There are many different types of conflicts of interests. Conflicts of interest are a complex issue that can arise in both personal and professional settings. Understanding the different types of conflicts is crucial for individuals and organisations to navigate ethical dilemmas and make sound decisions. This blog post will delve into the various forms conflicts of interest can take, providing examples to illustrate their potential impact. By recognising these conflicts, you can develop strategies to mitigate their influence and maintain integrity.
Contents
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What are conflicts of interests?
Different types of conflicts of interests can arise an any work or business setting. It is important to manage them for a range of reasons. At one extreme there is a risk of breaking the law on fraud or bribery. At the other end managing conflicts of interests are important for people in and out of your organisation. These systems help them have confidence in your processes and ethics, and provide a key pillar of effective corporate governance.
It is important to understand conflicts of interests cannot always be avoided, and sometimes it is better not to. However, they must always be identified and managed. This will enable you to become much more resilient and help overcome challenge or criticism.
A conflict of interests is defined as “when a reasonable person would consider that an individual’s ability to apply judgement or act is, or could be, impaired or influenced by another interest they hold”.
The risks of failing to manage conflicts of interests are to:
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the organisation’s, and individual, reputation
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a lack of good governance and a poorer corporate culture
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legal or regulatory action
Conflicts of interests come in many forms, and below are six different types with examples.
Different types of conflicts of interests
1. Direct and Indirect
Direct Conflict
A direct conflict of interests arises when a person has two different interests that may be incompatible. An example of a direct conflict of interests would be a non-executive director who has the same role with more than one company. If they have a role on the board of two companies that are direct competitors then they would have access to sensitive commercial information about both.
In this example the non-executive director could come under pressure from one business to reveal information about the other e.g. projects they are bidding for, suppliers, costs, prices. In these circumstances the amount of information the non-executive can have access to, and the decisions they can be involved in must be strictly managed.
Indirect Conflict
This is similar to the example above, but involves another person. In this scenario you might be a senior manager in one company and your partner or a close family member is a senior manager in a direct competitor. You would both then have access to the same sensitive commercial information. One or both of you could be put under pressure to try and get commercially valuable information from the other. This indirect conflict of interests would need to be managed in the same way as the example above.
2. Actual and Potential
Actual Conflict
Both of the examples above describe actual conflicts of interests. An actual conflict of interests is where the situation that causes a conflict currently exists. Another example that affects people in many lines of work is if a person goes to an event organised by a potential supplier. Clearly the organiser puts on events like this because they can be a sales opportunity. Organisers of events like this sometimes pay for attendees’ travel, accommodation and food.
This presents a conflict of interests because if the organiser gets business from the employer of one or more attendees it may look as if they exerted undue influence to make the sale. Because of this any company wishing to manage conflicts of interests will have strict policies about accepting gifts, sponsorship and hospitality.
Potential Conflict
A potential conflict is one that may arise, given the interests of one or more people. These also need to be identified and managed. It is important to be proactive (manage risks) rather than reactive (manage problems) because perception matters.
An example of a potential conflict is when someone procures or tenders for a service on behalf of their business, and a close family member works for a company that could be a bidder for that contract. Organisations will need to reflect on whether that person is the right lead for that particular procurement or tender in this instance.
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3. Financial and Non-Financial
Financial
Most people will understand a financial conflicts of interests. Clearly a conflict can arise if someone has the opportunity to make a financial gain from a situation they are in. For example, if someone works on commission and is likely to get a larger payment for recommending one supplier or product over another, then there is a conflict between the best outcome for the customer and the prospect of a higher financial reward. This has been an issue in financial services and therefore conflicts of interests in that sector are carefully regulated (as you can see here).
Financial interests can also lead to the risk of fraud and bribery.
Where a financial conflict arises, or may arise, there is a risk someone could use their position for unfair financial gain. This might be considered fraud, or could risk bribery, so there is a potential risk of criminal activity with penalties for both companies and individuals. Ways of managing this type of conflict include regulating the size of the commission, or requiring complete transparency if a commission is paid to the seller for a successful sale.
Non-financial
This type of conflict can arise more often than a financial conflict, and frequently needs sensitive handling.
An example of a non-financial conflict may arise in healthcare. A healthcare worker, like a doctor or a nurse, may have an ill family member waiting for treatment at the hospital where they work.
Clearly the healthcare worker may come under pressure to prioritise the treatment of their family member over that of other patients. This type of conflict, also known as a conflict of loyalty, can be quite difficult. The need for sensitivity arises from the additional emotional dimension to this type of conflicts of interests.
Different types of conflicts of interests are not mutually-exclusive
One thing to remember is that any conflict of interests will be of more than one of the six types above. You can have a potential, indirect, non-financial conflict of interests for instance. It is important that you recognise all the different forms they can come in. This will help with making decisions.
When designing your conflicts of interests processes should be mindful of:
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A perception of wrongdoing, impaired judgement or undue influence can be as detrimental as any of them actually occurring
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If in doubt, it is better to assume a conflict of interest exists and manage it appropriately. Do not ignore it!
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For a conflict to exist, financial gain is not necessary
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How to Manage Different Types of Conflicts of Interests
Firstly you should not try to eliminate or avoid conflicts of interests. They key is to identify and manage them, because they will arise from time to time.
The most important thing is to have clear processes for identifying conflicts of interests, making decisions on them, and putting those decisions into practice.
Your processes should not be restricted to only senior people, given the range and depth of actual and potential conflicts. At a minimum anyone with a significant level of control over finance, people, decision making or systems like IT should be included.
Step by step guide to managing conflicts of interests.
Download this infographic here.
Key steps
You should have a clear Conflicts of Interests policy that sets out your processes and when people should declare any conflicts. Typically this is:
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on appointment
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refreshed annually
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and within 28 days of becoming aware of a new conflict
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People with no conflicts of interests to declare should still confirm this as part of the process
A decision should be made on how to manage the conflict, if at all. Think about who should make decisions. Who should decisions be escalated to if they are highly complex or difficult?
Then you should collate all the declarations into a single register. It is important to keep that register live by reiterating the process above.
It is also important to educate your staff. That way they will understand what conflicts of interests are. If they know why it is important to manage them they will comply with your needs. With so many different types of conflicts of interests you can’t afford not to.
Remember managing conflicts of interests is not a bureaucratic exercise. Failing to do so can have real life consequences as you can see here.
Gain the practical skills you need to identify and manage conflicts of interests with this five-star rated training course.
Available in person, online or in-house the focus on practical skills and unique post-course support you get by learning with us will ensure you and your organisation can tackle this key governance activity with confidence.
