What it means
Conflicts come in obvious and subtle forms. An obvious one is a purchasing manager awarding a contract to a company her brother owns, while a subtler one is an audit firm earning large consulting fees from the same client it is meant to scrutinise.
Business takes this seriously because trust is effectively the product in many relationships. Directors, trustees, advisers and finance staff all owe duties to someone else, and a decision that merely looks self interested can undo years of credibility.
Conflicts are usually sorted into three levels of seriousness. An actual conflict is influencing a live decision, a potential conflict is one that will arise if circumstances change, and a perceived conflict is one a reasonable outsider would suspect even if no interest is being acted on.
All three are worth declaring, because the last is the one that damages reputations fastest. Most organisations manage conflicts with a register, an annual declaration and a recusal rule that removes the conflicted person from both the discussion and the vote.
Board minutes then record that the individual declared an interest and left the room, which is the evidence that matters if anyone questions the decision later. Regulated sectors go further than a register.
Auditor independence rules restrict the non audit services a firm can sell to an audit client, and financial advisers must disclose commission arrangements, because in those cases the conflict is structural rather than personal. The commonest failure is assuming that a genuinely honest person has nothing to declare.
Conflicts are judged on appearance as well as substance, and the cost of declaring something harmless is trivial next to the cost of an undeclared interest surfacing later.
In practice
Real-world examples.
Example
A charity trustee who owns a print business declares an interest when the board reviews printing tenders, then leaves the meeting while the decision is made. His firm still wins the work on price, but the minutes record that he took no part in choosing it, which protects both the charity and the trustee if a donor asks later.
Example
A fund manager is offered a personal allocation in a company's share offering while deciding whether the fund should invest. Compliance blocks the personal allocation outright, because no amount of disclosure would make the two decisions independent of each other. The firm's policy treats personal dealing in any security the fund is actively considering as an automatic refusal rather than a matter for judgement.
Example
A finance director sits on the board of a supplier and does not mention it in the annual declaration. When the relationship surfaces during an internal audit, the contract is retendered and she is asked to resign one of the two roles. The supplier keeps the work at a slightly lower price, which shows the original arrangement was defensible on commercial terms but indefensible on process.
Think of it
“Conflict of interest is when personal interests could affect your professional judgment-divided loyalties.
Case study
Seen in the real world.
This is an illustrative and clearly fictional example. Thornbury Mutual, an invented insurance group, had a long serving chief operating officer whose spouse ran a small claims handling agency. The arrangement predated his promotion, had been mentioned informally years earlier, and was never written into the interests register.
Over six years the fictional agency's fees grew from $200,000 to $3,100,000 a year without a competitive tender, and quality complaints were routinely resolved in the agency's favour. An internal audit review flagged the pattern, and the board discovered that no minute anywhere recorded a declared interest.
Thornbury did not find evidence of dishonesty, and the agency's service was defensible on price. Even so, the board retendered the contract, introduced an annual signed declaration for all senior managers, and adopted a rule that any related party spend above $50,000 needed audit committee approval, an illustrative reminder that the appearance of a conflict is itself a governance failure.
Watch out
Common mistakes.
- Believing that declaring an interest solves the problem, when the person usually also needs to withdraw from the decision itself.
- Only considering financial interests, when family relationships, future job prospects and personal friendships create conflicts just as easily.
- Keeping an interests register that is updated once and then forgotten, so it no longer reflects who is connected to whom.
Questions
People also ask.
Is a conflict of interest illegal?
Not in itself, but acting on one in breach of a director's or trustee's duties can be, and in regulated sectors failing to disclose is a breach on its own.
Can a small company realistically avoid all conflicts?
No, since related party dealings are common in owner managed firms, so the practical answer is to document them clearly and price them at arm's length.
Who should hold the conflicts register?
Usually the company secretary or the audit committee chair, so that it sits with someone independent of day to day purchasing and hiring decisions.
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