In Business dictionary (2012), conflict of interest is defined as a situation that has the potential to undermine the impartiality of a person because of the possibility of a clash between the person’s self-interest and professional interest or public interest; or a situation in which a party’s responsibility to a second-party limits its ability to discharge its responsibility to a third-party. MacDonald, McDonald & Norman (2002) defined conflict of interest as a situation in which a person, such as a public official, an employee, or a professional, has a private or personal interest sufficient to appear to influence the objective exercise of his or her official duties. McDonald et al (op cit) goes on to explain the three elements of this definition as follows:
- A private or personal interest means something like a financial interest or concern for yourself (i.e. oneself), a friend, or a relative.
- An official duty arises from an office or position held.
- There must be an appearance that the personal interest influences the official duty by interfering with objective professional judgment.
The implication of this definition is that official duty is supposed to trump or take precedence over private or personal interest.
In Legal Dictionary (no date), conflict of interest is described as ‘the situation in which a public official or fiduciary who, contrary to the obligation and absolute duty to act for the benefit of the public or a designated individual, exploits the relationship for personal benefit, typically pecuniary’. In certain relationships, individuals or the general public place their trust and confidence in someone to act in their best interests. When an individual has the responsibility to represent another person – whether as an administrator, attorney, executor, government official, or trustee – a clash between professional obligations and personal interests arises if the individual tries to perform that duty while at the same time trying to achieve personal gain (Legal Dictionary, op cit). The appearance of a conflict of interest is present if there is a potential for the personal interests of an individual to clash with fiduciary duties, such as when a client has his or her attorney commence an action against a company in which the attorney is the majority stockholder. A member of a profession who has been involved in a conflict of interest might be subject to disciplinary proceedings before the body that granted permission to practice that profession.
Hill & Hill (2008) perception of conflict of interest is that of a situation in which a person has a duty to more than one person or organisation, but cannot do justice to the actual or potentially adverse interests of both parties. This includes when an individual’s personal interests or concerns are inconsistent with the best for a customer, or when a public official’s personal interests are contrary to his/her loyalty to public business. An attorney, an accountant, a business adviser or realtor cannot represent two parties in a dispute and must avoid even the appearance of conflict. He/she may not join with a client in business without making full disclosure of his/her potential conflicts; he/she must avoid commingling funds with the client, and never take a position adverse to the client (Hill & Hill, op cit).
As further buttressed in Wikipedia (2016), conflict of interest occurs when an individual or organisation is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other. The presence of a conflict of interest is independent from the execution of impropriety. Therefore, a conflict of interest can be discovered and voluntarily defused before any corruption occurs. A widely used definition is: “A conflict of interest is a set of circumstances that creates a risk that professional judgment or actions regarding a primary interest will be unduly influenced by a secondary interest” (Law Society, 2011). The Society defines primary interest and secondary interest as follows:
- Primary interest refers to the principal goals of the profession or activity, such as the protection of clients, the health of patients, the integrity of research, and the duties of public office.
- Secondary interest includes not only financial gain but also such motives as the desire for professional advancement and the wish to do favours for family and friends, but conflict of interest rules usually focus on financial relationships because they are relatively more objective, fungible, and quantifiable.
The secondary interests are not treated as wrong in themselves, but become objectionable when they are believed to have greater weight than the primary interests. The conflict in a conflict of interest exists whether or not a particular individual is actually influenced by the secondary interest. It exists if the circumstances are reasonably believed (on the basis of past experience and objective evidence) to create a risk that decisions may be unduly influenced by secondary interests (Law Society, op cit).
More generally, conflicts of interest can be defined as any situation in which an individual or corporation (either private or governmental) is in a position to exploit a professional or official capacity in some way for their personal or corporate benefit. Depending upon the law or rules related to a particular organisation, the existence of a conflict of interest may not, in and of itself, be evidence of wrongdoing. In fact, for many professionals, it is virtually impossible to avoid having conflicts of interest from time to time. A conflict of interest can, however, become a legal matter, for example, when an individual tries (and/or succeeds in) influencing the outcome of a decision, for personal benefit. A conflict of interest exists even if no unethical or improper act results. The implications of conflict of interest are that it can:
- create an appearance of impropriety that can undermine confidence in the professional; and
- impair a professional’s ability to perform his or her duties and responsibilities objectively
Types of conflict of interests
As outlined in Wikipedia (2016), the following are the most common forms of conflicts of interests:
- Self-dealing, in which an official who controls an organisation causes it to enter into a transaction with the official, or with another organisation that benefits that particular official. In this case, the ‘official’ being described here is on both sides of the ‘deal’.
- Outside employment, in which the interests of one’s job contradict another.
- Family interests, in which a spouse, child, or other close relative is employed (or applies for employment) or where goods or services are purchased from such a relative or a firm controlled by a relative. For this reason, many employment applications ask if one is related to a current employee. If this is the case, the relative could then recuse (i.e. disqualify oneself) from any hiring decisions. Abuse of this type of conflict of interest is called nepotism.
- Gifts from friends who also do business with the person receiving the gifts. Such gifts may include non-tangible things of value such as transportation and lodging.
- Pump and dump, in which a stock broker who owns a security artificially inflates the price by “upgrading” it or spreading rumours, sells the security and adds short position, then “downgrades” the security or spreads negative rumours to push the price down.
Distinction between ‘own interest conflict’, ‘client conflict’ and ‘substantially common interest’
Conflicts of interests can arise between the professional and current clients (“own interest conflict“); and two or more current clients (‘client conflict’). Conflict of interest means any situation where (Davis & Stark, 2001; Law Society, 2011):
- someone owe separate duties to act in the best interests of two or more clients in relation to the same or related matters, and those duties conflict, or there is a significant risk that those duties may conflict (a ‘client conflict’); or
- your duty to act in the best interests of any client in relation to a matter conflicts, or there is a significant risk that it may conflict, with your own interests in relation to that or a related matter (an ‘own interest conflict’).
- Own interest conflict means any situation where your duty to act in the best interest of any client in relation to a matter conflicts, or there is a significant risk that it may conflict, with your own interests in relation to that or a related matter.’
- Client conflict means any situation where you owe separate duties to act in the best interests of two or more clients in relation to the same or related matters, and those duties conflict, or there is significant risk that those duties may conflict.
- Substantially common interest means a situation where there is a clear common purpose in relation to any matter or a particular aspect of it between the clients and a strong consensus on how it is to be achieved and the client conflict is peripheral to this common purpose (Law Society, 2011). While this definition envisages situations of clear common purpose, this is not the same as situations where there is a common interest. In situations when there is a client conflict and clients have a substantially common interest and you can act for both clients. It is highly essential to always keep a situation where you are acting for two or more clients under review. This includes deciding whether, at any time, a point has been reached where it would be untenable to continue to represent both clients without either of them being prejudiced. For example, if one of the conditions set out below is no longer being fulfilled or you cannot act in a fair manner, at that point, you must cease to act for one or both clients. The conditions are (Law Society, 2011):
- the professional in this circumstance reasonably belief that both clients understand the relevant issues and risks;
- the clients have given informed consent in writing;
- it is reasonable and expedient for you to act for both clients in their best interests;
- the benefits to act for both clients outweigh the risks
- both clients know and understand what you will be doing including any limitation to the brief being executed on their behalf.
No professional should act where there is a conflict, or a significant risk of conflict, between him and his clients. If there is a conflict, or a significant risk of a conflict, between two or more current clients, the professional must not act for all or both of them unless the matter falls within the scope described in the paragraph above. In deciding whether to act in these limited circumstances, the overriding consideration will be the best interests of each of the clients concerned.
Ways to mitigate conflicts of interests
The best way to handle conflicts of interests is to avoid them entirely. For example, someone elected to political office might sell all corporate stocks that they own before taking office, and resign from all corporate boards. Or that person could move their corporate stocks to a special trust, which would be authorised to buy and sell without disclosure to the political office holder; this is referred to as a “blind trust” (Law Society, 2011). With such a trust, since the politician does not know in which companies they have investments, there should be no temptation to act to their advantage. Other specific ways that professionals could mitigate conflict of interest are:
- Disclosure: Certain professionals are required either by rules related to their professional organisation, or by statute, to disclose any actual or potential conflicts of interest. In some instances, the failure to provide full disclosure is a crime, for example, EFCC requirement with regard to real estate financial dealings.
- Recusal: Those with a conflict of interest are expected to recuse themselves (i.e. abstain) from decisions where such a conflict exists. The imperative for recusal varies depending upon the circumstance and profession, either as common sense ethics, codified ethics, or by statute.
- Third-party evaluations: Third-party evaluations may also be used as proof that transactions were, in fact, fair (‘arm’s-length). For example, a company or firm that leases an office building owned by the Chief Executive Officer (CEO) might get an independent evaluation showing what the market rate is for such leases in the locality. This will effectively address any perceived conflict of interest that exists between the fiduciary duty of the CEO to the other stakeholders in the company by getting the lowest rent possible and the personal interest of that CEO (to maximize the rental income that the CEO might get from owning that office building.
References
Businessdictionary.com (2012). Conflict of interest. WebFinance, Inc. Retrieved on September 10, 2012 from http://www.businessdictionary.com/definition/conflict-of-interest.html#ixzz2DBAHR0DX
Davis, M., Stark, A. (2001). Conflict of interest in the professions. Oxford: Oxford University Press.
Hill, G. N. & Hill, K. T. (2008). Conflict of interest. West’s Encyclopedia of American Law (2nd ed.). The Gale Group, Inc.
Law Society (2011). Conflict of interests. Retrieved on September 10, 2012 from http://www.law society.org.uk/advice/practice-notes/conflict-of-interests/
Legal-dictionary (2012). What is conflict of interest? Farlex, Inc. Retrieved on September 10, 2012 from http://legal-dictionary.thefreedictionary.com /conflict+of+interest
Legal-dictionary (n.d.). Conflict of interest. Retrieved on September 10, 2012 from http://legal-dictionary.thefreedictionary.com/conflict+of+ interest”>conflict of interest
MacDonald, C., McDonald, M. & Norman, W. (2002). Charitable conflicts of interest. Journal of Business Ethics, 39:1-2, 67-74, August 2002. (p.68).
Wikipedia (2016). Conflict of interest. Wikipedia, the free encyclopedia. Retrieved on September 25, 2012 from http://en.wikipedia.org/wiki/Conflict_of_interest
