareholders also act in concert in controlling the company. This type of shareholders are referred to as “controlling shareholders” and their controlling power varies on the size of their dispersed or concentrated ownership. In addition, their parameter of controlling power also pretty much depends on their voting rights attached to each class of shares. 

In the wake of overlapping roles between board members and the management team, valuable decisions are made and agreed by a few who hold power without going through a collective board participation. Conflicts of interest are very much prevalent at the board level. This is because the boardroom is a dynamic place where struggles of ego, power, rules and authority continuously surface, and it is not always clear what constitutes a conflict of interest as director duties tend to diverge from one company to another and from country to country. This adds even more complexity.

What Defines a Conflict of Interest?

In a corporate environment context, a conflict of interest is defined as circumstances that are architectured through malicious decisions that paves the way to enrich decision makers or parties related to them with promises of financial or non-financial gains.

Transparency International which is a global movement setup with a vision to create a world free of corruption defines a conflict of interest as a situation where an individual working for an entity is confronted with choosing between the duties and demands of their position and their own private interests.

Below are five examples of how a conflict of interest may arise.

Example 1: An accountant who prepares a cheque and at the same time authorises the cheque by unilaterally signing on it.

Here, a conflict of interest is said to have taken place when the accountant cashes in the cheque for personal gain.

Example 2: A board chairman, chairs a board meeting in which important decisions are made in the selection of new vendors as part of the corporations supply chain management. The board chairman’s wife is the owner of the new vendor company.

Here, a conflict of interest has already taken place when the chairman sits in the board meeting and participates in the selection of the new vendor. The decision made will bring personal gains to his family members.

Example 3: A CEO of an organisation who is also the board chairman of an enterprise used uses inside information to make profitable investment to enrich himself without getting authorisation from the board.

Example 4: An ex-board director with knowledge of property, information and product of his previous company, opens another new company with similar business operation. 

Here, although the director has left the company he is still bound to the ‘conflict of interest’ clause. 

Example 5: When an employee of an organisation is promoted to a supervisory position by her manager because of her close allegiance with the manager, a conflict of interest occurs!

How Does a Conflict Arise?

As explained in the examples, conflict of interest can lead to biases that has a tendency to smudge integrity and ethical virtues of a person’s ability in making the right decisions. Humans are most likely to exploit their positions for personal gains instead of obligation to others. Human brains are not wired hard enough to be able to distinguish their personal interests from their professional duties. It is understood from some scientific brain experiments in the past, the human brain is divided into limbic and cognitive areas in the prefrontal cortex. 

Biases arise from the exploited psychological status of human brain. As mentioned, the human brain is not wired strong enough to hold and therefore is weakened by the intrusion of self-servicing elements into our brain’s cognitive system. Conflict of interests arise when the cognitive system is compromised. So how then do we solve the threat of biases human minds and subsequently reduce the risk of conflict of interest?

Managing and Mitigating Risk of Conflict of Interest

There are 2 ways of managing and mitigating a conflict of interest. They are:

1. Establishing best practices

a. Culture

1. Form a policy to create a culture of ethical behaviour. This policy must be communicated to all stakeholders. The methodology to channel the best practices policy can be initiated through training or via newsletters.

2. In addition, a reward procedure for behaviours which is in line with the policy will have a meaningful outcome. Those found breaching the policy should be reprimanded.

b. Resolution

1. Employ qualified people to develop processes to address and resolve conflicts of interest.

c. Training

1. Conduct training programmes for risk owners on fraud and risks due to conflict of interest as well as exposure to good ethical culture in the company. Best practices applied in the industry can also be injected into the training programme.

d. Review

1. The policies, processes and the training programme should be reviewed for compliance by stakeholders and for assessment of the overall programme’s effectiveness.

2. Monitoring and inspection

a. Reports (weekly basis)

1. A summary report on “conflict of interest” disclosure and the resolution by risk owners are distributed to each head of department. This step will allow them to monitor compliance at their structural level.

b. Tracking of completion (monthly basis)

1. The reports from the heads of department are recorded and compiled, showing number of disclosures that has been resolved, pending and its corresponding percentage of completion.

c. Tracking of acceptance (monthly basis)

1. After compiling the disclosure reports in 2(b), it is then vital to compile statistics on resolved and unresolved issues. This provides a clearer status of accepted resolution, unaccepted resolution and its corresponding accepted percentage.

d. Others

1. Occasionally meet vendors and suppliers and question them on matters pertaining to conflict of interests. These stakeholders must be obliged to notify the risk compliance officer of any potential conflicts.
2. Setting up of helpline/hotline calls for reporting of conflict of interest.

A conflict of interest if perceived to arise, can generate negative public opinion thus board of directors along with executive managers should put the interest of the enterprise first by curbing the appearance of the dreadful risks from misaligned interests, a.k.a conflict of interest.