Understanding Conflicts of Interest in Business

Conflicts of interest arise in many contexts. Professionals such as attorneys, financial advisors, and realtors are all bound by ethical codes of conduct that address potential conflicts.

In the business context, too, conflicts of interest can pose a major concern, undermine the success of a business, and even expose stakeholders to personal liability.

Examples of conflicts

In the business context, the term “conflict of interest” refers to a personal interest that potentially clashes with the interests of the business. These conflicts can take many forms:

Financial: Self-dealing, “moonlighting” in ways that compete with the business, usurping or failing to disclose business opportunities, and the like
Relational: Romantic or family relationships (i.e., nepotism) that interfere with the optimal operation of the business
Confidentiality: Misuse of confidential information (such as trade secrets or customer information) for personal gain
Of course, whether a conflict in fact arises depends on the unique circumstances of each business. In a family-run business, for example, it may be desirable to hire family members over outsiders. On the other hand, nepotism in the context of a publicly traded corporation can lead to serious legal and financial consequences.

Addressing potential conflicts

No matter the type of business entity, governing documents (such as bylaws), operating procedures, and employment contracts should address conflicts of interest at all levels–among executives, directors, management, and employees–as well as vendors. Carefully crafted business policies should outline procedures for identifying and disclosing conflicts of interest.

At the highest level, directors have a fiduciary duty to uphold the interests of the business above their own. They owe this duty to shareholders, members, and owners. When directors engage in self-dealing, they may be subject to personal liability for breaching their fiduciary duties.

Determining how to identify and deal with conflicts of interest is a crucial business decision, one that should be made in consultation with experienced legal counsel.