Handling Conflicts of Interest
Within any organization, individuals in a position of trust are sometimes faced with a situation in which their professional objectivity conflicts with personal or other interests. In this event, ethical misconduct is a real danger; a good ethical policy includes measures to avoid or at least minimize the occurrence of conflicts of interest.
Seeing the pitfalls
According to the Ethics Resource Center, conflicts of interest comprise 18 percent of all cases of observed employee misconduct, reflecting the real difficulty in keeping personal interests detached from professional responsibilities. As a manager, you should always exercise objectivity and avoid favoritism in your judgments. If you feel like your objectivity is compromised, seek the counsel of a third party.
Conflicts of interest among boards of directors can have devastating effects. Directors have privileged information about the stock market that can lead to insider trading; they have control over compensation packages and knowledge of investments and business ventures; and they may serve on the board of more than one company. For some, the temptation to neglect their stakeholder duties in exchange for personal gain is too great.
Following several scandals in the early 21st century, such as the multibillion dollar accounting fraud at US telecom giant WorldCom, legislation was passed to address conflicts of interest. The Sarbanes-Oxley Act, enacted in the US in 2002, laid down regulations for all US public companies and accounting firms. Under the Act, directors face increased liability for their decisions: although they cannot be held liable if they exercise due care in their decision-making, they may be held responsible for actions not committed in good faith.
Respecting regulation
The Sarbanes-Oxley Act helps to prevent conflicts of interest, improves investor confidence, and ensures that organizations produce more accurate financial statements. Its provisions include that:
While the Sarbanes-Oxley Act continues to be a powerful tool in regulating organizational ethics, it has its detractors. Some claim that its very power makes businesses think twice before listing on US stock exchanges rather than less regulated exchanges in Europe.
An Accounting Oversight Board be established and placed in charge of regulations administered by the Securities and Exchange Commission.
CEOs and CFOs certify that their companies’ financial statements are true and without misleading statements.
Corporations be prohibited from making or offering loans to officers and board members.
Codes of ethics be put in place for senior financial officers.
Accounting firms be prohibited from providing both auditing and consulting services to the same client.
Company attorneys be required to report wrong-doing to top managers and, if necessary, to the board of directors; if managers and directors fail to respond to reports of wrong-doing, the attorney should stop representing the company.
“Whistle-blower protection” for persons who disclose wrong-doing to authorities must be in place.
Financial securities analysts be required to certify that their recommendations are based on objective reports.
Accounting firms rotate individual auditors from one account to another from time to time: two senior auditors cannot work on a corporation’s account for more than five years.
Audit committees should consist of independent members with no material interests in the company.
Avoid conflicts of interest
Remove all potential for conflict of interest before it occurs.
Abstain from participating in any decisions in which conflict exists.
Disclose any conflicts of interest to the board or the public.
Involve third parties to assert that a decision is fair and free from partiality.
TIP
Always award contracts on merit alone and avoid favors to family and friends. If you run a small business, think about how your actions now may be perceived if you choose to expand and seek investors. All your dealings with family members will be closely scrutinized.