What is a conflict of interest in business?
In the business world, a conflict of interest (COI) refers to any situation where there is an incompatibility or conflict between an individual’s personal interests and the interests of a business or organisation. A conflict of interest can also occur when a person has a responsibility to two different individuals or groups which are in conflict with each other. Loyalty to one person or group may harm the interests of the other party. Conflicts of interest arise in all spheres of people, for example, the law, government, and academic spheres.
🏆10 Best Forex Brokers in South Africa
| Rank | Broker | Broker Review | Regulators | Minimum Deposit | Visit Broker |
|---|---|---|---|---|---|
| 🥇 |  | Read Review | ASIC, FSA, CBI, BVI, FSCA, FRSA, CySEC, ISA, JFSA | $100 | Visit Now |
| 🥈 |  | Read Review | FSCA, FCA, DFSA, FSA, CMA | $0 | Visit Now |
| 🥉 |  | Read Review | CySEC, IFSC, DFSA, FCA | $5 | Visit Now |
| 4 |  | Read Review | ASIC, CySEC, FSA, SCB | $0 | Visit Now |
| 5 |  | Read Review | FSA, FSCA | $250 | Visit Now |
| 6 |  | Read Review | FSA, FSC, FSCA, ASIC, CMA | $20 | Visit Now |
| 7 |  | Read Review | FSC, FSCA | $50 | Visit Now |
| 8 |  | Read Review | ASIC, CySEC, FSCA, FSA, FSC, CMA | $100 | Visit Now |
| 9 |  | Read Review | CySEC, MWALI, FSCA | $25 | Visit Now |
| 10 |  | Read Review | FSA, CySEC, FSCA, FSC | $10 | Visit Now |
Understanding conflicts of interest
Understanding conflicts of interest requires an awareness of the following characteristics, amongst others:- Conflicts of interest occur when people take advantage of their financial or professional relationships.
- They can arise in any type of business, corporation, or organisation.
- A person who is guilty of a conflict of interest chooses personal gain over commitment and duties to a business or employer.
- They entail a lack of impartiality and objectivity.
- Conflicts of interest might involve only one individual or a group of people who conspires to benefit themselves, causing damage to the credibility of an entire business or organisation.
- Interests involved can be financial and non-financial. Money, as well as other factors such as reputation, power, revenge, status, and prejudice, can create a conflict of interest. Other interests can, inter alia, include:
- Family relationships
- Loyalty to friends and family
- Contractual and legal obligations
- Inside knowledge
- Professional duties
- Conflicts of interest often have legal consequences.
- A conflict of interest makes it almost impossible for the person or group involved to perform their duties appropriately and with integrity. If such a situation occurs, it is often legally required for those involved to remove themselves from the particular situation.
Categories of an individual’s potential interests
In an article on the website of Indeed (‘an American worldwide employment website for job listings’), Jamie Birt refers to the following four types (groups) into which an individual’s potential interests can be categorised:- Direct interests, which comprise a person’s ‘own personal self-interest, family obligations, and personal business interests.’
- Indirect interests include ‘the personal, family, and business interests of people or groups with whom the individual associates.’
- Financial interests refer to ‘anything of monetary value.’ For instance, share ownership, services rendered, or business dealings.
- Non-financial interests, involving personal relationships or relationships with family, and ‘other potential sources of bias.’
Common types of conflict of interest
Conflicts of interest come in many forms, of which the following common types are examples:- Self-dealing is considered the most common type of conflict of interest in the business world. It happens in a business when a person in a position of trust, who is supposed to put the business’s interests ahead of its own, acts in his or her own best interest, harming the business or the employees or clients of the business.
- Using the funds of a company as a personal loan.
- A financial advisor suggests that a client buy a financial asset that is unsuitable for him/her.
- An individual who uses his/her position as a director to make an agreement that benefits them instead of benefiting the company.
- Accepting a bribe refers to a situation when an employee buys inferior goods for his/her business, simultaneously benefiting themselves but hurting their employer.
- Nepotism is nowadays a common practice in businesses and organisations. Nepotism occurs when people with influence or power in a business unfairly use their power or influence to favour relatives, friends, or associates. Especially, giving them jobs or positions in the business.
- Insider trading refers to a situation where someone in a publicly traded company trades the shares of the company, based on material information that ordinary shareholders are not aware of, for his/her personal gain.
- Accepting gifts in an untoward way occurs when a director, manager, or a person in a senior position in a business accepts a gift from a client/customer, or an individual who wants to gain influence in the business in an inappropriate way.
- Filling positions in two competing businesses may lead to a conflict of interest when the confidential information of one business can become available to another business, presenting a clear conflict. In addition, the individual who fills the two positions might put himself/herself at risk of corruption charges.
- Making confidential information of a business available to outsiders constitutes an outright lack of professional judgment, which becomes a conflict of interest if the revelation of the information creates one's own financial or professional gain.
How to manage conflicts of interests
There are numerous ways to manage (avoid and mitigate) conflicts of interest in the business world. The best way to mitigate conflicts of interest is to avoid them in the first instance. However, in the business world, this is almost impossible. Therefore, conflicts are a reality and have to be managed correctly and properly. The Organisation for Economic Co-operation and Development (OECD) remarks that the management of conflicts of interest requires a balance, mentioning that ‘a modern approach to conflict-of-interest policy seeks to strike a balance by:- Identifying risks
- Prohibiting unacceptable forms of private interest
- Raising awareness of the circumstances in which conflicts can arise
- Building capacities to prevent conflicts of interest through training
- Ensuring effective procedures to resolve conflict of interest situations
Example of a conflict of interest in a company
A classic and true example of a conflict of interest can be found in a company called Steinhoff International Holdings NV, a multinational company. An article on May 19, 2019, in News24, a South African news website, led with the heading, ‘Steinhoff report reveals the maelstrom of conflicts of interest.’ This was a reference to Steinhoff’s 2017 annual report, which was released on May 7, 2019, identifying ‘a plethora of related-party transactions that the company now says weren’t properly disclosed according to the best corporate governance practice,’ according to News24. (Accentuation in the quotation is by the article writer.) According to the company’s 2017 annual report, its former CEO, Markus Jooste, and some members of his close family ‘were affiliated to seven entities that should have been disclosed as related parties’ when the company entered into transactions with them. On the positive side, the National Prosecuting Authority (NPA) in South Africa reported in March 2021 that there was no conflict of interest when Steinhoff contributed R30 million towards investigating fraud at the company. Note: This article does not constitute investment, financial or trading advice. Please obtain the advice of a professional, reputable, and regulated broker before making trading and investment decisions.You Might Also Like
Recommended brokers
