5 Examples of Conflict of Interest

Conflicts of interest can occur in all walks of life, from business to politics and some which straddle both fields. They come about when a person’s personal, financial or other interests may compromise or appear to compromise their impartiality and objectivity in performing their official duties.

Whether they purposefully use one position to leverage another or not, the fact that they are exposed to that possibility can be detrimental to the organisation for which they work and must be managed accordingly. The European Commission states that “having in place detailed policies and rules on avoiding and managing conflicts and perceived conflicts of interest is an essential part of good governance and sound financial management.”

This article provides real-world examples of conflict of interest and discusses the lessons learnt from them for the future.

1. Notable examples of conflicts of interest

1.1 The company chair tainted by scandal

In the mid-2010s, the Chief Financial Officer of an EU-based automotive company moved to become chair of the organisation. However, many investors were unhappy with the new role, given that he had been on the company’s board of directors during a time in which it admitted it was installing software that ensured its cars passed emissions tests when they should not have.

The argument of shareholders was that the chair would be leading the board at a time when it was investigating the wrongdoing and the reasons behind it. This would lead to a conflict of interest where he might prevent proper scrutiny of his own role in the prevailing company culture that led to the misconduct.

The company responded by ensuring that the chair left the room during items at board meetings related to the matter, particularly those where the liability of board members over the scandal was discussed. This shows that having the individual step aside in specific situations can help avoid conflicts of interest.

1.2 The CEO’s relationship with a contractor

In the early 2010s, the chair and CEO of a major tech company (Person A) was accused of inappropriate behaviour towards a contractor who carried out work with the business (Person B). This complaint was investigated and there was no evidence found to substantiate the original accusation.

However, one outcome of an outside counsel looking into the matter was that Person A and Person B did share what was described as a close personal relationship, which had not been declared. As the CEO would be in a position to influence which parties received contracts from the company, this was deemed to be a conflict of interest. Person A could have favoured Person B over better-qualified candidates, given their connection.

There were also suggestions that Person B had been reimbursed for expenses that were not for legitimate activities on behalf of the company, clearly to the detriment of the business.

As a result of this, and other issues that arose during the investigation, Person A was asked by the board to resign. The case shows the importance of monitoring not just the actions of the employee but also of those people closely associated with them.

1.3 The administrator with a potential interest in a struggling business

In the 2020s, a European fashion retailer (Company A) went into administration, closing many of its shops. An administrator (Company B) was appointed to oversee the process of paying creditors.

However, Company A’s largest lender (Company C) took issue with the installation of Company B, as Company B’s owner (Company D) also owned a stake in Company A’s parent company. The lender’s argument was that the administrator would be tempted to act in the interests of Company D rather than on behalf of Company A’s creditors, as should have been the case.

The case went to court, with Company D arguing that its subsidiaries were run separately as independent organisations, meaning that its shareholding had no bearing over Company B’s decisions. The judge agreed and declared that Company B should continue as the administrator.

This shows the importance of having structures in place to prevent conflicts of interest from affecting decision-making. The separation of Company D’s interests from Company B allowed the latter to make decisions without pressure from its parent business.

1.4 The financial regulator whose brother was a banker

The deputy governor at a European country’s central bank was reprimanded for failing to declare that her brother held a significant strategic role at a bank headquartered in the same country.

The deputy governor held a role on a committee regarding the regulation of banks, with her brother’s bank one of those that she would have an influence over. This familial connection meant that it would be difficult for her to guarantee impartiality over decision-making on the committee.

After admitting that she failed to adhere to the central bank’s code of conduct, she resigned from her position. One suggestion for her actions was that she did not see her brother’s position as affecting her impartiality, which shows the need for codes of conduct to be written in such a way that they leave no ambiguity over what constitutes a conflict of interest.

1.5 The board member sharing corporate secrets

In the mid-2010s, Person A, a member of the board of directors at a major international investment bank, was found to have shared confidential information about the company with a hedge fund manager (Person B).

An investigation reported that Person A had told Person B about a $5 billion investment about to be made in the bank, as well as information about its financial reports gleaned in his official capacity as a director. All information shared was non-public at the time.

Person A showed a conflict of interest between his duty to the company and his own financial position. This led to a $13.9 million fine from the financial regulator, a $5 million criminal fine and two years imprisonment.

One outcome of this case is the need for insiders to understand their responsibilities and for companies to implement dissuasive measures to prevent the unlawful distribution of inside information and insider trading.

2. Consequences of conflicts of interest

Here are some of the consequences of conflicts of interest for organisations:

Consequence	Explanation
Legal liability	Allowing a conflict of interest to occur can lead to lawsuits from damaged parties, as well as contraventions of legislation such as MiFID II, which states that investment firms should “take all appropriate steps to identify and to prevent or manage conflicts of interest.”
Damage to reputation	Being found to have allowed a situation to occur that resulted in a conflict of interest can cause people to question the integrity of the company and its operational robustness. It becomes more difficult to promote high standards when the company’s systems have been found to be lacking.
Loss of credibility and trust	Clients may be wary of working with a company that they cannot be sure will always be acting in their best interests. Furthermore, employees can lose faith in the organisation, leading to lower productivity and higher staff churn.
Financial loss	As well as losing money through regulatory and criminal fines for which the company may be liable, there are indirect costs, such as that from clients moving their business away or choosing not to work with your organisation. In addition, a conflict of interest can affect decision-making, leading to missed growth opportunities.

3. How can companies prevent conflicts of interest?

There are a number of steps a company can take to prevent conflicts of interest. They include:

Creating a conflict of interest policy to ensure all employees understand what conflicts of interest are, how to declare them, how to report others’ conflicts and the sanctions for allowing a conflict of interest to take place.

Developing a speak-up culture that shows employees you value their input and reports of conflicts of interest, that you will investigate them and protect the reporting person from retaliation.

Carrying out due diligence on new starters to ensure you understand all outside interests that they hold. Analyse them to ensure they do not conflict with those of the organisation or its clients.

Create a procedure for managing conflicts of interest, such as moving the employee off the project or demanding they end their outside interest, for example.

Use monitoring technology to ensure that employees’ personal trades and outside interests do not cause a conflict of interest.

TradeLog is personal account dealing software which uses your parameters to only allow employees to perform personal transactions that you deem to be acceptable. Its conflict of interest feature gives you a comprehensive overview of employees’ roles, detecting potential conflicts by comparing client and vendor lists to those roles and trades. If there is a conflict of interest, TradeLog flags it and you can take appropriate action.

4. FAQs

4.1 What are the four types of conflict of interest?

Four types of conflict of interest are:

Financial benefit, where the individual can make monetary gain from one interest to the detriment of another.

Personal, where their judgement is affected by a familial or other close link to another individual, favouring them over another purely down to their previous personal relationship.

Organisational, where the person has a stake in a competitor or other organisation that can benefit from the decisions made in your business.

Gifting, where the individual provides preferential treatment for an organisation or person who offers them gifts and perks.

4.2 What qualifies as a conflict of interest?

A conflict of interest is any situation in which someone stands to gain in some way by leveraging their position in one interest against their position in another, to the benefit of one and the detriment of the other.

4.3 How to resolve a conflict of interest?

To resolve a conflict of interest, the party should disclose the conflict to their management team or to the relevant authorities, recuse themselves from decision-making processes related to the conflict, and follow organisational policies and procedures designed to manage such situations.

5. Conclusion

These examples of conflict of interest cases show how such situations can occur as well as illustrating the steps that businesses and other organisations should take to prevent, mitigate and manage them when they arise. By having a robust conflict of interest policy, you create an open environment for people to disclose their own conflicts and report any they spot in the course of their official duties. Furthermore, implementing monitoring technology allows you to identify risks before the actual conflicts.

TradeLog can keep track of all your employees’ interests and help you spot any potential conflicts before they cause a problem. Request a demo of TradeLog today.