What you should know about conflict of interest
To any organisation who commits to integrity and sustainable development, conflict of interest is an issue that needs to be constantly monitored. With conflict of interest under control, the senior management may encourage meritocracy, diversity and innovation within an organisation.
To get that objective done, the organisation should have policies and strategies in place. In this post, we suggest a few methods you may use.
What is conflict of interest?
Before we approach to managing and preventing conflict of interest, we must identify what it is. There are many definitions about conflict of interest (COI).
For example, International Chamber of Commerce defines COI as: “Conflicts of interest may arise when the private interests of an individual or of his/her close relatives, friends or business contacts diverge from those of the organisation to which the individual belongs. Conflicts of interest are a particular form of Corruption where an individual grants himself/herself an improper advantage by exercising his/her decision-making power to his/her advantage (or to that of a person close to him/her). Typical conflicts of interest include hiring relatives or favouring relatives as suppliers of goods or services”
Investopedia also provides a definition: “A conflict of interest occurs when an entity or individual becomes unreliable because of a clash between personal (or self-serving) interests and professional duties or responsibilities. Such a conflict occurs when a company or person has a vested interest—such as money, status, knowledge, relationships, or reputation—which puts into question whether their actions, judgment, and/or decision-making can be unbiased.”
Definitions may differ, but overall, they agree on the following points:
- The individual has an interest that goes against his/her employer’s interest
- The individual may use an advantage (i.e. using the authority he/she is given) to benefit himself/herself or any other person close to him/her.
Types of conflict of interest
Not every conflicts of interest are the same. Depending on each type of COI, an organisation may deploy different strategies to manage them.
Basically there are 3 types of COI:
- Actual conflict of interest: Actual COI means that the conflict is happening. For example, you are a recruitment officer, your sister also applies to the vacancy that you are recruiting.
- Potential conflict of interest: Potential COI means that the conflict has not yet happened, but it will occur in the future. For example, you works as a procurement specialist. You are assigned to purchase an item which your friend’s company also provides. If you decide to purchase the item from other business, nothing serious happens. But if you decide to purchase from your friend’s company, it will become an actual conflict of interest.
- Perceived conflict of interest: Perceived COI means that the situation seems to have COI, but actually the COI is well-recognised, well-managed and monitored. For example, an individual is a senior director at company A and accepts a board membership at company B, with which company A does a lot of business. This may merely create a perceived Conflict of Interest, if the Associate is appointed as board member with the full support and approval of the board of Company A and the situation is closely monitored.
How to prevent and monitor conflict of interest
To deal with conflict of interest, organisations may use policies and administrative procedure to identify and prevent it from happening. The policies often include the following:
- Objective: The conflict of interest within an organisation should be prevented from happening. Potential conflict of interest should be documented and managed.
- Every quarter (or six months), the individuals with certain authority (i.e. with Manager title or above) must disclose their interests and close relatives who might get involved.
- A dedicated officer (i.e. Company secretary, Compliance manager,…) or department keeps records of COI and manage it closely.
- Mitigation: When a potential conflict of interest is identified and it may become an actual COI, the individual with COI must withdraw or step back from making the decision.
Though the conflict of interest can be effectively controlled by written policies and administrative procedures, many organisations still overlook it. This leaves spaces for poor performance and corruption. To promote ethical and responsible sourcing, the procurement professionals should acknowledge and prevent the conflict of interest in their own field.