Avoid conflict of interest Featured

9:28am EDT January 31, 2006
Consider this: You wish to appoint your sister-in-law — a financial expert of unquestioned capability and integrity — to your company’s board of directors. Is there a conflict of interest? Probably not, but the situation creates an appearance of conflict that could be enough to damage your reputation and your organization’s public image.

The potential for conflict of interest is inherent in any organization. In its most basic form, a conflict of interest arises when someone in a position of trust violates that trust for personal or group gain.

Situations need not result in actual violations of trust, however, to qualify as conflicts. Depending on the circumstances, the potential for conflict alone may present a conflict of interest.

For example, your purchasing manager’s cousin owns a service that bids on your annual building-maintenance contract. Your purchasing manager is conflicted simply because he could exert influence over the vendor-selection process, whether or not he actually does.

Assess vulnerability
Your business may be most vulnerable to certain general categories of conflict-related risk, both internal and external. Assess your exposure in the classes most closely associated with your typical operations.

For example, perhaps your firm manufactures proprietary electronic components that you incorporate into a finished product for the IT market. You may also license these components to other end-users who compete with you in the marketplace.

Given your sensitive position in competitors’ supply chains, conflict of interest is a very real possibility. You should examine your customer-relationship management practices for sources of real or potential risk.

Also evaluate your employment policies. If your organization supplies government agencies, for example, and your newest hire formerly worked for an agency customer, the possibility of real or apparent conflict may be heightened.

Look, too, at specific positions within your firm. If your bookkeeper’s husband owns a business that might potentially supply goods or services to your company, the bookkeeper should not be responsible for managing vendor contract approvals.

Make managers aware
Management awareness and active management oversight are crucial to risk-mitigation efforts. Is your company’s management oversight adequate to ensure that risks are mitigated to the greatest extent possible?

Assessing risk is just one piece of an effective risk-management program, though. For long-term success, you will need sustainable policies. The three Cs of conflict mitigation can help.

  • Creation — Establish an across-the-company policy statement that defines conflict in the specific context of your organization’s business operations and relationships. It should also establish clear expectations for ethical conduct for internal and external stakeholders, and provide nonthreatening methods for individuals to disclose, resolve and withdraw from actual or potential conflict.

  • Communication — Make sure that internal and external stakeholders understand your conflict of interest policy and its consequences. Vendors and service providers, as well as employees and managers, must know how your policy affects behavioral expectations, organizational relationships and accepted business practices. This may involve periodic training and clarification from management.

  • Commitment — Your efforts to mitigate conflict-related risk will have little effect if you do not demonstrate willingness to enforce your policy across the organization, from employees to directors. Vendors, suppliers, contractors and other external stakeholders also must recognize that violating the policy will have an immediate negative impact on their relationships with your organization.

A proactive approach to conflict-related risk management can supply powerful support for your organization’s long-term success and industry reputation. A policy that meets the essential standards of objectivity, good faith and independence will reinforce your strategic advantage by minimizing your exposure to conflict liability.

A conflict-of-interest policy based on the three-Cs framework will help everyone do the right thing, and be seen doing the right thing.

Emlyn Neuman-Javornik can be reached at (312) 899-5315 or eneuman-javornik@crowechizek.com.