Conflict of interest

Conflict of interest is a situation where an individual or organization has competing interests or loyalties. It can arise in the workplace when a person's personal interests interfere with or conflict with their professional responsibilities. Conflict of interest can also occur when a person or organization has competing interests in a certain situation. In the management context, it is important to recognize and identify conflicts of interest as they can have a negative effect on decision-making and can lead to unethical behaviour. To prevent conflicts of interest, it is important to openly communicate, set clear boundaries, and ensure that all employees understand their responsibilities.

Example of conflict of interest

• An employee who owns stock in a company that their employer is considering doing business with is an example of conflict of interest. This employee may be in a position to influence the decision-making process and could benefit financially if their employer chooses to do business with the company in which they own stock.
• A manager who is responsible for evaluating the performance of their direct report, but also has a personal relationship with that same direct report, is another example of conflict of interest. In this situation, the manager may be more likely to give the direct report favorable reviews, even if that report is not performing up to expectations.
• A lawyer who represents both sides in a divorce case is an example of conflict of interest. In this case, the lawyer may be in a position to represent both parties and could benefit financially if they are able to reach a settlement that is favorable to both parties.
• A doctor who owns an interest in a drug company that makes a particular drug that they routinely prescribe to their patients is an example of conflict of interest. In this case, the doctor may be more likely to prescribe the drug that they have a financial interest in, regardless of whether or not it is the best treatment option for the patient.

Formula of conflict of interest

The formula for conflict of interest is as follows:

COI = Profit + Personal Gain - Professional Standards

This formula outlines the three main components of conflict of interest. The first component is profit, which refers to the potential monetary gain from a decision or action. The second component is personal gain, which refers to any private benefit or gain that an individual may receive from a decision or action. The third component is professional standards, which refers to the ethical guidelines and standards of practice that are expected of a professional.

When all three components are taken into account, the conflict of interest equation can be used to measure the potential for conflict of interest in any given situation. If the sum of the three components is positive, then there is a potential conflict of interest. If the sum is negative, then there is no potential conflict of interest.

It is important to note that this formula is only a guide and should not be used as a definitive measure of conflict of interest. Every situation is unique and must be evaluated on a case-by-case basis.

Types of conflict of interest

Conflict of interest can take many forms, including:

• Financial: When an individual or organization stands to gain financially from a decision, they may be inclined to make decisions that benefit them financially, rather than what is best for the organization.
• Professional: When an individual or organization has a professional relationship with another, such as a business partner, they may be inclined to make decisions that benefit them professionally, rather than what is best for the organization.
• Personal: When an individual or organization has a personal relationship with another, such as a family member, they may be inclined to make decisions that benefit them personally, rather than what is best for the organization.
• Political: When an individual or organization is politically aligned with another, they may be inclined to make decisions that benefit them politically, rather than what is best for the organization.
• Regulatory: When an individual or organization is subject to regulations, they may be inclined to make decisions that benefit them in terms of the regulations, rather than what is best for the organization.

Steps of dealing with conflict of interest

• Identifying: First, it is important to identify any potential conflicts of interest that may arise within an organization. This involves looking at the roles and responsibilities of each person and assessing whether any of them have competing interests.
• Communicating: Once a conflict of interest is identified, it is important to communicate this to all parties involved. This helps to ensure that everyone is aware of the situation and can take steps to address it.
• Setting boundaries: It is also important to set clear boundaries and expectations for all employees. This includes establishing policies regarding conflicts of interest and ensuring that everyone understands and follows them.
• Monitoring: Finally, it is important to monitor the situation to ensure that conflicts of interest don't arise or worsen. This may involve regular reviews of policies and procedures, as well as regular communication between all parties involved.

Effects of conflict of interest

Conflict of interest can have a negative effect on decision-making and can lead to unethical behaviour, and there are several limitations to managing it effectively. These include:

• Lack of Transparency: Conflict of interest can often be hidden and not easily detected, making it difficult to manage and prevent.
• Power Imbalances: When one party has more power than another, it can create an unbalanced dynamic that can lead to conflicts of interest.
• Self-Interest: Self-interest can lead individuals to make decisions that are not in the best interests of the organization or their colleagues.
• Misunderstanding of the Rules: If employees do not understand the rules around conflicts of interest, they may not be able to identify or manage them effectively.
• Inadequate Policies: Without adequate policies and procedures in place, it can be difficult to manage conflicts of interest and ensure they are addressed appropriately.

Conflict of interest — recommended articles

Declarations of interest — Professional misconduct — Moral hazard problems — Perception of risk — Social desirability bias — Social control mechanisms — Principal agent problem — Personal ethics — Risk appetite statement

References

• Davis, M., & Snead, W. S. (1982). Conflict of Interest [with Commentary]. Business & Professional Ethics Journal, 1(4), 17-32.
• Demski, J. S. (2003). Corporate conflicts of interest. Journal of Economic Perspectives, 17(2), 51-72.