How to Avoid Conflict of Interest in the Workplace

When the original Markets in Financial Instruments Directive (MiFID) came into effect, it required that investment firms manage and mitigate conflicts of interest. However, with 2018’s MiFID II – an updated version of the legislation – the focus shifted to concentrate on in-scope organisations actively preventing conflicts of interest from occurring in the first instance.

The potential sanctions for companies that fail to prevent these conflicts of interest underline the importance of avoiding them. One case featuring three individuals working in the financial sector in a European Union country, who manipulated the markets, led to fines totalling €35 million for the companies that employed them.

This article will help you understand how to avoid a conflict of interest in the workplace and protect your business from regulatory, financial and reputational damage.

1. Common types of conflicts of interest in the workplace

Here are the five of the most common examples of conflict of interest:

Conflict	Explanation
Financial conflicts	When an individual’s outside financial interests, like investments of ownership of other companies, influence their professional decisions
Personal conflicts	When personal romantic relationships, family ties or friendships impact their impartial decision-making at work by leading to preferential treatment for close associates
Professional conflicts	When personal professional commitments, including participating in the board of another company, are at odds with their duties for your business
Legal and ethical conflicts	When employees attempt to make gains through methods that are unethical or non-compliant with local laws
Inside information conflicts	When an internal stakeholder gains access to inside information about the company or its clients and uses it for insider dealing or unlawfully distributes it

There are also a number of other, less common types of conflicts of interest of which companies should be aware:

Ideological conflicts	When an employee’s personal beliefs and values inhibit their ability to make decisions in the best interests of the company
Time-based conflicts	When an individual cannot commit the required time to their work for your organisation due to competing interests
Leadership conflicts	When multiple leaders have conflicting priorities or styles, leading to confusion and misalignment

2. How to identify conflicts of interest

To avoid conflicts of interest flourishing in the workplace, you must understand the telltale signs that an individual or group of individuals are not necessarily working in the best interests of the organisation. Here are some ways to identify conflicts of interest:

2.1 Situational indicators

Dual roles or responsibilities. If an internal stakeholder also holds an important position at another business, you should monitor this to ensure that it doesn’t conflict with their work. For example, if they were on the board of a competitor, that would call into question whether they were working towards the best possible performance for your business.

Personal financial investments. When an employee owns stock in a personal capacity in competitors of your company or your clients, vendors or suppliers, this could affect their decision-making.

Gifts and perks. If you notice an individual receiving gifts, services or favours from clients, vendors, suppliers or other such entities, it can affect their impartiality.

Personal relationships. Where the employee is in a position to decide on awarding employment, contracts or other benefits to a friend or family member, this can influence their decision.

2.2 Behavioural cues

Sudden changes in decision-making. When employees begin making decisions that seem out of character, it may suggest there is an outside influence dictating their actions.

Secretive behaviour. If an individual refuses to reveal the justifications for their decision-making or avoids scrutiny over their decisions and transactions, it might be that there is a conflict of interest at play.

Unexplained favourites or biases. If a decision-maker seems to favour a particular supplier or makes decisions that the consensus does not believe are in the best interest of the business, this can be suspicious.

Resistance to transparency. When individuals hesitate or refuse to provide documentation or details of transactions and decisions, they may be trying to hide a conflict of interest.

2.3 Patterns of recurring conflicts of interest in the workplace

Repeated interactions with the same entities. If the stakeholder displays patterns of dealing with the same specific clients or vendors, especially without a justified business reason, this suggests they have an interest in favouring that entity.

Inconsistent policy enforcement. If you observe an individual applying your company policies inconsistently to benefit certain parties, especially in areas such as procurement and HR, this might suggest a conflicting relationship.

3. How to prevent conflicts of interest

Here are some preventative actions you can take to prevent conflicts of interest in your workplace.

3.1 Establish a clear conflict of interest policy

Having a clear and accessible conflict of interest policy provides employees with the information they need to understand what a conflict of interest is, how to spot and report it in the workplace and when they need to disclose potential conflicts.

Your policy should contain:

Details of the types of conflicts of interest that might occur in your particular company and industry. This helps you communicate the common risks to your internal stakeholders so that they can be vigilant and avoid them in the future.

The objectives of your policy and how it feeds into the ethical standards of your business. This is important for maintaining a culture of compliance that prizes those who do their best to maintain regulatory adherence.

Employee responsibilities, including the requirement to read and understand the policy, the methods in place to avoid conflicts of interest, methods of reporting violations and details of ongoing training programmes.

Disclosure process so employees can log any potential conflicts and the company can work with them to mitigate the effects.

Details of the internal sanctions for failing to adhere to the policy and its requirements. Include a wider description of the potential external sanctions from regulators relating to both individuals and companies to illustrate the importance of avoiding conflicts of interest.

3.2 Create a safe environment for disclosure

It is important that employees feel safe disclosing conflicts of interest as they arise. Prevention is important, but on occasion, conflicts of interest will occur organically. In these situations, it is important that those affected are comfortable with reporting them to management, knowing that the company will work to resolve the conflict.

For example, a director might also hold a place on the board of another company that is unconnected with your business. However, after your company creates a new product, the other business may now be in competition to supply materials to you, creating a conflict of interest for the director. Being able to disclose this immediately allows you to manage the situation before it causes a problem.

Ensure that colleagues understand that you welcome disclosure and make it as easy as possible to inform the company of any such situations.

3.3 Communicate the policy effectively

Ensure the policy is easily available to all employees, both office-based and remote. Add it to the onboarding pack so that new starters understand their obligations when they begin. Include it on your shared workspace so that internal stakeholders can access it whenever they need and refresh their memory of the contents.

Carry out regular training sessions on avoiding conflicts of interest, including information on how to spot them, how to report them and how to disclose employees’ own conflicts. It is essential that stakeholders understand what constitutes a conflict of interest and the legal ramifications. Proper training and education is a powerful tool for bringing this important topic to life.

4. Conflict resolution strategies

Bring together a team of compliance professionals to create a conflict of interest committee that considers the cases within your business and devises suitable mitigation strategies to handle them in a compliant manner.

This could include:

Mediation and negotiation with the individual involved to help them understand the consequences of the conflict for them and the company, as well as to decide on a mutually beneficial pathway forwards.

Reassigning the affected party to other roles and responsibilities so that their outside interest no longer causes a conflict with those of the business.

Having the employee step away from situations that might be influenced – or seem to be influenced – by their outside interests. For example, a board member might step out of the room when there is a discussion in which they would not be able to remain impartial.

Allow for open dialogue sessions so that all parties are happy with the resolution.

5. FAQ

5.1 What is the difference between actual, perceived and potential conflicts?

An actual conflict occurs when a personal interest directly interferes with professional duties. A perceived conflict exists when others believe a conflict might influence decisions, even if there isn’t one. A potential conflict refers to situations where a conflict could arise in the future due to changing circumstances.

5.2 What are the consequences of ignoring conflicts of interest?

Ignoring conflicts of interest can lead to legal penalties, damage to the organisation’s reputation and cause a loss of trust among stakeholders. Financial or operational risks may also arise due to biased decision-making.

5.3 Is a conflict of interest a legal issue?

Conflicts of interest can lead to legal issues, depending on the nature of the conflict. For example, under MiFID II, investment firms must avoid conflicts of interest by law.

6. Conclusion

It is important to know how to avoid a conflict of interest in the workplace for the sound functioning of the business. Conflicts of interest can cause legal issues and reputational damage. Employees may become frustrated with colleagues who prioritise personal financial gain over the company's best interests. Similarly, clients might choose to stop working with your company if they feel they are not being treated with the highest level of care and professionalism.

TradeLog is conflict of interest management software that matches your employees’ outside interests against your client and vendor lists and internal policies to check for conflicts of interest, alerting you to any potential issues. This allows you to resolve issues before they become damaging to your business. Request a demo of TradeLog today.